SUN HING DYEING FACTORY LTD v. TACTWAY FAR EAST (HOLDING) LTD

Date of Handing Down Judgment: 14 August 2003

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J U D G M E N T

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1. The Plaintiff is a dyeing factory. The Defendant is a fabric manufacturer. The Garnishee is a purchaser of fabrics and a garment manufacturer. On 7 August 2002, Judgment was entered in favour of the Plaintiff against the Defendant in the sum of $918,137.76 together with interest thereon. The Judgment was in respect of the cost of dyeing services performed by the Plaintiff for the Defendant. The Plaintiff alleged that the Garnishee was indebted to the Defendant and, on 16 August 2002, obtained a Garnishee Order Nisi to show cause. The Garnishee Order Nisi was served on the Garnishee on 21 August 2002. The Garnishee has accepted that it was indebted to the Defendant in the sum of HK$26,278.47 as at the time of service of the Garnishee Order Nisi. This amount was arrived at as follows:

Amount due from the Garnishee to the Defendant being the cost of fabrics purchased from the Defendant:	HK$807,148.91
Less
Debit Note CM0022324 dated 19 August 2002 ("the 1st Debit Note"):	HK$350,000.00
Debit Note CM0022332 dated 19 August 2002 ("the 2nd Debit Note") in the sum of US$ 55,239.80 which is equivalent to:	HK$430,870.44
Net amount due to the Defendant:	HK$ 26,278.47

2. The Plaintiff takes issue with the Garnishee on the bona fides of its purported set off by way of the two Debit Notes in question. On 9 October 2002, Master Wee directed a trial of the issue whether, other than the said sum of HK$26,278.47, there was any debt due or accruing due in any and what amount from the Garnishee to the Defendant at the time when the Garnishee Order Nisi was served on the Garnishee. Master Wee ordered payment of the said sum of HK$26,278.47 and also give directions for the filing of affidavit evidence.

3. At the trial of the issue I received into evidence the affidavits and affirmations (contained in the Bundle of Court Papers and Affidavits) and the exhibits thereto (contained in the Bundle of Exhibits) which had been filed and served by the parties, as well as a bundle of documents called the Supplemental Bundle. The Plaintiff, who did not have personal knowledge of the dealings between the Defendant and the Garnishee, did not adduce any oral testimony. The Garnishee called three witnesses, Madam Wong Yee Lai, the Senior Sales Manager of the Garnishee, Mr. Lau Bing Cheung, the General Manager of the Garnishee, and Mr. Chan Chui Hung, the Deputy Manager (Finance and Business Development) of the Garnishee. All 3 witnesses were subjected to a searching cross examination by Mr. Carphen C. K. Wong who appeared for the Garnishee. I heard evidence from these 3 witnesses over a number of days and I also received detailed written submissions from both parties.

4. The substantive dispute between the parties centred on the transactions giving rise to the 2 debit notes. The debit notes apart, there was no real dispute on the issue of the indebtedness of the Garnishee to the Defendant. Without taking into account any set off by way of these debit notes, I find that the Garnishee was indebted to the Defendant in the sum of HK$807,148.91 as at the time of service of the Garnishee Order Nisi. Indeed, in paragraph 8 of his affidavit sworn on 18 September 2002, Mr. Chan Wai Ming of the Plaintiff sought a garnishee order absolute on this sum of HK$807,148.91.

5. The Garnishee's case in respect of the 1st Debit Note is that it represented an agreed payment of the liquidated sum of HK$350,000. The agreement to pay this sum was made in settlement of the Defendant's breach of contract by its failure to supply certain fabrics and which had resulted in loss and damage to the Garnishee. The Garnishee's case in respect of the 2nd Debit Note is that it represented an agreed payment of the liquidated sum of US$55,239.80. The agreement to pay this sum was made in settlement of the Defendant's breach of contract in supplying certain defective fabrics and which had resulted in loss and damage to the Garnishee. The liquidated sum of US$55,239.80 was the equivalent of 15% of the price of garments manufactured and sold by the Garnishee to its overseas buyer, Eddie Bauer. The Plaintiff disputes the bona fides of the alleged set off for non-delivery and defective delivery contained in the said debit notes.

