EVERHARVEST WEAVING FACTORY LTD. v. LUNG TANG GARMENT MANUFACTURING LTD.

1993, No.A4752

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an action by the plaintiff for an outstanding balance of the purchase price for goods sold and delivered. The defendant counterclaims for damages arising out of alleged breaches of contract due to late delivery and defects in the goods delivered.

2. The plaintiff was a supplier of fabrics including denim and cotton twill. The defendant was a manufacturer of garments and jeans. Prior to 1992, all the defendant's manufacturing process was conducted in Hong Kong either by the defendant's factory and/or its sub-contractors. Since 1992, such manufacturing process had moved to China. The plaintiff and the defendant had only had one business transaction in 1988. The circumstances leading to the transactions which were the subject matter of the present action were as follows.

The purchase orders

3. In or about May 1992, the plaintiff supplied certain quantities of dyed cotton twills to one Fornari International Limited for the production of jeans under the brand name of Fornari. The twills were weaved by the plaintiff and then dyed by a dyeing factory according to the plaintiff's instructions. It was the defendant which had manufactured the Fornari jeans using cotton dyed twills supplied by the plaintiff. After the jeans had been manufactured, they were sent for chemical washing. The Fornari jeans so produced had a special colour effect. Some time later, having seen such jeans, another company, Giordano Limited, wanted to have jeans of their own having the same colour effect. Giordano requested the defendant to do that for them. Hence, Mr Valiant Chan of the defendant arranged to have a meeting with Mr Steve Pai of the plaintiff. After some discussions between the two, the defendant placed several orders with the plaintiff for the purchase of the same type of dyed cotton twills as that supplied to Fornari.

4. It was not disputed by the parties that there were altogether six confirmations of sale and one purchase order made between December 1992 and March 1993 for the supply of the same type of dyed cotton twills. They were Confirmation of Sale Nos.EH2773, 2774, 2775 and 2776, all dated 3rd December 1992, Confirmation of Sale No.EH2814 dated 7th January 1993, No.EH2820 dated 14th January 1993 and Purchase Order No.LT-036/93 dated 17th March 1993.

The present disputes

5. It was also not disputed that the defendant had already paid the plaintiff for the goods supplied under Confirmation of Sale Nos.EH2773 and 2774 and part of 2775 and 2776 in the total sum of HK$945,709.20. The balance of the purchase price in respect of dyed cotton twills supplied under the remaining Confirmations of Sale and the Purchase Order amounted to HK$765,846.60. This figure were slightly bigger than the contract price contained in the relevant Confirmations of Sale and Purchase Order since the quantities of twills actually delivered were slightly larger than those specified in the contractual documents. However, the defendant did not dispute this difference. In fact, the defendant admitted that this was the amount which was still outstanding under the various orders but claimed that because of the plaintiff's breaches of contract, the defendant had suffered loss and damage which could be used as a set-off to the plaintiff's claim.

Any express warranty

6. It was not seriously disputed that some time in November 1992, Mr Chan of the defendant contacted Mr Pai of the plaintiff to arrange a meeting. They met in the defendant's office. Mr Chan showed Mr Pai some pairs of Fornari jeans and said that it was made from dyed cotton twills previously supplied by the plaintiff to Fornari. Mr Chan said that he wished to place orders with the plaintiff for the supply of the same type of dyed cotton twills which the defendant intended to use to make jeans which would display the same colour effect after chemical washing as that displayed by the samples of Fornari jeans. He told Mr Pai that the defendant needed the twills for the production of jeans for Giordano and asked Mr Pai to supply the defendant with identical twills as those previously supplied to Fornari. So far there was no dispute.

7. However, according to Mr Pai, Mr Chan told him that when the defendant manufactured the Fornari jeans, the defendant had used a washing factory called Gateley Limited and gave Mr Pai a name card of a personnel in that company. Mr Pai also said that he told Mr Chan that if the same type of dyed cotton twills was used, the same chemical washing was conducted and the same washing factory was engaged to process the fabrics, the resulting colour effect should be more or less the same. He also promised Mr Chan that the plaintiff would supply the same cotton twill materials and would use the same dyeing factory as was used for the Fornari fabrics and would instruct the dyeing factory to use the same recipe in the dyeing process. On the other hand, Mr Chan said that during the discussions, Mr Pai, on behalf of the plaintiff, assured him that the plaintiff would supply the defendant with dyed cotton twills which would be identical with the Fornari fabrics and which would show the same special colour effect as in the Fornari jeans. He alleged that there was an expressed warranty given by the plaintiff through Mr Pai that the dyed cotton twills to be supplied under these contracts would display the same colour effect after washing as with the Fornari jeans.

