HING YIP PRODUCTS FACTORY v. RINGO INDUSTRIAL LTD

DCCJ 4930/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4930 OF 2004

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JUDGMENT

INTRODUCTION

1.  In this action, the Plaintiff claims against the Defendant for the cost of goods sold and delivered in early 2003.

2.  The claim was originally filed in the Small Claims Tribunal.  The Defendant raised quality dispute and alleged damages of almost HK$2 million.  The proceedings in the Tribunal had to be aborted so that claim could be filed in this court.  The Plaintiff did, and the Defendant now counterclaims for damages up to the limit of this court’s jurisdiction.

BACKGROUND

3.  The Plaintiff has been a manufacturer of metal, plastic and alloy accessories for garment manufacturers for over 3 decades.  The Defendant is a garment manufacturer and has been a customer of the Plaintiff.

4.  In about December 2002, the Defendant approached the Plaintiff for the supply of various accessories including metallic buckles.  The buckles in question chosen by the Defendant were zinc alloy buckle No. MX1133.  This buckle consists of 2 parts which join when put at right angle and then lock when levelled.

5.  Samples of the buckle were supplied to the Defendant in December 2002.

6.  The Defendant eventually placed with the Plaintiff a formal purchase order (No. RPO-030102) dated 10 January 2003 (“the PO”) for, among other things, 252,500 pieces of MX1133.  Delivery would be by instalments as subsequently confirmed by the Defendant’s letter.  Delivery would be made at the Defendant’s garment factory in the Mainland.

7.  Delivery commenced.  Between 13 January and the end of February 2003, not counting some replacement deliveries, the Plaintiff had delivered 253,500 pieces of the buckles to the Defendant.

8.  The Defendant required the buckles as the front buckles of the brassieres which it was manufacturing for export to its German customer.

9.  In early March 2003, the Defendant notified the Plaintiff by letter that it had submitted its brassiere sample to the German customer for approval but the same was rejected on the ground that, among others, the front buckle was too loose.

10.  After communication between the parties, the Plaintiff agreed to modify the buckles for the Defendant.  The modification was by denting a tiny hole on one part of the buckle.  Samples of the modified MX1133 were supplied to the Defendant.  Upon the Defendant’s confirmation, the buckles previously delivered were returned to the Plaintiff for the modification.

11.  The modified MX1133 were subsequently redelivered to the Defendant during the period between mid-March and late April 2003.  In the interim, the Defendant also placed 2 new orders for the modified MX1133.  The real additional deliveries by late April amounted to 4,500 pieces.

12.  All together, 258,000 pieces of buckles had been delivered.  The total cost was HK$180,600.  At 2% agreed discount, the amount payable by the Defendant to the Plaintiff was HK$176,988.

13.  More than 3 weeks after the last delivery by the Plaintiff, by letter dated 21 May 2003, the Defendant complained about the quality of the buckles.  It was said that the German customer found 40% defect during the random inspection of the Defendant’s brassieres.  The alleged problems included that the front buckles were too loose.

14.  This led to a meeting in early June 2003 in Hong Kong where the representatives of the parties and the Defendant’s German customer were present.

15.  Further discussion between the Plaintiff and the Defendant led to no conclusion.  The Plaintiff subsequently demanded payment.  In December 2003, the Defendant sent to the Plaintiff a debit note claiming that 120,000 pieces of the buckles were too loose.  For that reason, the Defendant claimed to debit an amount of HK$84,000 from the amount payable to the Plaintiff.

16.  Correspondence endured.  In February 2004, the Defendant offered to pay HK$93,511.81 which was said to be the balance after the debit of HK$84,000.  The Plaintiff received that but only as part payment.

17.  Hence the Plaintiff filed its claim in the Small Claims Tribunal for the balance of the cost the buckles but up to the Tribunal’s jurisdictional limit.  As mentioned above, due to the substantial counterclaim, the present action had to be commenced.

