NG KIN CHING t/a IMAGES (HK) v. SUCCESS LABELS MANUFACTURING LTD

DCCJ 1190/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION No. 1190 OF 2005

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BETWEEN

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JUDGMENT

Introduction

1.  This case concerns goods sold and delivered and the dispute is of some age.  Ng Kin Ching (“Ng”) trading as Images (H.K.) sues Success Labels Manufacturing Limited (“Success Labels”) in respect of the allegedly defective leather patches supplied to his sub-buyers and claims for damages. Success Labels denies liability and counterclaims for the unpaid price for leather patches sold and delivered to Images (H.K.) and 10 sample charges under 79 invoices and damages for wrongful repudiation of two sales contracts. 

2.  In his opening submissions, Mr. Vincent Chen, Counsel for Ng, made it clear that Ng would abandon his claims for loss of reputation and loss of profit and would confine his claim for damages to the compensations he had actually paid to his sub-buyers, namely Ever Peak Garment Limited (“Ever Peak”) and United Jeans Inc. (“United Jeans”).

Background Facts

3.  Images (H.K.) was the sole proprietorship business of Ng and it trades in accessories for the garment industry. Success Labels was in the business of manufacture and supply of labels and patches for garments.

4.  Since 2003, Images (H.K.) had placed purchase orders with Success Labels for labels and patches of different brands to be used in its course of business.

5.  The leather patches in dispute are for the jeans traded under the brand name of “Baby Phat”.  Such jeans were manufactured by Ever Peak and marketed by Baby Phat Jean Co. (“Baby Phat Co.”) as apparent from the leather patches. Success Labels supplied leather patches bearing the trade mark of “Baby Phat” to Images (H.K.). Images (H.K.) resold such leather patches together with other accessories to Ever Peak. The leather patches were delivered, either directly by Success Labels or by Images (H.K.) itself to the factory of Ever Peak located in Pun Yu on the Mainland for further processing.

6.  United Jeans is a company located in New York. United Jeans purchased Baby Phat leather patches from Images (H.K.) through its contractor Ever Peak. United Jeans itself was a contractor of Baby Phat Co. .

7.  The particulars of the Baby Phat leather patches the quality of which is at issue are as follows:

8.  It can be seen that the Baby Phat leather patches supplied by Success Labels to Images (H.K.) came in two colours. Ever Peak complained about the white leather patches whereas United Jeans complained about the gold ones.

9.  It can be also seen that for some styles of the leather patches, they came with metal plates bearing the mark of Baby Phat. Such metal plates were to be sourced and provided by Images (H.K.).

Plaintiff’s Case

10.  The pleaded case of Images (H.K.) is that in all the oral agreements between Images (H.K.) and Success Labels whereby Success Labels agreed to supply to Images (H.K.) the Baby Phat leather patches, there were implied terms to the effect that the leather patches should be (a) reasonably fit for resale purpose and (b) able to sustain ordinary home laundry.

11.  Mr. Chen agreed that the first condition is synonymous with the usual implied term that the goods should be of reasonable merchantable quality.

12.  The white leather patches supplied to Ever Peak were first found to fail home laundry test by its factory in the Mainland on 2 October 2004. Paint peeled off from the white leather patches after home laundry. Upon complaint by Images (H.K.), Success Labels sent its factory manager Mr. Chan Wai Ming (“Chan”) accompanied by his colleague one Mr. Wong to the factory in Pan Yu to inspect the allegedly defective leather patches. Chan and Mr. Wong were received by a lady person-in-charge whose name was unknown. The case of Images (H.K.) is that Chan and Mr. Wong too acknowledged that the leather patches were defective and they suggested that white paint should be sprayed onto such leather patches as a remedy. This suggestion was rejected flatly by Ever Peak.

13.  As a result, Ever Peak replaced all such white leather patches and dispatched jeans with new white leather patches by air shipment thereby incurring extra costs. 

14.  By a letter dated 20 October 2004 (“EP’s Letter”), Ever Peak complained about the quality of the 34,172 white leather patches supplied by Images (H.K.) and claimed that total cost of replacement was HK$96,877.62 (HK$2.835/piece). Moreover, in order to make up for the time loss, 15,059 pieces of garment had to be delivered by air shipment and the air charge was USD46,381.72 (USD3.08/piece).  Ever Peak indicated that it would charge Images (H.K.) the said two sums and would deduct them from the “current invoices” of Images (H.K.).

15.  The pleaded case of Ng is that Images (H.K.) did pay the said two sums to Ever Peak and thus he now seeks to recoup the said two sums from Success Labels.