8. I do not believe that Mr Pai for the plaintiff would have given such warranty as alleged. I am sure that during the negotiations, Mr Pai had promised to produce the same type of dyed cotton twills as that supplied to Fornari. I think that he might also have said that the twills would, in the normal course of event, produce the same colour effect as in the case of the Fornari jeans. However, I do not think that Mr Pai would have guaranteed or warranted that the dyed cotton twills to be supplied by the plaintiff would show the same colour effect after chemical washing. Mr Pai might have warranted the quality of his dyed cotton twills and I think he probably did. But it is unlikely, in my view, that he would have gone further to warrant that the twills, after the chemical washing, would show the same colour effect. The chemical washing was something which was not to be done by the plaintiff and he was in no position to give such warranty. Even if he had said something along this line, it must have been said on the basis that the dyed cotton twills produced by the plaintiff were to be chemically washed using the same process. I do not think, in the circumstances of this case, that there was any express or implied warranty in addition to those implied under the provisions of the Sales of Goods Ordinance.

9. It was the defendant's case that the plaintiff was in breach of contract in two ways. First, the plaintiff had failed and/or refused to deliver the fabrics in accordance with the delivery dates stipulated in the contracts as evidenced by the Confirmations of Sale and the Purchase Order. Second, the plaintiff had failed to deliver fabrics which were reasonably fit for the purpose in that some of the jeans wbich were made from such fabrics did not show the required special colour effect after undergoing chemical washing. It was alleged by the defendant that by reason of these two breaches of contract on the part of the plaintiff, the defendant was prevented from performing the contracts it had with Giordano in time and was unable to manufacture jeans for Giordano with the required colour effect.

Any delay in delivery

10. Each of the Consignments of Sale and Purchase Order contained a specified date for the delivery of the dyed cotton twills under that contract. In respect of Consignment of Sale No.EH2773, it was stipulated that delivery of a total of 21,000 yds. of twills was to be made "on or before 10th January 1993". According to the Lists of Yardage which accompanied the delivery of goods from the plaintiff to the defendant, a total of 21,127 yds. were delivered on 13th January, 16th January and 18th January. The invoices issued by the plaintiff to the defendant in respect of these deliveries were dated 13th and 18th January. In respect of Consignment No. EH2774, the delivery date was specified to be "on or before 5th February 1993". From the Lists of Yardage which evidenced the deliveries (of a total of 17,128.5 yds. of twills) from the plaintiff to the defendant, it seems that the delivery dates under this consignment were 6th and 8th February. The invoice issued by the plaintiff with regard to these deliveries was dated 8th February. In respect of Consignment Nos. EH2775, 2814 and 2820, the delivery dates were specified to be on or before 15th February 1993. The relevant Lists of Yardage showed that there were altogether six deliveries under these consignments on 13th, 15th and 16th February 1993. Some parts of the twills which were dyed navy blue and dark green were returned to the plaintiff on 1st March following the defendant's complaint and some other quantity of fabric which was dyed dark green was redelivered to the defendant on 16th and 18th March pursuant to some discussions between the parties. I shall deal with these at a later stage.

11. In respect of Consignment No. EH2776, the specified delivery date was on or before 25th February 1993. The twills under this consignment were delivered by the plaintiff to the defendant on 3rd, 9th and 23rd March 1993. The goods delivered on 29th March were 5,623 yds. of navy blue fabric. However, this quantity was returned to the plaintiff on 7th April. Apart from these deliveries, further deliveries were made on 9th and 13th April 1993. For the Purchase Order No.LT-036/93, the delivery date specified therein was on or before 8th April 1993. It seems that deliveries were made on 9th and 13th April. It is therefore clear from the documents that the deliveries made by the plaintiff to the defendant under these Consignments of Sale and Purchase Order were generally late.

12. Mr Pai of the plaintiff denied that the late deliveries were due to the fault of the plaintiff. He said that the goods were ready on or about the specified dates. It was the defendant who had to arrange for transportation to deliver the dyed cotton twills to China for manufacturing and washing. He said that such arrangements would very often take some time and the plaintiff had to wait for instructions from the defendant to take delivery of the goods. He said that because of this, he would give allowance for sometimes up to one to two weeks in the taking of delivery. He usually received telephone calls from the defendant giving notice of the dates for delivery and after he had received such notices, the plaintiff would get the dyed cotton twills ready in about seven to ten days. Mr Pai further said that sometimes the number of deliveries for each contract had to depend on a number of factors such as the maximum loading capacity of each truck. It was after the deliveries, as evidenced by the Lists of Yardage, that the invoices would be issued by the plaintiff in about one or two days.

13. Mr Pai's explanation for any late delivery would be more acceptable if the delay was for just one or two days. It would be reasonable for a purchaser of goods to make arrangements for the transportation of the goods from Hong Kong to China and hence a delay of one or two days for taking delivery would be understandable. However, I do not accept that when the defendant asked for the delivery of goods, it did not know how many trucks would be required or had not made any arrangements for those trucks to be ready until seven to ten days later.

14. The method and time of payment may also throw some light on the question of whether the plaintiff was late in making deliveries. The price for the goods under these contracts was to be paid by letters of credit. One of the terms specified in each of the letters of credit included the presentation of a cargo receipt which was to be dated a certain date. If there had been any delay, no payment would be made under the letters of credit except with the consent or agreement of the defendant.