18.  The above background was common ground or in any event evidenced by contemporaneous documents.

19.  Though there had been mention of various alleged defects in the buckles supplied by the Plaintiff, the real quality dispute related to the tightness of the buckles as front buckles on the brassieres manufactured by the Defendant.  That was the focus of the trial.

THE PLEADED CASE

The claim

20.  The Plaintiff now claims HK$83,476.19 (HK$176,988 - $93,511.81) being the balance of the cost of the buckles (rather than HK$84,000 withheld by the Defendant).  When asked at the commencement of the trial, Mr. Chow for the Defendant confirmed that the Plaintiff’s entitlement to the claim was not disputed subject to the defence of set off by the Defendant’s counterclaim.  In his closing submissions, Mr. Chow seemed to retract from that and maintained the Defendant’s primary position that it was entitled to, and did, reject the buckles and therefore should not be liable for the claim.

21.  The Plaintiff also pleaded the claim for the extra cost incurred in the modification of the MX1133 at the request of the Defendant.  When the trial commenced, Mr. Wong for the Plaintiff made clear that the Plaintiff would not pursue this claim.

The defence

22.  According to the Defence, 120,000 pieces of the buckles on the Defendant’s brassieres were allegedly too loose and too easy to open.  On this basis, the Defendant pleaded the following:

(1)	The alleged defective buckles were not of satisfactory quality, not fit or reasonably fit for which they were required by the Defendant for its German customer as well as not in accordance with the sample.  The Plaintiff was therefore in breach of the implied contractual term as to quality of the buckles.
(2)	The Defendant was entitled to reject the alleged defective buckles and was not liable for the claim.
(3)	The Defendant was held liable for breach of contract with its German customer.  As a result, the Defendant has paid agreed compensation in the sum of US$250,000 or HK$1,950,000.  The Defendant counterclaims damages against the Plaintiff in the sum HK$1,000,000.  It abandons the claim for the balance of HK$950,000.

23.  There was pleading of sale by description but Mr. Chow for the Defendant did not really make submission in respect of that in closing.  In my view, this was not a real issue in any event.

ISSUES

24.  Broadly there are the following issues:

(1)	Whether any part of the buckles were defective as alleged.
(2)	Whether the Defendant was entitled to reject and has rejected the alleged defective buckles.
(3)	Whether the Defendant has suffered loss as a result of the alleged defective buckles and is entitled to its counterclaim.

WITNESSES

25.  The following witnesses were called:

(1)	Leung Wing Fai (“W F Leung”), the proprietor of the Plaintiff;
(2)	Leung Ka Ling (“K L Leung”), the business manager of the Plaintiff;
(3)	Kwok Siu Hang (“S H Kwok”), the purchasing officer of the Defendant; and
(4)	Kwok Yuk Ching Jennifer (“J Kwok”), the general manager of the Defendant.

PLAINTIFF’S ENTITLEMENT TO THE CLAIM

26.  I shall first dispose of the question of the Plaintiff’s entitlement to the claim.

27.  Mr. Wong for the Plaintiff argued that the Defence only says that the Defendant was entitled to reject the alleged defective buckles.  There was neither pleading of actual rejection nor suggestion of that in the course of the evidence.  He therefore submitted that the Defendant was not in a position to dispute the Plaintiff’s entitlement to the balance of the costs of the Buckles sold and delivered to the Defendant.

28.  According to the Defence, and as evidenced by the correspondence, upon receipt of the debit note on account of the alleged defective buckles, the Plaintiff requested for the return of these buckles for verification of the Defendant’s allegation.  However, the Defendant refused on the basis that the buckles had been incorporated as parts of the brassieres.  They would remain in Germany unless the Plaintiff agreed to pay numerous items of cost and expenses in excess of EURO 170,000.  The Plaintiff did not respond to that.

29.  Where the buyer is entitled to reject the goods, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them: see section 38 of the Sale of Goods Ordinance, Cap.26 (“the Ordinance”).

30.  The Defendant might believe that it had intimated its refusal to accept the alleged defective buckles.  In my judgment, this was factually wrong.