16.  On the other hand, Mr. Rafael Benarie (“RB”) who was the representative of Images (H.K.) in Los Angeles on 8 October 2004 put six samples of the golden leather patches supplied by Success Labels to home laundry test. The gold foil and protective coating peeled off from the gold leather patches after the test. RB then informed United Jeans of the findings. United Jeans decided to, instead of rejecting the 24,000 gold leather patches, make a 100% inspection and to attach disclaimer tags to all of the jeans pursuant to the instructions of its client, presumably the Baby Phat Co.. United Jeans was charged USD14,400 for these remedial measures and by a letter dated 10 December 2004 (“UJ’s Letter”), indicated to Images (H.K.) that it would deduct from the “open invoices” of Images (H.K.) a sum of USD14,400 to cover the extra expenses of disclaimer tags incurred.

17.  The pleaded case of Ng is that Images (H.K.) did pay United Jeans the sum of USD14,400 subsequently and he now seeks to recoup the said sum from Success Labels.

18.  Images (H.K.) further commissioned SGS Hong Kong Ltd. (“SGS”) to conduct tests on the leather patches returned by Ever Peak. A test report dated 29 October 2004 was compiled  (“the SGS Report”).

19.  According to the SGS Report, a woven denim cutting with a white leather patch and a woven denim jeans with a gold leather patch were submitted by Images (H.K.) on 25 October 2004. A test known as AATCC 135-2003 was administered on both samples and after three wash, SGS had the following observations on the sample with the white leather patch: (a) appreciable wrinkle appearance on leather patch; (b) slight colour change on gold metal and white leather patch and (c) no significant cross staining on washing sample. The conclusion of SGS was that the general appearance of this washed sample was unsatisfactory.

20.  As regards the sample with the gold leather patch, after the test the following observations were made: (a) slight wrinkled appearance on leather patch, (b) no significant colour change nor cross staining on washed sample and (c) no deterioration nor change in appearance on gold metal. The conclusion of SGS was that the general appearance of this washed sample was satisfactory.

21.  Another test known as AATCC 150-2003 was further administered on the gold leather patch sample only. The following observations were made after the test but it is unknown which sample they were related to: (a) appreciable removal of coating on leather patch, (b) appreciable colour change on body fabric of jeans and slight colour change on leather patch. The conclusion was that the general appearance of the washed sample was unsatisfactory.

22.  Two more tests were applied to the white leather patch and the metal plate as requested by Images (H.K.). One was AATCC61-2002 Test No.2A for testing colour fastness to washing and the other one was AATCC 8-2001 for colour fastness to crocking. The results of these two tests were apparently satisfactory having earned the rating of 4 or above in a scale of 1 to 5, where 1 is bad and 5 is good.

23.  Ng relies heavily on the SGS Report to prove the breach of the two implied conditions by Success Labels. Ng explained in the witness box that AATCC 135-2003 differed from AATCC 150-2003 in that the former was applied to a piece of fabric whereas the latter was applied to a piece of garment. He said he had been explained this difference by a staff member of SGS.

24.  Ng also related the circumstances leading to his commission of SGS. Ng maintained that on or about 15 October 2004 Mr. Henry Lee (“Lee”) who was Sales Manager of Success Labels agreed that Images (H.K.) could withhold payment of any invoices issued by Success Labels pending confirmation (a) by Ever Peak as to the amount of compensation and air shipment charges payable by Images (H.K.)  and (b) by United Jeans as to the costs of the disclaimer tags. However, Lee insisted that the leather patches were not defective and so Ng and Lee reached another agreement that Success Labels would send the leather patches to SGS for testing. It was further agreed that if the leather patches passed the tests conducted, Images (H.K.) would pay up all the outstanding invoices to Success Labels but if they failed the tests, Success Labels should forgo all the sums payable under all those outstanding invoices relating to the leather patches. With respect to other invoices relating to other products, Lee agreed that Images (H.K.) could set off any compensation payable to Ever Peak and United Jeans against such sums payable thereunder.

25.  On or about 25 October 2004, Ng asked Lee for the result of the SGS testing agreed to be procured by Success Labels. Lee told Ng that the tests were passed but he refused to let Ng have a copy of the test report. Ng then told Lee that he himself would instruct SGS to conduct tests on the leather patches and hence the SGS Report.

26.  Images (H.K.) has not returned any leather patches to Success Labels.

27.  Ng contends that he is not liable to pay for those invoices relating to the leather patches in question on the one hand and on the other hand he is entitled to set off the outstanding payment of other invoices of Success Labels against the compensation he has paid Ever Peak and United Jeans.

28.  Ng also denies liability in respect of the invoice SD04-003567, alleging there was an agreement to reduce HK$6,000 from the amount payable thereunder due to delay of delivery on the part of Success Labels.

29.  In regard to the invoice SD04-003426, the goods supplied thereunder were said to be compensatory supply for a previous short delivery. Lee agreed to this contention at the trial and on behalf of Success Labels abandoned its claim for the price of this invoice.

30.  As regards those invoices seeking sample charges, Ng alleges that there was an agreement that there would be no charge for samples and thus he denies liability to pay any sample charges.