6. My findings in respect of the disputed set off by way of the 2 debit notes in question are as follows.

1st Debit Note: Set off for non-delivery of fabrics

7. In late April and early May 2002, the Garnishee purchased certain fabrics from the Defendant consisting of two types of fabrics which were referred to as "the solid version" and the "non-solid" or "healthier" version. The fabrics were purchased for the purpose of manufacturing garments under orders placed by the Garnishee's overseas buyer, Eddie Bauer. In early May 2002, it became apparent that the Defendant could not supply the Garnishee with the solid version of the fabrics and the Garnishee had to place replacement orders for the solid version with other suppliers. On 10 June 2002, the Garnishee placed replacement orders for the solid version with a company known as Nice Dyeing Factory Limited ("Nice Dyeing"). In July 2002, replacement garment orders were executed by Eddie Bauer revising the shipment dates of the original garment orders which had been placed by them. On 19 August 2002, the 1st Debit Note claiming the set off of HK$350,000 was issued.

8. I accept the evidence of Madam Wong that the Garnishee became aware of problems with the solid version of the fabrics to be delivered as early as 8 May 2002. The Defendant's proposal to make the fabrics afresh and to deliver them in early August was rejected. Negotiations for an earlier delivery were unsuccessful. At a meeting held at the Garnishee's offices on 30 May 2002, and attended by Madam Wong, Mr. Lau and Mr. Bang Moy of the Defendant, Mr. Bang Moy confirmed that it was impossible for the Defendant to deliver the solid version of the fabrics and asked to cancel the order for the solid version. It was accepted that the Garnishee would have to place orders for the solid version from other suppliers and would suffer loss and damage arising from late shipment. The question of compensation was discussed and I find that Mr. Bang Moy, for the Defendant, agreed to pay compensation in the sum of HK$350,000. This amount was calculated by reference to projected losses in the form of a 10% late shipment discount on the price of the garments sold to Eddie Bauer plus the extra cost of airfreight charges. The agreement to pay compensation was confirmed by an email from Madam Wong to Mr. Bang Moy of the Defendant sent on 31 May 2002 stating, inter alia:

"Regard the fleece programe for Eddie Bauer Hol O2, due to quality issue was found on the solid version n the replacement really really late that we can't catch the original gmt del, buyer hv to move out this solid portion to other vendor in order to keep the in DC date.

Since of this change which lead us suffer extra losses in order to meet buyer ship date. Recap the conversation with our Sherman n you last day, Tactway cfm absorb the losses which is HK$350,000 for compensation. Those claims will be deduct in yr invoices which we are current running for healther portion. In order to make it clear, pls find the lists below which we will deduct fm those fabric p/o accordingly. ...."

The phrase "in order to keep the in DC date" meant "in order to keep within the delivery time to the distribution centre of Eddie Bauer". There is no evidence that Mr. Bang Moy or anyone else of the Defendant disputed the contents of this email which is cogent evidence of the compensation agreement. I am not impressed by the submission on behalf of the Plaintiff that the fact that the Garnishee made payments of HK$1,700,000 (as shown in pp. 220-222 of the Exhibits Bundle) between 5 and 30 June 2002 to the Defendant without deducting the sum of HK$350,000 from such payments, somehow casts doubt on the existence of the compensation agreement. There may be many reasons why no deduction was made. I cannot infer or conclude that no compensation agreement was entered into simply from the fact that no deduction of HK$350,000 was made from these payments.