31.  By late May 2003 when the Defendant complained about the quality of the buckles, they had become integral parts of the brassieres already shipped to its German customer.  The use of the buckles to manufacture the brassieres was act inconsistent with the ownership of the Plaintiff in the buckles.  Even Mr. Chow for the Defendant suggested in his submissions that the Defendant was unable to return the buckles which had already been placed on the brassieres.  The Defendant was prima facie deemed to have accepted the buckles so that even if they might be defective on their own, the right to reject them had been lost: see section 37(1)(b) of the Ordinance.

32.  I say this was the prima facie position because of section 37(2) of the Ordinance.  It provides that:

“	where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them for the purpose –
	(a)	of ascertaining whether they are in conformity with the contract; and
	(b)	in the case of a contract for sale by sample, of comparing the bulk with the sample.”

33.  Did the Defendant have a reasonable opportunity to examine the buckles?  In my judgment, the answer must be in the affirmative.  This was not a case of the Defendant being a buyer for onward sub-sale and direct delivery of the buckles to its customer.  The Defendant’s complaint was made after its customer had received the bulk of the brassieres.  I can hardly believe that the process of the Defendant’s manufacturing of the brassieres did not amount to reasonable opportunity of examination of the buckles by the Defendant.

34.  Therefore, even assuming that the buckles were defective, the Defendant has lost the right to reject them.  Any complaint about quality, if proved, could only be considered as a breach of warranty and could afford the Defendant with the right to claim damages.  This would be a matter of counterclaim.

THE CONTRACTUAL OBLIGATION OF THE PLAINTIFF

35.  The Defendant made the bulk purchase by way of the PO in early January 2003.  This was the time of contract.  By then, the Defendant had approved the MX1133 samples previously supplied to the Defendant (“the Sample”).  S H Kwok confirmed that in his evidence.  This was also “the Sample” referred to in the Defendant’s pleading (see paras.3.5; 4.3; and 4.4 of the Defence).

36.  The contractual obligation of the Plaintiff was therefore to supply the bulk of the buckles in accordance with the Sample then.

37.  The PO provided that the Defendant had the right to cancel the order if the quality of the goods did not meet its customer’s requirement.  This was effectively a condition subsequent upon which the Defendant reserved the right to rescind the contract.  However, I am not convinced that this contractual right to cancel order was intended to vary the Plaintiff’s primary obligation to supply the buckles in accordance with the Sample.  In the absence of the exercise of this contractual right, whether the Plaintiff has performed the contract in terms of quality would still be measured by reference to the Sample.

IMPLIED TERMS AS TO QUALITY

38.  When a sale is by way of sample, there is an implied term that the quality of the goods supplied shall correspond with that of the sample.  It is also implied that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.  The goods shall also be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample: see section 17(2) of the Ordinance.

39.  In the present case, the Plaintiff’s such obligations were not in dispute.

40.  Where the seller sells goods in the course of a business and the buyer makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely on the seller’s skill or judgment: see section 16(3) of the Ordinance.

41.  In the present case, there was no real dispute that the Plaintiff knew or reasonably contemplated, at the time of the PO, that the buckles would be used as buckles for the brassieres which the Defendant would be manufacturing then.

SPECIFICATIONS AT THE TIME OF CONTRACT

42.  There was no dispute that prior to this transaction, the Defendant was in possession of the Plaintiff’s catalogue of products.  The catalogue was actually a file of the actual samples of the Plaintiff’s products, their measurements and their model numbers.

43.  In late 2002, the Defendant approached the Plaintiff for the supply of accessories including buckles.  According to S H Kwok, the Defendant’s purchasing officer, the Defendant had received documents from its customer showing some specifications including the measurements and materials of the brassieres to be manufactured.  However the Defendant did not seem to have been provided with the specification of the type or colour of the buckle required.  According to him, the Defendant actually chose a black metallic buckle (MX127) but was rejected by the customer.  MX1133, which was gold in colour, was only chosen eventually.  The reasonable inference is that MX1133 was the ultimate choice confirmed by the Defendant with its customer’s approval.  Upon that, the Defendant placed the PO.