15. In respect of Consignment No. EH2773, I note that the cargo receipt which was required for payment under the letter of credit for that contract specified that it should not be dated after 16th January 1993. It seems, therefore, that notwithstanding the specified contractual date of "on or before 10th January 1993", the defendant had agreed to extend time until 16th January. The last delivery made under Consignment No. EH2773 was made only on 18th January. However, it was not disputed by the parties that the plaintiff had been paid under this consignment. In other words, notwithstanding the late delivery of the last batch of goods, the defendant had accepted the late delivery and made payment therefor.

16. In relation to Consignment No. 2774, the relevant letter of credit specified that the cargo receipt for the deliveries must be dated 5th February 1993. That means that at least initially the contractual date of delivery i.e., on or before 5th February, was to be adhered to. The four deliveries made under this consignment on 6th and 8th February were therefore late. However, again, it was not disputed that the plaintiff had been paid under this consignment. In other words, notwithstanding the late deliveries, the defendant had waived any such breach.

17. In respect of Consignments No. 2775, 2814 and 2820, the contractual date of delivery was on or before 15th February 1993. A letter of credit was issued by the defendant to cover these three consignments. One of the terms specified that the cargo receipt must be dated not later than 15th February 1993. This means that the contractual date of delivery was adhered to. From the documents, it seems that the deliveries under these three consignments were made on 13th, 15th and 16th February. Hence, the last delivery was late. However, the defendant had also made part payment in respect of these deliveries.

18. In respect of Consignment No. 2776, the contractual delivery date was to be on or before 25th February 1993. According to the terms of the letter of credit relating to this consignment, the cargo receipt in respect of this batch of goods must not be later than 10th March. This means that the defendant had agreed to extend the time for the delivery at least up to 10th March. The plaintiff had made two deliveries on 3rd and 9th March, and one on 29th March. The last delivery was returned by the defendant on 7th April. Following from that, another two deliveries were made on 9th and 13th April. From these, it does seem that the plaintiff was also late in making deliveries under this consignment. Part of the reason was due to the alleged defects in the goods delivered.

19. In respect of Purchase Order No. LT-036/93, the deliveries were to be made on 8th April. By then, there had already been a dispute between the parties as to the quality of part of the goods. Looking at the quantities of the goods to be purchased under this Order, it seems that this was a supplementary order and not for large quantities. Deliveries under this Purchase Order were made on 23rd March, 9th and 13th April. Again, it would seem that there was a delay in the making of deliveries under this order. However, this was also partly due to the dispute regarding quality of the goods.

20. From these documents, it is clear that there had been some delay in the making of certain deliveries of goods by the plaintiff to the defendant under these seven purchases. However, it is also obvious that the defendant had extended the time for the deliveries and/or had also waived such late deliveries. This is because if it were otherwise, the defendant would not have permitted payment under the relevant letters of credit or would have at least stated clearly that it would hold the plaintiff liable for the late deliveries. There was an on-going dispute with regard to the colour effects of the goods delivered. This accounted for the return of part of the goods and the redelivery of them after the specified delivery dates. I also note that although it was pleaded in the Defence and Counterclaim that the plaintiff was late in making delivery, there was little or no evidence before me to show that the delay had resulted in any loss and damage to the defendant. Nor was the defendant able to show clearly that the plaintiff's late delivery in any part of the goods had resulted in the defendant's customer, i.e., Giordano, in rejecting any specific part of the finished product or in claiming for damages.

Any colour difference

21. Considering the evidence as a whole, I think that the main complaint made by the defendant which had allegedly resulted in loss and damage was the defective quality of the goods rather than late delivery.

22. With regard to the quality of the dyed cotton twills delivered by the plaintiff, the defendant's complaint was that the fabrics were not fit for the purpose for which they were required. It was alleged that after the defendant had made use of the fabrics delivered by the plaintiff to manufacture jeans, the jeans did not have the same colour effect after washing as that displayed on the jeans made for Fornari using fabrics previously supplied by the plaintiff. On the other hand, the plaintiff denied that if there had been a different colour effect after washing, this was due to the fact that the fabrics were washed by a different washing factory used by the defendant as that used for the Fornari jeans. Mr Pai said that during the pre-contract negotiations, Mr Chan of the defendant mentioned to him that the defendant would use one Gateley Factory for washing the jeans. He was even given a name card by Mr Chan showing the person in charge of that factory. Mr Pai said that he had already told Mr Chan of the defendant that the jeans had to be washed by the same factory, using the same formula and using the same chemical. He said that if a different colour effect was shown after washing on the jeans made from twills supplied under the consignments and purchase order in question, they must have been washed by a different washing factory. The colour difference had nothing to do with the twills or the dyeing.

23. The documents before me showed quite clearly that the defendant had engaged the services of a washing factory called Golden Ridge Factory to do the chemical washing for the Fornari jeans. It was in fact the same washing factory which was engaged for the chemical washing in the present case. I do not believe that the defendant, through Mr Chan, had told Mr Pai that in the production of the Fornari jeans, the defendant used Gateley Limited to do the washing. If it was not Gateley Ltd which was used by Mr Chan in connection with the Fornari jeans, I see absolutely no reason why Mr Chan would have said so instead of telling Mr Pai that the defendant had in fact used Golden Ridge.