9. Whilst I have accepted the evidence of Madam Wong on this issue, I find it very difficult to accept the evidence of the General Manager, Mr. Lau. He gave evidence that he estimated the Garnishee's losses to be between HK$700,000 to 800,000. I find his justification for these amounts to be inherently improbable and I reject it. Amongst the items he listed were the cost of the unused facility of the garment manufacturing factory; overtime work when the replacement fabric became available; the possibility of having to give greater discount if the delay was greater; losses relating to accessories; and losses caused by delay by the replacement fabrics supplier. Whilst I accept that these items or, at least, some of them, are legitimate heads of loss and damage, I formed the distinct impression that Mr. Lau was clutching at straws to justify his estimation and that he was doing so well after the event. Even the agreed sum of HK$350,000 turned out to be more than the actual losses suffered, which came to HK$300,315.68 as assessed from the actual discount given to Eddie Bauer and the actual extra airfreight charges incurred. It may be that Mr. Lau actually threw out these figures of HK$700,000 and HK$800,000 during the course of the discussions on 30 May 2002. He may have done so as a negotiating ploy. Those figures were certainly not genuine pre-estimates of likely loss. However, I need not make any finding on whether or not he actually mentioned these figures as it has not been suggested that the compensation agreement was vitiated by misrepresentation. My rejection of Mr. Lau's evidence justifying these figures does not, however, cause me to doubt the evidence of Madam Wong evidence that Mr. Bang Moy of the Defendant agreed to pay compensation in the sum of HK$350,000 for the Defendant's failure to supply the solid version of the fabric. As I have said, that agreement was evidenced by the email of 31 May 2002.

10. Mr. Wong for the Plaintiff, however, submits that even if there was such an agreement, it was unenforceable since the Defendant had never confirmed delivery dates in the first place. As the Defendant was not contractually obliged to deliver the fabrics, the Defendant's failure to do so did not sound in damages. There could be no claimable loss if there was no breach of contract. The basis for this submission was that the fabric purchase orders (at p.397-417 of the Exhibits Bundle) stipulated "27 May 2002 TBA" as the fabric delivery date. Madam Wong explained in evidence that the letters "TBA" meant "to be advised" and "to be confirmed". These purchase orders were placed on 30 April 2002 and 2 May 2002. By 8 May 2002, the date of fabric delivery had not yet been confirmed. On 8 May 2002, the Defendant sent an email to the Garnishee advising of the problem with the solid version and proposing delivery dates in August. Madam Wong gave evidence, which I have accepted, that this proposal for delivery in August was rejected. Even so, Mr. Wong for the Plaintiff submits that delivery dates for the solid version had never been confirmed or concluded.

11. I cannot accept this submission. In order to give business efficacy to the contract, the words "Fabric delivery date: 27 May 2002 to be advised" or "Fabric delivery date: 27 May 2002 to be confirmed" must be construed to mean the specified date or, in the absence of further confirmation, within a reasonable time before or after this specified date. Given the timetable that had been set for the delivery of the manufactured garments, I also find that delivery in August 2002 would not have been within a reasonable time. Accordingly, the Defendant was in anticipatory breach of contract when it announced that it could not deliver the fabrics before August 2000. This breach was accepted by the Garnishee at the time that the compensation agreement was made on 30 May 2002.

12. The actual discounts offered and the additional airfreight charges incurred in connection with these shipments to Eddie Bauer amounted to US$38,502.01 or HK$300,315.68. This was about 14% less than the agreed compensation of HK$350,000. These losses are shown on p.225 of the Bundle of Exhibits. Although he did not have personal knowledge of these matters, Mr. Chan, the Deputy General Manager (Finance and Business Development) of the Garnishee, gave evidence that he had conducted a verification exercise based on the supporting documents (at p.226-246 of the Exhibits Bundle) and that he could verify that the Defendant had actually incurred the losses shown on p.225. I accept that evidence. It was not seriously suggested that the compensation agreement was unenforceable for the reason that it was not a genuine or pre-estimate of loss, being off the mark by about 14%. Rather, it has been submitted that the discounts offered and extra airfreight charges incurred for the solid version of the manufactured garments was only US$12,554.55 or HK$97,925.49. If that were the only loss flowing from the Defendant's breach arising from its failure to deliver the solid version of the fabrics, I would have concluded readily that the sum of HK$350,000 was not a genuine pre-estimate of loss. However, in this connection, I accept the evidence of Madam Wong that the delay in the delivery of the solid version of fabrics caused not only a delay of the delivery of the garments manufactured from the solid version, but also a delay in the delivery of the garments manufactured from the non-solid or healther fabrics, since the orders placed by Eddie Bauer required both types of manufactured garments to be shipped at the same time. I also find that the non-delivery of the solid version of the fabrics caused a delay in the shipment of both types of garments, notwithstanding that partial shipments were permitted. Accordingly, I conclude that the suggestion at the meeting of 30 May 2002 of likely losses in the sum HK$350,000 was a genuine pre-estimate of the actual losses eventually suffered in the sum of HK$300,315.67. However, even if the suggestion of likely losses in the HK$350,000 had not been a genuine pre-estimate of loss, I conclude, for the reasons which I have stated below, that the compensation agreement was supported by consideration and was enforceable as such. As stated above, it has not been suggested that the compensation agreement was vitiated by misrepresentation.