44.  There was also no evidence of any specification by the Defendant’s customer of the tightness required of the buckle immediately prior to the PO.  More importantly, there was no evidence that the Defendant itself had given to the Plaintiff specific instruction as to the tightness of the buckle at the time of the PO.  I can only believe that the Defendant would not have placed the PO for MX1133 if the Sample had already appeared to the Defendant to be too loose for their purpose.

45.  In my judgment, as at the time of contract, the requirement of tightness of the buckle required, and eventually MX1133, could not be more specific on the mind of the parties than what was mentioned above.

WHETHER THE BUCKLES SUPPLIED WERE DEFECTIVE

Evidence of the alleged defect – “too loose”

46.  It is the Defendant’s burden to prove the alleged defect, namely, the buckles were too loose.  However, it serves no meaningful purpose by saying whether the buckles were loose or tight.  For proving whether the buckles were too loose, witnesses for both parties gave evidence.  They also carried out demonstration in court.

47.  In court, Mr. Chow for the Defendant led the Defendant’s witnesses to demonstrate that the two parts of the buckle, if held up, were loose.  Mr. Wong for the Plaintiff however pointed out that this did not reflect the position of the 2 parts of the buckle on the brassiere being worn on a lady’s body.  According to J Kwok, she had the personal experience of wearing the brassiere and the buckle loosened up at one point.  In court, K L Leung put on the brassiere (on top of her garment) and demonstrated that the buckle would not loosen in the absence of drastic movement.  Lastly, there was the meeting in June 2003 where the representatives of the parties and that of the Defendant’s customer were present.  The evidence was that the customer’s representative demonstrated the tightness required of the front buckle of the brassiere by holding it in the hand and shaking it a number of times.

48.  In my judgment, none of these tests or demonstrations sufficed.  The alleged variation in tightness was never specific.  More importantly, the concern was not only whether the buckle was per se tight or loose but also whether it was so when serving as the front buckle of the brassiere on a lady’s body.  For the determination of the quality dispute like the present one, it is certainly not up to me to simply compare the various exhibits (though I did) to come to a conclusion.  There was no evidence of the standards or tests which are adopted in the relevant field for testing the appropriate tightness of the buckle on the brassiere when worn.  There was also no evidence to show that which test or demonstration mentioned above was the proper one, if at all.

49.  Mr. Wong for the Plaintiff drew my attention to the fact that the Defendant was specifically reminded of the desirability, and therefore the opportunity, of the preparation of expert evidence in this regard during the pre-trial review.  The Defendant has now to live with its decision not to produce such evidence.

50.  I may still determine whether the buckles supplied by the Plaintiff were defective as alleged by reference to the circumstances.  What were then the primary facts and the inference which could be drawn from them?

The Defendant’s submission of the brassiere samples

51.  The Defendant’s factory first complained about the quality of the buckles, including that they were allegedly too loose, in late February 2003.  There was also similar complaint in early March 2003.

52.  However, the Defendant’s complaint in late February about the tightness related to about 3,000 pieces, including allegedly too loose and too tight buckles.  According to its letter dated 4 March 2003 to the Plaintiff, the Defendant complained but only after its customer rejected the brassiere samples which it supplied for the customer’s approval.  Had the majority of the buckles been too loose, I would have expected the Defendant’s complaint in late February to relate to a much bigger amount.  More importantly, had the Defendant taken the view that the buckles supplied were too loose for its purpose, I wonder why Defendant would still have used them to make the brassiere samples and submitted the same to its customer for approval.  The Defendant’s witnesses agreed that they would not have done so.  If the buckles were too loose, the Defendant must have discovered them at least during the making of the brassiere samples.

53.  This leads me to doubt whether by the time when the PO was placed, the Defendant had an accurate understanding of the tightness of the buckles on the brassieres required by its customer.

Modification of the buckles

54.  Upon the Defendant’s first complaint in late February 2003, the Plaintiff was ready to deliver replacements.  In fact it did.  Notwithstanding that, parties eventually agreed that the buckles already delivered would be returned to the Plaintiff.  J Kwok confirmed that that was not a cancellation of order.  The buckles were returned for modification in order to make them tighter.