31.  Ng now through his Counsel Mr. Chen accepts his cancellation of two purchase orders (PO-2004/003956 and PO-2004/04026) on 15 October 2004 was unlawful but denies that Success Labels is entitled to any damages.

Defendant’s Case

32.  Success Labels accepts that the implied conditions were that the leather patches supplied to Images (H.K.) had to be reasonably fit for resale purpose and suitable for home laundry. It simply denies that the leather patches in question failed to satisfy these conditions.  Success Labels relies on the acknowledgement of Images (H.K.) by way of stamping the company chop of Images (H.K.) right under the phrase “Received in Good Condition” printed on their invoices.

33.  Success Labels asserted that what actually transpired during the visit of Chan and Mr. Wong to the factory of Ever Peak in Pan Yu on or about 8 October 2004 was that they were told by the lady in charge of the factory that there was nothing wrong with the white leather patches and they had already been sewed on jeans which had already been packed and ready to be shipped. Thus, they were not available for the inspection by Chan and Mr. Wong. They did not make and could not have made the alleged acknowledgement of the defective quality of the leather patches upon inspection of the same in the factory.

34.  Lee did an ordinary home laundry test on the leather patches nevertheless in the wake of Ng’s complaint and the result was to his satisfaction.  After the commencement of these proceedings, Lee instructed SGS to carry out test on the product samples of the leather patches. The test of AATCC 135-2003 was applied. The result contained in a report entitled “Technical Consultancy Report” dated 21 July 2005 was that the quality of both the white and the gold leather patches met general industrial requirement, in respect of washing durability, shrinkage and distortion properties.

35.  Success Labels further contends that the sale of the leather patches to Images (H.K.) was a sale by sample. Prior to the confirmation of the sale agreements, Lee provided Ng with different samples at different stages for Ng’s inspection in his office.  Only after Ng had approved the final production samples upon his visual inspection of the same did Success Labels manufacture and deliver the final products to Images (H.K.). Therefore, Success Labels argues that Ng cannot now complain about the quality of the leather patches which should correspond with those of the production samples.

36.  Success Labels denies any agreement to allow Images (H.K.) to withhold payment. Nor was there any agreement to reduce HK$6,000 from the purchase price for the goods sold under the invoice SD04-003567 by reason of its belated delivery.

37.  Moreover, for each new type of label or patch, Success Labels produced a first sample, a salesman sample and a production sample for the approval of Images (H.K.). Success Labels usually produced the latter two types of samples for Images (H.K.) free of charge but not the first samples. 

38.  Lastly, Success Labels alleges that for the wrongfully cancelled purchase orders (PO-2004/003956 and PO-2004/04026), it has almost completed production of the goods to be sold thereunder and hence it seeks to recover their total price in the sum of HK$36,278.00.

Issues

39.  The parties have filed a joint statement of issues in dispute dated 27 May 2009. The document contains 14 issues. Among them, there are many non-issues given the present state of evidence and in view of Ng’s concession in relation to the two cancelled sale contracts, I believe the live issues are as follows:

(1)       Whether the 34,172 white leather patches supplied to Ever Peak were not reasonably fit for resale purpose and/or not able to sustain ordinary home laundry?

(2)       If so,

(i)  whether Images (H.K.) is not liable to pay Success Labels the purchase price under all the invoices relating to the white leather patches?

(ii) whether Ever Peak was entitled to charge Images (H.K.) the replacement costs of HK$96,877.62 and the air shipment costs of USD46,381.72 as damages and hence the two sums are recoverable from Success Labels?

(3)       Whether the 24,000 gold leather patches supplied to United Jeans were not fit for resale purpose and/or not able to sustain ordinary home laundry?

(4)       If so,

(i)  whether Images (H.K.) is not liable to pay Success Labels the purchase price under all the invoices relating to the gold leather patches?

(ii) whether United Jeans was entitled to charge Images (H.K.) the sum of USD14,400 being the costs of disclaimer tags as damages and hence the sum is recoverable from Success Labels?

(5)       Whether there was an oral agreement between Images (H.K.) and Success Labels regarding the postponement of payment of all other invoices pending the resolution of their disputes?

(6)       Whether there was an oral agreement between Images (H.K.) and Success Labels to reduce HK$6,000 from the purchase price for the goods sold under the invoice SD04-003567 by reason of belated delivery?

(7)       Whether there was an oral agreement between Images (H.K.) and Success Labels that Success Labels would not charge Images (H.K.) any charges for first samples?

(8)       What is the quantum of damages that Success Labels is entitled to in respect of Ng’s wrongful cancellation/repudiation of the two purchase orders?

Witnesses

Ng

40.  Ng was the only witness for the plaintiff’s case. To establish his claim, he in the main relied on hearsay evidence in the form of correspondences among Ever Peak, RB, United Jeans, Baby Phat Co. and the SGS Report. All these documents were included in the Hearsay Notice of the Plaintiff dated 8 May 2009 and Success Labels did not apply to call the makers of such documents for cross-examination. Indeed, Success Labels included the SGS Report, together with the Technical Consultancy Report, in its own Hearsay Notice dated 27 October 2008.