13. That is not the end of the matter because Mr. Wong for the Plaintiff submits that subsequent events materially affected the situation.

14. The first matter relied upon by the Plaintiff is the breach of contract by Nice Dyeing in its own delivery of the replacement fabric. The replacement fabric orders were placed with Nice Dyeing on or about 10 June 2002. It was expressly provided in those orders that the replacement fabrics should be delivered to the Garnishee on 30 June 2002. The documents at p.471-586 of the Bundle of Exhibits show that there was a late and partial delivery of the replacement fabrics by Nice Dyeing. Madam Wong agreed that if Nice Dyeing had supplied the replacement fabrics on time, the garments manufactured from them could have been delivered on time to Eddie Bauer. The Garnishee had never requested Nice Dyeing to delay the delivery of the replacement fabrics and Madam Wong agreed that the only reasonable assumption to make was that Nice Dyeing had failed to deliver the replacement fabrics on time in accordance with its contractual obligations. Mr. Chum, Counsel for the Garnishee, also appears to accept, in paras.35 and 30 of his written submissions dated 24 April 2003, that Nice Dyeing delayed in delivering the replacement fabric. However, he submits that such breach of contract was not too remote as to break the chain of causation.

15. In my Judgment, the question to ask in this case is not whether the loss and damage to the Garnishee was too remote to be recoverable, but whether or not there was a valid accord and satisfaction or valid compromise agreement on 30 May 2002. I have found that the Defendant and the Garnishee entered into an agreement on 30 May 2002 whereby the Defendant promised to pay HK$350,000 as compensation. Whether one construes that agreement as a release of the Defendant's obligation to deliver the solid version fabrics or whether one construes it as a compromise of the Garnishee's claims for damages arising from the Defendant's anticipatory breach of contract, the question to ask is whether or not there was valid consideration for the agreement. If the Defendant was never under any obligation to deliver the solid version fabrics, the "release" was of no value whatsoever. If the Garnishee knew at the outset that Eddie Bauer would accept delayed delivery without penalty and that it would not suffer any losses as a result of delayed delivery, the claim by the Garnishee for compensation for non-delivery could not have been made in good faith. However, I have already found that the Defendant was under a contractual obligation to deliver the solid version fabrics on 27 May 2002 or within a reasonable time before or thereafter. I also find that the Garnishee reasonably believed that the Defendant's failure to deliver the fabrics on time would result in loss and damage to the Garnishee by way of discount on its sale price to Eddie Bauer and by way of additional airfreight charges. In the circumstances, I conclude that the "compensation agreement" to pay HK$350,000 was valid and binding on the Defendant notwithstanding that, as matters turned out, the Garnishee would not have suffered any loss if Nice Dyeing had delivered the replacement fabrics on time.

16. In the same vein, I conclude that the additional profits earned by the Garnishee from these transactions on account of:

(a) the fact that Eddie Bauer agreed to pay increased prices for the garments in question when it placed its replacement purchase orders with the Garnishee (at p.380-399 of the Bundle of Exhibits) as compared with the purchase prices in its original orders for these garments (at p.380A-393 of the Supplemental Bundle); and

(b) the fact that the cost of the replacement fabrics purchased from Nice Dyeing was lower than the cost of the solid version fabrics originally purchased from the Defendant (cf. pp. 449-451, 455-459, 464-466 with pp.380-399 in the Bundle of Exhibits),

do not, in any way, invalidate the "compensation agreement" of 30 May 2002. In short, once a court is satisfied that a contract was entered into, it does not enquire into the sufficiency of the consideration provided in support thereof. This is particularly so in the present case where the "value" of a bargain that has been struck might fluctuate depending on the influence of subsequent events.