55.  This was the agreement after the parties had met in early March.  Both K L Leung and W F Leung said that they decided to help the Defendant deal with the requirement of its customer.  K L Leung was first against the idea but respected K L Leung’s old school of thought about maintaining business relationship.  According to them, the machine acquired for the modification could be used for future purpose anyway.

56.  If delivery of replacements could have solved the Defendant’s problem with its customer, I see no reason why the Plaintiff would not have simply opted for that relatively more convenient course.  As mentioned above, the Plaintiff did so after the Defendant’s first complaint in late February.  Instead, the Plaintiff proposed and agreed to modify the buckles.  I believe the Plaintiff must have formed the view that no replacements would be able to meet the tightness of the buckles required and now made known by the Defendant.  This limitation also explained why the Plaintiff had to write to the Defendant eventually in June 2003 explaining that MX113 was made of zinc alloy.

57.  I believe that the Defendant was not (fully) aware of the specific tightness of the buckles on the brassieres required by its customer until the article sample inspection report from Germany in late February.  I believe that it only transpired in early March to both the Plaintiff and the Defendant that MX1133 might not be able to meet the specific tightness requirement of the Defendant’s customer.  I also believe in the Plaintiff’s witnesses that the Plaintiff agreed to help by modifying MX1133 in these circumstances.  This was not rectification of breach but modification of a product.

The Defendant’s use of the modified MX1133 to manufacture the brassieres

58.  The buckles were returned for modification after the Defendant’s customer approved the sample of the modified buckle.  Delivery of the modified buckles commenced in mid-March.  Apart from some minor replacements, the Defendant raised no complaint about the modified buckles.  It used them to manufacture the bulk of brassieres in fulfilment of its customer’s order.  It also placed 2 additional orders for the buckles, namely, RPO03040028 dated 15 April and RPO03040048 dated 22 April.  Naturally these 2 orders must be for the modified MX1133 (as opposed to the PO).  The brassieres were also shipped to the customer.

59.  More than 3 weeks after the Plaintiff’s last delivery of the modified MX1133, the Defendant’s factory then informed the Plaintiff of the customer’s complaint after the random inspection of the brassieres.  40% of those inspected was said to be defective (mainly with the tightness of the front buckle).

60.  Again, if the modified buckles were still too loose by its customer’s standard and the Defendant was aware of that, I wonder how the Defendant could have failed to discover that prior to and during the manufacturing of the brassieres.  The reality was that the Defendant even placed additional orders for the modified MX1133.  It shipped the bulk of the brassieres incorporating the modified buckles to the customer.

61.  The discrepancy in the understanding of the tightness requirement of the brassiere front buckle on the parts of the Defendant and its customer apparently still persisted despite the modification of the buckles.

62.  This discrepancy was also evidenced by what happened during the meeting in June 2003.  K L Leung gave evidence, and I accept, that the representatives of the Plaintiff and the Defendant were somehow surprised by the demonstration by the Defendant’s customer of how tight it desired the front buckle on the brassiere to be.

The Plaintiff’s skill or judgment

63.  It was argued on behalf of the Defendant that it had to and did rely on the Plaintiff’s skill and judgment on the suitability of the buckle for the Defendant’s purpose.  In my judgment, this was factually untrue.

64.  The Plaintiff knew or reasonably contemplated that the accessories ordered by the Defendant would be used to manufacture brassieres.  It might be said that the Plaintiff made no suggestion that MX1133 would not be suitable for such purpose.  But the Defendant chose the buckle independently after its customer’s approval in the first place.

65.  The key was the specific tightness of the buckle on the brassiere required by the Defendant.  As to this, while the Plaintiff might be an experienced supplier of accessories for manufacturing brassieres, it was actually the Defendant which was experienced in manufacturing brassieres.  In fact this was the Defendant’s main business and its annual business volume was substantial.  Neither had the Defendant specified to the Plaintiff the precise tightness of the buckle required (as the Defendant did not seem to fully apprehend from its customer either), nor was the Plaintiff involved in the design of the brassiere in question.