24. The evidence with regard to what happened after the deliveries of the fabrics was unfortunately not very clearly presented. However, there were contemporaneous documents including the correspondence between the parties and the invoices which helped reveal what I believe was a fuller picture.

25. During the stage of pre-contract negotiations, Mr Chan of the defendant relied on and showed Mr Pai of the defendant the Fornari jeans. He wanted the plaintiff to supply dyed cotton twills which would, after washing, produce the same colour effect as that appearing on the Fornari jeans. Since the plaintiff had a record of its supply of fabrics to Fornari, it was not necessary for the plaintiff to take away the Fornari jeans as samples from the defendant. Nor was it necessary for the plaintiff to make a sample for the approval by the defendant before contract or production. All the plaintiff needed to do was to check and refer to the previous record. It was the understanding of the parties that the plaintiff would produce the same type of cotton twills as it did for Fornari and would have them dyed in the same way. It was expected that the defendant would use the twills delivered by the plaintiff to manufacture jeans which would be washed in the same way as with the Fornari jeans. It was on this basis that the parties expected that the jeans to be made for Giordano in this way would show the same colour effect as that on the Fornari jeans.

26. The deliveries under Consignment No. EH2773 was referred to as the 1st lot of fabrics and those delivered under Consignment No. EH2774 was referred to as the 2nd lot. In respect of Consignment No. EH2775, 2814 and 2820, the deliveries made on 13th, 15th and 16th February were described as the 3rd lot. It was at about this time that the defendant found out that after the cotton twills dyed dark green which were supplied under the 1st and the 2nd lots had been manufactured into jeans and then washed, they showed a colour effect which was not the same as that which the defendant wanted at the time when it entered into the contracts. Mr Pai said that Mr Chan then informed him and asked for a discussion to solve this problem. A meeting was arranged between the parties. Mr Pai and/or the representatives of the plaintiff were also invited to visit the factories in China which were engaged by the defendant to make the jeans and to do the washing. They were asked to have a look at the finished product. This part of the evidence was to some extent confirmed by the fax letter dated 20th February 1993 from the defendant to the plaintiff (see p.129 of the defendant's bundle of documents). In that fax, the defendant informed the plaintiff that the rest of the dyed cotton twills had not yet been stone-washed. It also reminded the plaintiff that the quality of fabrics to be delivered under Confirmation No. EH2776 (the 4th lot) should be in accordance with the original colour. The complaint was that the dyed cotton twills delivered under the 1st and the 2nd lots, particularly the twills which were dyed dark green, did not show the desired colour effect after washing.

27. The discussion which followed between the parties concerned the various ways of solving this problem, including having the jeans or fabrics washed again using some other methods in order to get the correct colour effect. There was also a discussion on whether the plaintiff should be responsible for the additional costs for the extra washing. It seems that in early March, the parties had still not yet reached any concrete agreement. However, the plaintiff was agreeable to having the jeans made by the defendant washed in a different way. This was confirmed in a fax dated 2nd March 1993 from the defendant to the plaintiff (p.133 of the defendant's bundle of documents). In that fax, there was a reference to a conversation between the parties. It also referred to the plaintiff having agreed to accept the additional costs for washing for a few more times the twills which were dyed dark brown, dark red and navy blue in order to get the correct colour effect. There was a further reference to the dark green twills which, even after more washing was done, did not give the correct colour effect. The defendant proposed to return the uncut quantity of fabrics as well as the finished jeans. The defendant also reminded the plaintiff that they should compensate its loss if the jeans were not found to be acceptable by its customer, Giordano. The fax also requested for delivery of certain quantities of fabrics as replacement. It also referred to 6,133 yds. of dark green twills having an incorrect colour, and 5,952 yds. of navy blue twills having a colour shading and that these two quantities were returned to the plaintiff on the day before. There was a request that the plaintiff should re-dye the fabrics within three days. These last two quantities were indeed returned to the plaintiff on 1st March (see pp.46-48 of the plaintiff's bundle and p.134 of the defendant's bundle).

28. In another fax dated 2nd March 1993, there was a request by the defendant for the replacement of all the dark green twills under the 1st, 2nd and 3rd lot of delivery in the total quantity of 40,263 yds. (about 5,000 yds. under Consignment No. 2773, 3,130 yds. under Consignment No.2774, another 5,000 yds under Consignment No.2775, 800 yds. under Consignment No.2814 and 250 yds. under Consignment No.2820). Since the main complaint raised by the defendant related to the dark green twills and a small quantity of navy blue twills, quantities of the fabrics which were dyed in other colours were also delivered during the meantime. These included twills which were dyed white, dark brown and red.

29. In response to the defendant's fax dated 2nd March 1993, the plaintiff replied on 4th March 1993. In that fax (p.139 of the defendant's bundle) the plaintiff confirmed that it had agreed to be responsible for the additional washing costs as "per verbal agreement on 2nd March 1993". The plaintiff suggested that "the cut portion of the fabrics which were dyed dark green could be washed, using other washing methods, light enzymes wash, light acid wash, etc. to come with an acceptable after-wash colour". The plaintiff also informed the defendant that the 5,952 yds of navy blue twills which were returned to the plaintiff on 1st March were now under careful sorting and re-examination and that it would seem that about 60% were in workable condition and would be ready for transport to China by 6th March.