41.  As will be discussed below, Ng’s evidence was not really supported by the documents produced. Worse still, it was even materially contradicted by such documents.

42.  I do not find Ng a reliable witness. He failed to deal with important matters in his evidence in chief such as his own inspection of the white leather patches under complaint and the original complaint of Ever Peak which was about the protective pad of the metal plates on them rather than their inability to sustain ordinary home laundry purpose. When asked about these matters in cross-examination, he was decidedly unhelpful.

43.  An example is that he even made mistakes about the condition of the samples that he supplied to SGS for testing. He first said that the samples he gave to SGS were sent by post to him by Ever Peak and he only received white leather patches without any fabric or jeans. Thus he could only give such leather patches to SGS for testing. The fabric and jeans were provided by SGS in the tests applied to such leather patches. Upon challenge, he changed his version and said that he obtained from Ever Peak leather patches sewn on both fabrics and jeans and he in turn gave SGS these fabrics and jeans for testing.  It is also unknown how and where he obtained the gold leather patches for SGS as it was his evidence that all the gold leather patches had already been sewn on jeans and such jeans had already been shipped to the United States.

44.  I do have serious reservation about the truthfulness and accuracy of his evidence on the whole.

Lee

45.  Lee was the main witness of Success Labels for both its Defence and its Counterclaim. Understandably he insisted on the satisfactory conditions of the leather patches of Success Labels and he even asserted that negative conclusions were invariably reached in a large majority of the test reports compiled by SGS. His assertion was made without evidential basis and must be rejected.

46.  Lee did not strike me as a straightforward witness. He was not forthcoming and very often gave long answers to simple questions. However, as will be discussed below, the claim of Images (H.K.) and even his counterclaim do not heavily turn on his own credibility or the lack of it.

Chan

47.  Chan’s evidence fell within a narrow compass. He was asked by Success Labels to pay a visit to the factory of Ever Peak in Pan Yu to deal with the complaints about the quality of the white leather patches. He went there with his colleague Mr. Wong and the visit turned out to be uneventful. They were only told by a lady person-in-charge that there was nothing wrong with the white leather patches. The white leather patches were not even made available for their inspection. Chan denied having suggested to anyone in the factory that white paint should be sprayed onto those defective patches which had faded after home laundry test.

48.  Chan was in my view a truthful witness. His evidence was unshaken under cross-examination and not contradicted by any evidence, documentary or otherwise.  I accept his account in total.

Discussion

Issues (1) and (3)

49.  The simple claim of Ng is fraught with difficulties. Ng principally relies on hearsay evidence and this is not satisfactory. Such hearsay evidence is not helpful for my fact-finding exercise and some of such evidence is even inconsistent with Ng’s case and cries out for explanations. No explanation was given as to why Ng did not call anyone who had first hand information about the dispute and the documents placed before this court such as those personnel of Ever Peak, United Jeans and RB and more importantly the maker of the SGS Report to testify for him. 

50.  Mr. Chen correctly pointed out that the authenticity of the emails and letters produced by Ng was not challenged at the trial in his closing submission. Indeed the authenticity of these documents should be deemed to be admitted by Success Labels pursuant to Order 27 rr.4(1) and (2) of the Rules of the District Court.  However it does not mean that the truthfulness and reliability of the contents of these documents are not open to dispute.

51.  When deciding on the weight to be given to these documents, I should bear in mind the factors set out in section 49 of the Evidence Ordinance, Cap. 8.  Despite the fact that Success Labels did not apply for cross-examination of the makers of these documents, I am still at liberty to estimate the weight to be given to this evidence in light of other evidence: Chan Ka Lim v. Chow Wai Kin [2008] 5 HKLRD 881 at §34 per Le Pichon JA.

White Leather Patches

52.  I shall deal with those documents which touched upon the quality of the white leather patches. First by an email dated 2 October 2004, Ever Peak informed Ng that in that morning Ever Peak was informed by its factory that when the factory workers removed the protective plastic pads on the metal plates on the white leather patches,[1] the paint of the white leather patches peeled off at the same time. Ever Peak did not complain about the quality of the leather patches and merely asked Ng if there were any stocks for replacement of such leather patches.  It was subsequently added that Ever Peak needed 50 white leather patches for replacement.

53.  By an email dated 6 October 2004, Ever Peak complained about, among other accessories supplied by Images (H.K.), both the white and gold leather patches.  For the gold leather patches, Ever Peak claimed that they were not as glossy as those previously supplied. It was also found that different leathers were used.

54.  For the white leather patches, Ng was again informed of the foregoing incident and it was further claimed that the white leather surface was “worse”. I believe it was a comparison with those previously supplied to Ever Peak.