17. I conclude, therefore, that the Garnishee was entitled to set off the sum of HK$350,000 from the sum of HK$807,148.91 due to the Defendant.

2nd Debit Note: Set off for delivery of defective fabrics

18. The 2nd Debit Note arises out of purchase orders placed by the Garnishee with the Defendant for the supply of certain fabrics. These purchase orders appear at pp.437-446 of the Bundle of Exhibits. The complaint in respect of these contracts is that a portion of the fabrics that had been delivered had defects which were described as "pilling defects": the formation of excessive slubs or woollen balls or lumps on the surface of the fabric. Mr. Lau gave evidence that he had telephone conversation with Mr. Bang Moy of the Defendant on 6 August 2002. He had not been able to get in touch with Mr. Bang Moy and it was Mr. Bang Moy who had called him to press for payment of outstanding sums due to the Defendant. Mr. Lau said he took the opportunity to talk to Mr. Bang Moy about the defective fabrics. He sought compensation in the sum of about US$55,000, being a 15% discount of the FOB sale price to their overseas buyer. Mr. Lau said that Mr. Bang Moy eventually agreed, on the telephone, to pay that sum but he wanted the Garnishee to settle the outstanding account owing to the Defendant, after deduction of the agreed compensation, as soon as possible.

19. I have great difficulty accepting this evidence and I do not accept it. I find it difficult to accept that Mr. Bang Moy would agree to be liable for such a substantial sum without asking for evidence to substantiate the alleged defects and to substantiate the overseas buyer's claims for compensation. No complaint of such defects had previously been made to the Defendant. If such an agreement had been reached, I find it hard to accept that an email would be sent some 6 days later on 12 August 2002 from one Wing Cheong Li, an employee of the Garnishee in charge of materials control, to Mr. Bang Moy stating, inter alia,

"Due to the slubs problem on the dark honey & med. healther grey, we need to have special enzyme washing treatment on the garments, the add on cost of this treatment will be on Tactway's account. We will deduce the cost from your outstanding invoices."

That was the first written complaint made to the Defendant about the alleged defects. That email was copied to Mr. Lau. If the matter had been compromised on 6 August 2002, as alleged by Mr. Lau, I find it difficult to accept that the claim contained in that email of 12 August 2002 would have been advanced. I also find it surprising that there was no written confirmation, by email or otherwise, of the agreement to pay the substantial sum of about US$55,000. The Debit Note issued on 19 August 2002 does not refer to any agreement to do so but only describes the "slubs problem" and states that Eddie Bauer "requested us to offer 15% discount fob price".

20. The matter does not, however, end here because I must consider whether or not the Garnishee can set off against its indebtedness to the Defendant, its claim for damages for delivery of defective fabrics.

21. The fabrics which had been supplied by the Defendant under the orders at pp.437-446 were used to manufacture the garments ordered by Eddie Bauer by their purchase orders at pp.423-431 of the Exhibits Bundle. The time stipulated for shipment of the completed garments under these orders was between 13 May 2002 and 21 July 2002. An inspection report appears at p.137 of the Exhibits Bundle. It was a report of an inspection carried out on 12 July 2002 on a lot of garments comprising some 3,852 garments delivered pursuant to these purchase orders. 100 pieces from this were inspected and 40 of those pieces were rejected. The report advised that "colours honey and heather grey only (1,740 pcs); all units inspected have excessive pilling. Other colours showed only minor (if any) pilling. Digitals on file. 4 samples A.F. (airfreighted) 7/15/02". I see no reason not to accept the contents of this inspection report.

22. On 16 July 2002, Ms. Pisidia Wong of Eddie Bauer sent an email to Madam Wong of the Garnishee stating, inter alia:

"The complaint is on the inconsistent pilling within same garment and between colours. EB is aware this is carded fleece but the unevenness in the gmts seemed too much.