30. Meanwhile, the defendant were negotiating with Giordano as to the possible solution to the colour problems for the fabrics which were dyed dark green and navy blue. In some fax correspondence with Giordano, the defendant asked for time to deliver the finished products. During this time, it seems clear that the plaintiff and the defendant were continuing the discussion to find a solution. The fax dated 13th March 1993 from the defendant to the plaintiff was relevant. It read as follows :

"Re : All Cotton Piece Dyed Colour 2, Z2, 70 x 46, 7's x 6's, 59/60' width

As per our telephone conversation today, finally our buyer proposed the following condition to solve the present problems :-

1.) Navy colour less 10% base (sic) on F.O.B. value for both men's plus ladies' under first and second lot.

2.) Dark green less 50% base on F.O.B. value for both men's plus ladies' under first and second lot.

3.) Please proceed to dye navy colour without colour shading, and colour stin (sic) to T/C pocket lining for the 3rd and 4th lot.

4.) Please proceed to dye dark green according to 1st and 2nd lot colour (not as originally colour as in contract), buyer accepts no discount to be required.

5.) As reminder, if any of our jeans under this contract can't be shipped due to fabric problem that your company will take full responsibility to compensate our loss."

31. Following from that , there was some correspondence between the defendant and Giordano as to the amount of discount to be given to Giordano with regard to the jeans made from fabrics which were dyed dark green and navy blue. Finally, it seems that on 15th or 16th March 1993, the defendant and Giordano came to an agreement that there would be a 10% discount on the F.O.B. price for the goods with navy colour and 40% discount on goods which were made from the dark green fabrics. Giordano also asked for delivery of the goods by 14th April 1993, otherwise there would be a claim of compensation of 1% for each day of delay.

32. It seems that there was then a meeting between Mr Chan of the defendant and Mr Pai of the plaintiff on 15th March 1993. During the meeting, various matters were discussed including the reduction or discount in price with regard to the jeans in dark green and navy blue. Mr Pai said in evidence that the plaintiff only agreed that if there was any problem arising from the 1st and 2nd lot of delivery, the plaintiff would be responsible for part of the reduction or discount but that there was an express agreement to the effect that there would be no reduction or discount regarding fabrics delivered under the 3rd and the 4th lot even if there were to be problems. He also said that the plaintiff agreed to pay half of the discount, i.e. $120,000.

33. There was another fax dated 17th March 1993 from the defendant to the plaintiff with regard to the meeting held on 15th March 1993. It read as follows :

" Refer to our meeting on 15/3/93, in your office between the undersigned and your company will take full responsibility and compensate our loss due to fabric problem, which are including colour shading, colour stint, colour not according to the original contract, the actual details kindly refer to our fax LT-033/93 dated 13th March 1993."

34. At about the same time, the plaintiff delivered to the defendant two batches of fabric with a total quantity of 5,609 yds of twills in dark green which were delivered on 16th and 18th March 1993 (pp.62-64 of the plaintiff's bundle). On 23rd March, the plaintiff sent about 10,982 yds. of fabric for dyeing to a dyeing factory called Kong Sun Dyeing Factory.

35. It was on or about 17th March that the defendant, by way of a fax to the plaintiff, asked for five small quantities of fabric in various colours with a total quantity of 2,630 yds. This was the purchase order which was the last contract in question. The delivery date was to be 8th April.

36. On 21st March, the plaintiff made another delivery of about 3,458 yds. of dark green twills. On 29th March, the plaintiff delivered 5,623 yds. of navy blue twills to the defendant. However, the same quantity was returned by the defendant to the plaintiff on 7th April 1993. This was purportedly as part delivery under Consignment No. 2776. On 9th April, the plaintiff delivered to the defendant 4,849.5 yds. of navy blue twills purported to be under Consignment No. 2776 and various quantities of fabric in dark green, red, brown and navy blue purported to be made under the last purchase order. Finally on 13th April, the plaintiff delivered to the defendant 6,184 yds. of navy blue twills purported to be under Consignment No. 2776 and 488 yds. of white twills purported to be made under the last purchase order.

37. An inspection was held on or about 14th April with regard to the fabrics delivered. It seems that the inspection revealed that some of the navy blue twills were found to be not acceptable. This was evidenced in a letter dated 15th April 1993 from the defendant to the plaintiff. The letter said that the result of the inspection was that the twills coloured navy blue were not up to the defendant's customer's requirement. It also reminded the plaintiff that there would be a deduction of 30% in price for the navy blue fabric used for making ladies' jeans and a deduction of 10% of the price for the men's jeans of the same colour. The letter also referred to the fact that due to the colour problems of the several lots of delivery, there was a delay in shipment and that the plaintiff would be asked to pay for the costs for shipping the goods by air. In reply by fax dated 19th April 1993, the plaintiff informed the defendant that in respect of the last lot of 6,184 yds. of navy blue twills, it had already explained to the defendant that it was practically impossible to reproduce the same shade on fabrics after a change in factory for production. The plaintiff alleged that it found the lot delivered to be commercial acceptable. The plaintiff however indicated that they were prepared to hold a meeting to discuss the reduction or discount to be made but asked the defendant to provide proof of any loss.