55.  By an email dated 8 October 2004, one Mark Kelleher of Baby Phat Co. (“Mark”) asked RB whether any defective white leather patches were shipped to anyone other than Ever Peak. It was stated that “this must be addressed too. This is extremely urgent.” RB replied that he had asked Armida and Well Creations to test his domestic shipment and he had heard nothing from the former and the latter indicated that there was no problem. Apparently Armida and Well Creations were other contractors of Baby Phat Co. in receipt of the white leather patches supplied by Success Labels.

56.  By an email dated 12 October 2004, RB asked Mark if there was any news of the white patches. Mark replied on the next day by email that the white patches cracked in home laundry. It is unknown where the home laundry took place, who did it and how it was done. It could not possibly take place in the United States as Ng’s case is that the defective white leather patches were all replaced and did not reach the United States.

57.  RB immediately asked for further particulars of the alleged cracking by email and Mark in an email dated 13 October 2004 replied,

“The white fades, the indigo from denim rubs onto the patch and many hairline cracks develop. This problem must be corrected on future orders. I believe Ever Peak is changing the patch and since Well Creation only has a small amount, it will not be a big problem.”

58.  By an email dated 15 October 2004, RB asked if Mark could allow further time for delivery because Images (H.K.) needed to change materials in view of the latest development with the white leather patches.

59.  In an email dated 18 October 2004, Ng wrote the following to RB:

“Venus rec’d a call from the patch guy and saying to her that all the patches passed home laundry in the SGS report.

I am getting the patches on Jeans back from Maylie tomorrow and I will send it to SGS for washing test too. But I think it’s really a touch war to fight.”

60.  Venus was the purchasing officer of Images (H.K.). I do not accept the hearsay evidence that Venus had actually been told that Success Labels had the patches tested by SGS. It is also inconsistent with the pleaded case of Ng that it was on or about 25 October 2004 that Ng enquired about the SGS test result and Success Labels told him that it was satisfactory but refused to supply the test report to him.[2] I accept Lee’s explanation that Lee only told Images (H.K.) that Success Labels had done an ordinary home laundry by itself only. 

61.  As indicated by an email of RB dated 19 October 2004, Ng and RB went to the factory of Ever Peak in Pan Yu in the week of 11 to 15 October 2004 and inspected the white leather patches. Their following observations were indeed worthy of note:

“We have inspected 120 pcs and found 10 pic that were slightly damaged from the removal of the protecting plastic pad.”

62.  Ng made no mention about his inspection in his evidence-in-chief at all. When he was asked about this email in cross-examination, he was obviously evasive and claimed that he only inspected a small portion of the white leather patches.  

63.  It is clear that up to 18 October 2004, Ng himself only accepted the validity of the complaint about paint peeling off from the white leather patches when the protective pads were removed.

64.  For completeness, the following contents of the reply email of RB dated 18 October 2004 have to be mentioned:

“There is no tough war to fight, use the damaged patches on the garment and wsh (sic) and you will see that they will not pass. Besides make sure to sendback (sic) all the oldpatches (sic) from maylie to the patch supplier with a delivery note.”

65.  Then there came the EP’s Letter. Curiously enough, the evidence of Ng was that Ever Peak asked him to go to the office of EP in Yuen Long to pick up this letter. The contents of this letter were also interesting. There, for the very first time, Ever Peak disclosed that the garments on which the white leather patches had been applied had been sent to a final wash test and all of the patches came back in an unsatisfactory condition.  There is no evidence that before Ng’s first demand letter dated 8 March 2005 issued by his former solicitors, Ng had ever shown this letter to Success Labels and demanded from it an indemnity of the compensation sought by Ever Peak.

66.  There was no explanation as to why this allegation had not been made in the previous emails of Ever Peak in which it made other complaints about the white leather patches. Nor was there any explanation as to how unsatisfactory the condition of the leather patches was after they were tested and as to how the test was administered.

67.  In regard to the alleged extra costs incurred, there was not a shred of supporting documentary evidence.

68.  I can attach no weight to the contents of the EP’s Letter. If there was any truth in its contents, Ng should be able to come up with cogent collaborative evidence.

69.  I should also point out that by an email dated 25 October 2004, Ever Peak asserted that if the white leather patches arrived in the United States they would be rejected during inspection. Ng relies on this assertion to prove the quality of the white leather patches but to me it was nothing more than an expression of its opinion. Whether the leather patches were defective has to be proved by evidence emanating from a more objective and independent source.   

70.  It is also interesting to note that in this email, Ever Peak stated that it would send a detailed statement with debit note the following week.  I would have thought the EP’s Letter already set out the claims of Ever Peak. Anyhow, no such debit note has ever been disclosed by Ng.

71.  Now I come to the SGS Report.  Firstly, it does not support the allegation of Mark that the white leather patches cracked after home laundry. I note that wrinkles were observed on them after wash and I do accept this factual finding. Yet, wrinkles and cracks are two different things. I would readily accept that those leather patches which crack after home laundry are unfit for home laundry and resale purposes but the same cannot be said of those which merely show wrinkles.