66.  I do not find that the Defendant in fact relied on the Plaintiff’s judgment on the suitability of MX1133 as the front buckle on the brassiere which the Defendant was manufacturing.  It would have been unreasonable for the Defendant to do so anyway in the circumstances.

67.  In the light of the evidence, including those specifically analysed above, I turn to the specific questions to be answered in this case.

Whether the MX1133 supplied by late February corresponded with the Sample or reasonably fit

68.  I find that the Defendant has failed to prove that the buckles supplied by late February did not correspond with the Sample.  The Plaintiff was not to blame if the buckles did not fit the Defendant’s purpose as I am not satisfied that the specific tightness required of the buckles was made known to the Plaintiff at the time of contract.

Whether the modified MX1133 supplied by late April failed to correspond with the sample or reasonably fit

69.  It was not the Defendant’s pleaded case that the contract by way of the PO was varied so that the Plaintiff became contractually obliged to deliver the buckles in accordance with the sample of the modified MX1133.  The only contracts for buckles in accordance with the sample of the modified MX1133 were the 2 new orders placed by the Defendant in April 2003.

70.  I find that the Plaintiff’s proposal and agreement to modify MX1133 is not to be construed as admission of breach as there was in fact no breach on the part of the Plaintiff by then.

71.  In any event, I find that the Defendant has failed to prove that the modified buckles delivered did not correspond to the sample of the modified MX1133.  Again, the Plaintiff was not to blame if the modified buckles still did not fit the Defendant’s purpose as I find that the Defendant had still failed by then to specify to the Plaintiff the precise tightness required of the buckles by its customer.

Whether the buckles, before and after modification, were of merchantable quality

72.  According to K L Leung, MX1133 was not produced for the sole use as buckle, not to mention as front buckle, on brassieres.  The buckles had also been supplied for the manufacture of a few well-known brands of garment.  The Plaintiff had received no complaint about their quality from these manufacturers.  I accept that.

73.  I have no doubt that the buckles supplied by the Plaintiff to the Defendant were on their own of merchantable quality.

THE ALLEGED LOSS

74.  The Defendant’s case on its alleged loss was also problematic.

75.  According to the correspondence, the Defendant’s stance was that it would pay the Plaintiff but not the cost of the 120,000 pieces of alleged defective buckles.  Hence the payment of HK$93,511.81.  No claim for the alleged waiver of the 20% purchase price payable by the German customer (or US$250,000) had been put forward.  In court, J Kwok explained that she did not want to go so far against the Plaintiff.  This is so difficult to understand that I do not accept as credible.  The amount of loss alleged was substantial by any standard.  Had the Defendant suffered such alleged loss as a result of the Plaintiff’s breach, a decision not to claim against the Plaintiff would have been inconceivably generous.  The Defendant even paid for part of the buckles which they said they accepted.  Now that the Plaintiff commenced legal proceedings, the Defendant still chose to waive almost half of her claimable loss.  I cannot help feeling sceptical about how genuine and serious such claim could be.

76.  Documentary proof of the alleged loss was also scanty.  Further, there was evidence that the reasons for the rejection of the brassieres by the Defendant’s customers could be more than the tightness of the front buckle.  The causation and reasonableness of the alleged compensation to the German customer were far from being substantiated.

CONCLUSION

77.  The Plaintiff should have judgment in the amount claimed, i.e., HK$83,476.19.  The counterclaim is dismissed.  I order interest on the award to run at the base rate plus 1% p.a. from the date of writ until judgment and thereafter at the judgment rate until payment.

78.  Having succeeded, the Plaintiff should have costs of this action, including any costs reserved.  I so order with such costs to be taxed if not agreed.  Notwithstanding the amount of the award, I certify the engagement of counsel in view of the substantial counterclaim and the issues canvassed during trial.  This costs order nisi shall become absolute in the absence of any application to vary within 14 days.