38. It seems that their meeting was fixed to be held on 27th April 1993. I do not think anything constructive had resulted from that meeting. This was because after that the plaintiff wrote to the defendant some time in May, demanding for the payment of outstanding purchase price and the defendant asked for payment of the loss and damage.

39. Looking at the above evidence, I think a number of points can be made. First, the defendant's complaints on the colour difference shown on the finished jeans were made shortly after the deliveries made by the plaintiff and/or the washing of the finished products. Second, the plaintiff was informed from time to time of the complaints. The plaintiff was asked to discuss on the matter and to find a solution. It is important to note that there was no contemporaneous document from the plaintiff denying that there was anything wrong with the fabric resulting in the colour difference after washing, apart from the fax sent towards the end which was dated 19th April. Third, the plaintiff's conduct during the months between February and April was consistent with the presence of a colour defect and/or a different colour effect in the jeans after washing. Mr Pai of the plaintiff said that the plaintiff was prepared to help the defendant because it did not want to affect the business relationship between the two parties. That might be one of the motives behind such negotiation and "concessions" made by the plaintiff from time to time.

40. However, in my view, the events which took place showed more than that. The plaintiff was prepared to give a discount or reduction in the price with regard to the first two lots, if not also the 3rd lot of delivery. The plaintiff was prepared to change its dyeing factory for the dyeing process of the fabrics. The plaintiff was prepared to accept the return of some parts of the deliveries. The plaintiff even suggested certain washing methods and chemicals to the defendant. I think all of these taken together gave an indication as to the type of attitude adopted by the plaintiff towards the complaints lodged by the defendant. Such an attitude was consistent with the plaintiff acknowledging or accepting that the fabrics they had delivered contained some defects. While this might not be conclusive in showing that the plaintiff was in breach of contract, it was an important matter which I have to take into account in considering whether the goods were in fact defective as alleged by the defendant.

The expert evidence

41. I shall now consider the expert evidence. There was an order of the Master directing that there should be an exchange of expert reports by the parties. However, the plaintiff did not see fit to take advantage of such direction and hence no expert report was initially adduced by the plaintiff. The lack of such evidence from the plaintiff could not be explained by the fact that the fabrics had been made into jeans and/or the uncut fabrics were in the possession of the defendant. There was also a Discovery Order made requiring the defendant to provide the plaintiff with the necessary fabrics for examination and/or inspection. The plaintiff did not avail itself of this Order as well. The burden was of course on the defendant to show that the goods delivered by the plaintiff were defective. and it was for the defendant to have the goods examined and tested, if necessary, in order to prove its case. This the defendant did. However, it was only very shortly before the beginning of the trial in November 1994 that the defendant saw fit to provide a copy of the survey and/or examination report to the plaintiff. Nevertheless, the plaintiff did not see fit to do anything about such evidence until I indicated that it should seriously consider doing so. After an adjournment of the trial, the plaintiff ultimately produced a report in answer to the defendant's expert report.

42. The first report was compiled by the Acts Testing Labs (Hong Kong) Limited on the instruction of the defendant. In December 1993, this company received four pieces of fabrics said to have been supplied by the plaintiff to the defendant for the Fornari contract and 26 pieces of fabrics said to have been supplied by the plaintiff to the defendant for the manufacture of the Giordano jeans. The tests were conducted in the Golden Ridge Factory in China. The fabric of one particular colour which was supplied for the Fornari contract was washed under the same conditions as two fabrics of the same colour which was supplied for the Giordano contract. The washing conditions were the same as those provided to the washing factory doing the washing for the Fornari jeans. After the respective washings, the Fornari fabric and the Giordano fabrics were compared to see if there was any colour difference between them according to the ISO Grey Scale. Although the comparison was made by the naked human eye, it was done with the assistance of a light box and under special lighting conditions. According to that ISO Grey Scale, the colour difference between two objects under comparison falls within one of five categories - Scale 1 to Scale 5. Scale 1 shows a marked difference in colour between the 2 materials under comparison while Scale 5 shows very little colour difference. The colour difference with a scale of 4 or above would be acceptable from a commercial point of view.

43. The results of the tests were as follows. The colour difference between the Fornari fabric and Giordano fabrics which were dyed dark red was graded Scale 4 both before as well as after washing. This indicated that for that colour of fabric, there was no significant colour difference. With regard to the fabrics which were dyed navy blue, the results showed that the colour difference between the Fornari fabric and the majority of the Giordano fabrics was graded Scale 4 before washing, but the colour difference after washing was between Scale 3 and Scale 4 indicating that the majority of the Giordano fabrics after washing did show a colour difference which was not usually acceptable according to commercial standards. With regard to fabrics which were dyed brown, the colour difference before and after washing between the Fornari fabric and the Giordano fabrics was both commercial acceptable. With regard to fabrics which were dyed dark green, the tests showed that the colour difference before washing between the Fornari fabric and 11 pieces of the Giordano fabrics was graded Scale 4 or above. However, the colour difference after washing between the Fornari fabric and 11 pieces of Giordano fabrics showed that eight of them had a Scale of only 3 to 4. This indicated that the majority of the Giordano fabrics of this colour showed a colour difference after washing which was not usually commercially acceptable.