72.  Regrettably the maker of the SGS Report did not testify and assist this court. I am not sure on what basis it was concluded that the general appearance of the white leather patch sample was unsatisfactory.  Though I accept the factual finding that there was slight colour change of the white leather patch sample[3] after wash, there is no evidence and I cannot conclude that any colour change in patches however slight is unacceptable in order for the patches to be fit for home laundry purpose. 

73.  This is particularly so in view of the fact that the white leather patch sample passed both the colour fastness to washing test (AATCC 61 -2002) and the colour fastness to crocking test (AATCC 8-2001) though I have no idea as to how the two tests were administered. According to the SGS Report, these two tests were specifically requested by Images (H.K.) to be done on the leather patch and metal plate.

74.  I am also not convinced by the evidence before me that the white leather patch was not of reasonable merchantable quality just because its colour changed slightly after home laundry.

75.  Lastly, only one sample of the white leather patch was tested after all. I am unable to accept that the findings of this single sample can be representative or indicative of the quality of all the 34,172 white leather patches under complaint. It is also noteworthy that despite the allegation that all the 34,172 white leather patches were replaced due to their unsatisfactory condition after home laundry test by Ever Peak, only 2,460 of such patches were returned to Images (H.K.) on 14 December 2004, as indicated by an email of Ever Peak of the same date. I simply cannot accept this allegation at all.

76.  Ng now relies on the undisputed fact that paint peeled off the white leather patches when the protective plastic pads were removed to substantiate his allegation that the white leather patches were not reasonably fit for resale purpose.

77.  On the evidence I am not convinced that it should be the conclusion. Obviously the true culprits were the protective plastic pads and/or the way they were allowed to come into contact with the white leather patches. Success Labels only contracted to supply leather patches and Ng accepted that the metal plates were separately provided by a factory which he knew for years. There is no evidence as to when, how and by whom such plastic pads were placed onto the white leather patches to protect their metal plates. Success Labels cannot be faulted for any damage caused by the addition of these plastic pads.  Indeed, it was not suggested in the pleaded case of Ng, nor in cross-examination of Lee, that Success Labels should be held responsible for any damage caused by the plastic pads.

Gold Leather Patches

78.  The evidence to prove the unfitness of the gold leather patches is even thinner. 

79.  Apart from the mild complaint in the email of Ever Peak dated 6 October 2004 mentioned in paragraph 53 above, there was no complaint by Ever Peak or its sub-buyers before the UJ’s Letter was issued on 10 December 2004.

80.  It was alleged by Ng that RB told him that on 8 October 2004 RB put 6 samples of the gold leather patches to a home laundry test and they failed the test. I cannot accept this hearsay evidence in the absence of any supportive evidence.

81.  Quite on the contrary, the contemporaneous documents tell a different story. In his email dated 9 October 2004, RB advised Ever Peak and Baby Phat Co. that a disclaimer should be attached to the garment bearing the gold patches with metal plates to advise against application of any heat or steam on the metal plates.

82.  Very promptly, Mark responded and enclosed with his email dated 9 October 2004 a disclaimer with a circle device which read ”ATTENTION DO NOT IRON OR APPLY HEAT ON PATCH”. Mark asked such disclaimer tags to rushed and shipped to all those who had ordered the leather patches.

83.  In an email of Well Creation dated 11 October 2004, it can be seen that Images (H.K.) was to send Well Creation 11,210 pieces of disclaimer tags the following day and 6,300 pieces on 13-14 November and all such disclaimer tags were to be provided free of charge by Images (H.K.).

84.  No mention was made about the alleged failure of a home laundry test done by RB at all. RB and United Jeans only found it necessary to attach the disclaimer tag, which had nothing to do with the fitness of the gold leather patches for home laundry.

85.  Turning to the SGS Report, the general appearance of the gold leather patch sample was found to be satisfactory after the AATCC 135-2003 test despite its slightly wrinkled appearance. 

86.  I do note that after the AATCC 150-2003 test, the general appearance of the gold leather patch sample was found to be unsatisfactory. Ng said a leather patch had to pass both the ATTCC 135-2003 test and the AATCC 150-2003 test in order to be fit for home laundry and thus concluded that the gold leather patch sample was unfit for home laundry. I cannot accept his assertion in the absence of expert evidence.

87.  I was not assisted by any expert evidence about the reason for the two tests to be taken for the same sample. I do not know why it had to undergo the second test when apparently it passed the first one.  I do not know how long lasting the coating of the leather patch is supposed to be.

88.  In the premises, though I accept the factual findings in relation to the sample after the ATTCC 150-2003 test, I am not convinced that the sample is satisfactorily proven not to be reasonably fit to sustain home laundry.