Here are some questions fm EB, please review and let me know:

1. Was a pilling standard established when Elegance started washing the garments?

2. Why is the pilling inconsistent between the colours?

3. Where are they on production? Could we lessen the wash slightly and improve the pilling effect?

Pls give me some ideas today... "

23. The next documents on point are 2 emails exchanged between Ms. Pisidia Wong and Madam Wong on 6 August 2002 confirming that the Garnishee would reduce the purchase price for the garments in question by 15%. Madam Wong gave evidence that between 16 July 2002 and 6 August 2002, there were discussions and negotiations between Eddie Bauer and the Garnishee. The documentary exchange between them has not been disclosed. Madam Wong said that some of the discussions were carried out orally over the telephone but she did not assert that all the discussions were oral. The total number of garments which were delivered and which was the subject of the 2nd Debit Note was some 42,360 pieces. As I have noted, the inspection report is only in respect of 100 pieces taken out from a lot of some 3,852 pieces. Madam Wong confirmed that the Garnishee had a quality assurance department which would have carried out inspections prior to shipment. However, no problems had been detected at such inspections. Madam Wong also explained that the completed garments had to undergo a washing process. It was suggested to Madam Wong that if a different washing formula or a different washing process had been used, the pilling problems might not have occurred. She appeared to accept that suggestion but qualified her acceptance by saying that "when they washed it, I did not know Tactway's quality would create this problem". Earlier she had stated that if the quality of the yarn used to produce the fabric was not good and was of a different quality then the pilling problem would appear after the washing process. I remind myself that in advancing their complaint, Ms. Wong of Eddie Bauer, in her email of 16 July 2002, appeared to accept that the quality of the fabric was "carded fleece" which Madam Wong explained was a lower quality of yarn. Instead of advancing complaints about the quality of the yarn, the email of 16 July 2002 concentrated on the washing process and, amongst other queries, posed the question: "could we lessen the wash slightly and improve the pilling effect?"

24. Madam Wong confirmed that the fabrics had passed the inspection procedures before they were sent to the garment factory to be manufactured into garments and that the completed garments had also passed the inspection procedures before shipment to Eddie Bauer. In the light of this evidence, and in the absence of evidence of the actual washing process that was carried out, and in the absence of evidence that such process did not cause the pilling problem, I am not satisfied on the balance of probabilities that the pilling problems which appeared on 40 garments out of 100 which had been inspected were caused by any breach of contract on the part of the Defendant. I, therefore, conclude that the Garnishee is not entitled to set off the amount of the 2nd Debit Note from the sum of HK$807,148.91 due to the Defendant.

25. In the light of my finding, I need not deal with the further issues raised, namely, whether or not the settlement reached between the Garnishee and Eddie Bauer discounting the purchase price of the garments by 15% was reasonable and recoverable from the Defendant as damages for breach of contract which were not too remote, and whether the same was an accrued or contingent liability which could be set off against the amount due to the Defendant from the Garnishee. In that connection, whilst I applaud the frankness of Mr. Chan who said that the Debit Note issued by Eddie Bauer in the sum of US$52,598.40 (appearing at p.248 of the Bundle of Exhibits) had not yet been settled because Eddie Bauer had been suffering financial difficulties and had been slow in making payments to the Garnishee and, indeed, on 17 March 2003 had sought Chapter 11 protection from the American courts, I must express my displeasure that the same admission does not appear in the affidavits filed on behalf of the Garnishee which give the wrong impression that this Debit Note had been settled.

Conclusion

26. I conclude, therefore, that the Garnishee was entitled to set off only the sum of HK$350,000 from the sum of HK$807,148.91. As the sum of HK$26,278.47 has already been paid to the Plaintiff, I make a Garnishee Order Absolute in respect of the sum of HK$430,870.44, being the sum which I have found to be due from the Garnishee to the Defendant, other than the said sum of HK$26,278.43.

27. I have considered the submissions made to me on the issue of costs. The Garnishee was entirely successful on its case in connection with the 1st Debit Note. The Plaintiff was entirely successful in contesting the purported set off which was the subject of the 2nd Debit Note. In the circumstances, I consider that the fairest order to make would be that there be no order as to costs as between the Plaintiff and the Garnishee save that the Garnishee should pay the costs of and thrown away by the adjournment on 18 February 2003 which was occasioned by the Garnishee's late disclosure of documents. I so order. I also order that the Plaintiff's costs of the Garnishee proceedings be retained by the Plaintiff out of the moneys recovered under the Garnishee Order Absolute and in priority to the judgment debt. Finally, I grant liberty to apply.