44. Another set of tests were also carried out by the Hong Kong Standards and Testing Centre Limited on the instruction of the defendant. The tests involved the measuring of the colour difference between one piece of Fornari fabric and 2 pieces of Giordano fabrics of the same colour before washing. These tests were conducted on fabrics on 2 different colours and by means of an instrument known as "Datacolour Elrepho 2000". The results revealed that while the colour difference between the Fornari fabric and one piece of Giordano fabric was acceptable, the colour difference between the Fornari fabric and the other piece of Giordano fabric of the same colour was not acceptable. This indicated that there was a colour difference even between two pieces of Giordano fabrics.

45. On behalf of the plaintiff, the first report compiled by the defendant was sent to SGS Hong Kong Limited for comment. No test or survey was carried out. According to the plaintiff's expert, fabrics which were subjected to different environmental conditions might lead to different colour changes. The common example was the exposure to air with pollutants such as nitrogen dioxide, surphur dioxide, ozone, etc. The extent of the colour change would depend on the concentration of the pollutants. Another important factor to be taken into account was the length of time the fabric was exposed to environmental changes. It was said that a fabric which was produced six months before another would show a difference in colour change since one was exposed to the environment and therefore subjected to environmental change for a longer period.

46. I accept that there would be a colour difference in two pieces of fabrics which were produced at different times and subjected to different environmental conditions. In the present case, the Giordano fabrics were produced about 6 months after the Fornari fabrics. However, there was no evidence as to the type of environmental pollution to which these fabrics in the possession of the defendant were subjected except that they were stored in the same factory in China. There was no suggestion that the Fornari fabric and the Giordano fabric were subjected to such drastically different environmental conditions as to cause visible colour differences. I do not think any. As one of the experts said, the difference would be about half a Scale if there was a time difference of more than six months.

47. Having considered all the evidence regarding the delivery, return and re-delivery of the fabrics by the plaintiff to the defendant and all the expert evidence, I am satisfied that some of the fabrics delivered by the plaintiff to the defendant showed some colour shading and slight colour difference before washing. After washing, there was an even more noticeable colour difference between the fabrics delivered by the plaintiff to the defendant under the Giordano contract and those under the Fornari contract. When I looked at the jeans exhibited before me, I think it was also clear that there was some colour differences between various jeans. I do not think such colour differences were due to the use of a different washing factory since I believe the defendant had used Golden Ridge for both the Fornari fabrics and the Giordano fabrics. Further, the plaintiff had not raised any serious query at the time when the defendant complained to them about the colour differences. The plaintiff's conduct after the complaints made by the defendant was consistent with some defects in the colour of the fabrics delivered. In all the circumstances, I have come to the conclusion that the plaintiff was in breach of contract in supplying fabrics which displayed a different colour effect after washing from that specified by the defendant.

The counterclaim

48. The defendant's counterclaim consisted of seven items. The first item was the reduction in the purchase price which was to be payable by Giordano to the defendant. It is clear from the documents that because of the colour difference in the jeans which were manufactured from the fabrics supplied by the plaintiff to the defendant in the first two lots, Giordano asked for a reduction in price. There was a 10% discount on the navy blue jeans and 40% discount on the dark green jeans. These discounts amounted to $29,599.95 and $94,464 respectively with a total of $124,063.95. I think the evidence showed that at one stage the plaintiff was agreeable to shoulder at least part of this deduction, but there was no concluded agreement on this. In my view, this item of damages was caused by the defects in the goods and the plaintiff should be responsible therefor.

49. The second item was a claim for reimbursements as a result of a claim by Giordano against the defendant. This consisted of 3 sub-items. It seems from the documents that Giordano claimed against the defendant for 30% discount on navy blue jeans and 40% discount on the dark green jeans in connection with Contract No.PO-2212009. The amount of discount paid or payable by the defendant to Giordano was $60,308.40 in respect of the navy blue jeans and $69,020 in respect of the dark green jeans. This should be recoverable. The second sub-item was a sum of $4,906.47 claimed for late shipment. As I have discussed earlier, I find that the defendant had waived any late delivery of fabric by the plaintiff. It might be that Giordano had included a claim for that amount as a result of the late shipment of the finished products. However, I do not think, from the evidence before me, that the defendant had shown that this sum had been properly incurred. I would not allow this amount. The 3rd sub-item was another claim for air-freight for $46,596. I think counsel for the plaintiff was right in pointing out that the defendant contracted to manufacture jeans for the sale by Giordano outlets in Hong Kong. That was the evidence of Mr Chan of the defendant. Hence, I see no reason for the claim for air-freight charges arising from any late delivery or defective goods. This item would be disallowed. Hence under this item of claim, the defendant is entitled to reimbursement in the sum of $129,328.40.