89.  Moreover, the ATTCC 150-2003 test suffered the same problem with its sample size.

90.  Lastly, the fact that United Jeans accepted the gold leather patches to be sewn on their Baby Phat jeans negatives any allegation that they were not reasonably fit for resale purpose.

91.  To conclude, on these core issues, Ng bears the burden to prove that both the 34,172 white leather patches and the 24,000 gold leather patches were not reasonably fit for resale and/or home laundry purpose. Ng has failed to discharge his burden of proof. On the evidence, I am not convinced that on balance of probabilities the patches were unfit for such purposes. On this basis, Ng’s claim should be dismissed. 

92.  Strictly speaking, I do not need to deal with the matters raised by the defence in relation to the quality of the leather patches. Suffice it to say that there is no merit in the sale by sample argument, given the common ground that the sale agreements in relation to the leather patches did contain the implied terms as to their fitness for resale and home laundry purposes.

93.  On the other hand, I attach no weight to the Technical Consultancy Report. As rightly pointed out by Mr. Chen, the subjects of the report were the production samples only and the present dispute is about the quality of the leather patches actually supplied to Images (H.K.) and resold to its sub-buyers and not the production samples.   

94.  Nor do I accept the alleged acknowledgment of the good condition of the leather patches by Images (H.K.) in the invoices. Images (H.K.) could not be precluded from challenging the condition of the leather patches delivered simply because its staff had stamped the company chops on the invoices. I hold that it is still open to Images (H.K.) to the raise objections to the quality of the leather patches delivered.

Issues (2) and (4)

95.  In light of my factual findings relating to the two core issues, the issues of Ng’s entitlement to (a) non-payment of the relevant invoices and (b) damages do not arise at all. For completeness, I would briefly make the following observations.

96.  Given the fact that Images (H.K.) did not reject the leather patches, its remedies lie in damages for breach of warranty only.  I cannot see how it can avoid payment for the price for the goods sold and delivered altogether though of course it is entitled to a set-off. 

97.  Further, I accept that in a case where at the time of sale it was within the contemplation of the parties that the goods sold would be used in making a product which would be sold on, the measure of damages for breach of warranty of quality would be based on the buyer’s liability to the subsequent or ultimate users of the product arising from the defects constituting a breach of the seller’s warranty: Bence Graphics International Ltd v. Fasson UK Ltd. [1998] Q.B. 87 at p.100F per Otton L.J..

98.  I also accept that a legal liability owed by B to C consequent upon and not too remote from A’s breach of its contract with B, is capable of constituting recoverable loss entitling B to substantial damages from A and there is no rule of law requiring B first to have paid C. This proposition of law was set out by Deputy High Court Judge Mr. Peter Gross Q.C. in Total Liban SA v. Vitol Energy SA [2001] QB 643 at 664F and was subsequently applied by Stone J in Center Optical (Hong Kong) Limited v. Jardine Transport Services (China) Ltd and Pronto Cargo Corporation (third party) [2001] Vol.2 Lloyd’s Rep 678 and A. Cheung J. in Luen Yau Company v. Maxson Resources Ltd., unreported, HCA 3267/2002, 8.3.2004, helpfully referred to me by Mr. Chen.

99.  However, the significance of the complete lack of documentary evidence to prove Ng’s alleged payments of the claims of Ever Peak and United Jeans, as pointed out by me at the end of the trial, is not that Ng should not be entitled to recover loss arising from his liability to Ever Peak and United Jeans until he had first made such payments to them. 

100.  It is more about Ng’s credibility and the bona fide of the claims of Ever Peak and United Jeans. It is his pleaded case and it was his evidence that he had settled the claims in the EP’s Letter and the UJ’s Letter already. I cannot accept his assertion in the absence of documentary evidence. There is no reason why Ng failed to produce any accounting documents to prove his alleged payments of the three sums claimed in the said letters if he had actually made them.

101.  Moreover, if the claims were indeed genuine, there is no reason why they have not been settled after so many years. If for whatever reason these claims have not yet been settled, I would expect that there should be correspondence between the parties containing discussion about these claims.

102.  What is alarming is the fact that these claims in the said two letters are not supported by any documentary evidence. I am not convinced of the validity of these claims and hence Success Labels is liable to pay Images (H.K.) if it is proved that the implied conditions were breached. I am certainly not bound to accept the validity and the quantum of these claims.  As pointed out by Deputy High Court Judge Mr. Peter Gross, Q.C. in the Total Liban SA case,[4] there are techniques which the court can adopt to make itself feel able to assess the existence and the extent of the liability in question to avoid “windfall” recoveries such as assessment of damages.

103.  I should also deal with the fall-back position of Ng stated in the closing submissions. It was submitted that Ng was at the very least entitled to USD30,000 which had been deducted from the account of Images (H.K.) by Ever Peak as indicated by the email of Ever Peak to Images (H.K.) dated 25 October 2004.  I cannot agree with this contention.