50. The third item of the defendant's claim was the amount of the goods which the defendant alleged to have been rejected by Giordano because of the colour difference in the finished jeans. The defendant proposed to prove this item by producing the Giordano's purchase contract, the production advice and the Giordano inspection report, packing list and other relevant documents. Counsel submitted that the purchase contract between the defendant and Giordano showed the number to be manufactured and sold by the defendant to Giordano and that the number appearing in the invoice sent by the defendant to Giordano upon delivery of the finished products would represent the number of jeans accepted by Giordano. He submitted that the difference between these two figures would represent the number of jeans rejected by Giordano.

51. This is, of course, an easy and convenient method of arriving at the shortfall between the contractual quantity and the quantity actually accepted. However, there might have been a number of reasons for the shortfall. I accept that normally the manufacturer would over-produce the jeans. But the defendant was content to rely only on the contractual quantity. When one looks at the inspection report compiled by Giordano's inspectors, it can be seen that first, there were other complaints about the workmanship of the jeans; second, there was no comment in the box with reference to uneven dyeing/washing effect; and third, there was a comment under the Remarks column with regard to jeans which were in navy blue and dark green. It was alleged that these had some red stains or spots after washing. The defendant was requested to take out those jeans with red spots. It is therefore not clear whether the entire shortfall, which was represented by the difference between the contractual quantity and the invoice quantity, represented rejected goods due to the defective colour effect or whether it was due to poor workmanship on the part of the defendant or whether it was for some other reason.

52. I think the same would apply to the defendant's alleged quantity of rejected ladies' jeans which was 835 pieces. Again, the inspection report contained various comments. The report dated the 24th March 1993 contained various complaints about the defendant's workmanship. Apart from that, there was a reference to uneven washing effects. In the Remarks column, again it referred to the jeans which were dyed navy blue and that they contained red stains and that the tone appearing in the jeans did not match with the tone appearing on the fabric sample. It was stated in the report that this would not be acceptable but had to be brought back to Giordano, presumably for further examination or inspection.

53. As to the dark green jeans, the survey report contained the remark that although there was a slight colour difference when compared with the fabric sample, such dark green jeans would also be acceptable.

54. In my view, the defendant had failed to prove that there were 953 pieces of men's jeans and 835 pieces of ladies' jeans which had been rejected by Giordano. Furthermore, there is no evidence as to the value of these rejected goods and whether they were worthless after such rejection. In the circumstances, I am not satisfied that the defendant had proved that it was entitled to this item in the sum of $107,039.50. I would reject it.

55. The fourth item claimed by the defendant was the additional washing charges incurred by the defendant as a result of the colour defect. One can remember that during the correspondence between the plaintiff and the defendant with regard to the colour defects, the plaintiff had indicated that it would be responsible for additional washing charges. The plaintiff had even suggested that the fabrics and/or jeans should be washed using a different washing factory and/or different washing method. In my view, this item was caused by the plaintiff's breach of contract. This item was well supported by documents. It amounted to $146,970. I think this item is recoverable.

56. The fifth item was a claim for travelling and accommodation expenses incurred by the defendant travelling to and from the People's Republic of China for the purpose of supervising the urgent manufacture of the Giordano jeans as a result of the late delivery of some of the goods and also the breach of contract by the plaintiff. A figure of $25,000 was claimed. However, apart from this item and description, there is no evidence regarding how this was incurred, how many visits to the People's Republic of China were involved, when these visits were made, and what was the amount incurred in respect of each of these visits. There is also no supporting document with regard to this amount. In the absence of any clear evidence as to the details of this item and the breakdown of such figure, I am afraid that the defendant had failed to prove this item. It would be rejected.

57. The sixth item claimed by the defendant was for the transportation costs incurred in returning some of the fabrics to the plaintiff. The documents showed that there was a quantity of 5,952 yds. of navy blue twills and 6,133 yds. of dark green twills returned on 1st or 2nd March 1993. There was also a return of 5,623 yds. of dark green twills on 3rd April 1993. The total amount of transportation costs was $21,482.50. This item was supported by documents and receipts. I do not think there is any dispute that this item is recoverable. I will allow it.

58. The final item claimed by the defendant was loss of profit. It was alleged in the pleading as well as in Mr Chan's witness statement that since November 1991 up to March 1993, the defendant had various contracts from Giordano and that the designated gross profit was in the region of $2.3 million. It was said that the defendant had not received any further orders from Giordano since the delivery of the jeans in question in the present case. I do not think the defendant had even begun to prove this item. Counsel for the defendant had quite properly conceded that the defendant was not entitled to any sum under this head.

59. The total amount I would allow under the defendant's claim is therefore $421,844.85.

60. The plaintiff's claim was not in dispute. In the circumstances, I would give judgment for the plaintiff in the sum of $765,846.60 and judgment for the defendant in the sum of $421,844.85. I shall hear the parties on the question of costs and interest.