104.  The email was in fact an email of Images (H.K.) dated 26 October 2004 in reply to the said email of Ever Peak to Images (H.K.).  One has to read these two emails in conjunction with an earlier email of Images (H.K.) to Ever Peak dated 19 October 2004, whereby RB indicated to Ever Peak that Images (H.K.) accepted liability to pay Ever Peak USD8,000 in relation to charms which Images (H.K.) had supplied to Ever Peak apparently. There, RB set out the payment schedule: first a check of USD3,000 cash to be issued by Ng and the balance to be deducted from future invoices. In this email, it is remarkable that no mention was made about the alleged liability in relation to the white leather patches at all and the intended payment of USD3,000 could have nothing to do with the settlement of the claim of Ever Peak relating to the leather patches.

Issue (5)

105.  Ng first alleged that there was an oral agreement made on 15 October 2004 that payment could be withheld pending the result of the SGS test to be procured by Success Labels.  I am not persuaded that such an agreement was made at all.  If such an agreement had ever existed, to ensure that the test was properly performed by SGS, Ng should have returned to Success Labels some of its leather patches for the purpose of a SGS test and required Success Labels to submit such leather patches and none others to SGS for testing. There is no such evidence at all.

106.  Ng relies on his email dated 19 October 2004 to prove the alleged oral agreement. I have already refused to accept the hearsay evidence to the effect that Success Labels had ever told Venus that the white leather patches had passed the SGS test. 

107.  Moreover, Success Labels issued two demand letters of Success Labels respectively dated 2 November 2004 and 12 November 2004 chasing payment of outstanding invoices. Ng accepted that he had received the former letter but not the latter. Ng alleged that he had talked to Lee in regard to the former letter. Ng reminded Lee to adhere to the alleged oral agreement and told Lee that he would withhold payment. I do not believe Ng’s version of events in the absence of any supporting documentary evidence. 

108.  In short, on this issue I find against Ng. I do not accept that there was any oral agreement as alleged made between Ng and Lee that Ng could withhold payment until the resolution of the disputes in these proceedings.

Issue (6)

109.  In his pleaded case[5], Ng gave no particulars of the alleged oral agreement. The alleged oral agreement was not covered by Ng’s evidence at all save that there was a general statement in his witness statement that he confirmed the truth of all the matters in his pleadings.  Mr. Chen did not address on this issue in his closing submissions.

110.  On the face of the relevant invoice, I cannot discern any delay as alleged. I am not convinced that there was such an oral agreement on the evidence and Ng must pay the full price in the invoice.

Issue (7)

111.  According to the history of practice between the parties narrated by Lee, Success Labels usually provided samples to Images (H.K.) without charge except first samples.

112.  I accept Lee’s evidence that the ten invoices relating to sample charges for first samples. There is no evidence that Ng has ever insisted on the alleged oral agreement and raised any objections to these invoices after they were issued to Images (H.K.). I find that the alleged oral agreement did not exist at all and Ng must pay the price in the ten invoices totalling HK$5,160.

 Issue (8)

113.  In its counterclaim, Success Labels claims for the full contractual price of the two purchase orders. As rightly pointed out by Mr. Chen, Success Labels is not entitled to maintain an action for price as the property of the goods to be sold has not yet passed to Images (H.K.).

114.  In Cellplus (HK) Ltd and Anor. v. Team Products International Inc. and Ors., unreported, HCA 1034/2004, 13.7.2005 at §35, Reyes, J. pointed out that normal measure of damages, in cases of such an accepted anticipatory repudiatory breach of buyers,  must prima facie be the profit foregone where there was no evidence that any manufacture costs had been paid.

115.  Success Labels has adduced no evidence of the profit expected to be made out of the two purchase orders. Further, Success Labels has failed to adduce any documentary evidence to prove the commencement of the production of the goods under the cancelled purchase orders, let alone its alleged near-completion. I do not accept Lee’s allegation that the production of such goods was near completion in any event and just that the products were mistakenly disposed of by the factory staff despite Lee’s instructions to preserve the same. In the circumstances, I am not inclined to allow any substantive damages to be recovered by Success Labels and I would only allow nominal damages in the sum of HK$100.

Conclusion

116.  In summary, I dismiss Ng’s action against Success Labels. I allow Success Labels’s counterclaim save the invoice numbered SD04-003426. There will be judgment in Success Labels’s favour against Ng on its counterclaim for the outstanding amounts in all other invoices set out in paragraph 4 of the Defence and Counterclaim totalling HK$326,551.90 plus the sum of HK$100 as nominal damages for Ng’s repudiation of the two purchase orders.

117.  Interest is to run on the sum of HK$326,651.90 at 1% over prime from 26 April 2005 (the date of the Defence and Counterclaim) until judgment, thereafter judgment rate until payment.

118.  Lastly there will be an order nisi that Ng pay Success Labels costs of this action, such costs to be taxed if not agreed on a party and party basis with certificate for counsel.