O.K. FASHION KNITTERS LTD v. LANTEX HOLDING LTD

DCCJ 4398 / 2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. DCCJ 4398 OF 2002

J U D G M E N T

1. The Plaintiff’s claim is for outstanding payment arising from goods sold and delivered to the Defendant; and also damages for wrongful rejection of some other garments supplied. The sums claimed by the Plaintiff includes HK$238,562.37 being outstanding payment in respect of 17 purchase contracts and HK$16,891.82 being expenses incurred by the rejection of 2,218 pieces of garments. The Plaintiff further claims storage fee for the same until determination of this matter.

2. In respect of the claim for outstanding payment, the Defendant only disputes 1 invoice, which is invoice no. 010173 [B48-49]. Liability on the other 16 invoices in the Plaintiff’s claim is admitted. The amount in dispute is now HK$ 28,837.71.  The liability on expenses incurred by wrongful rejection of goods is not admitted. 

3. On the other hand, the Defendant counterclaims the Plaintiff for HK$ 430,818.67 being loss and damages caused by short payments or rejection of the Plaintiff’s goods by its overseas buyer on grounds of defects or late shipment. The Defendant asks to set-off the said sum against the liability admittedly owed to the Plaintiff. The counterclaim arises from 7 contracts unrelated to those the Plaintiff now relies on to make its claim. During the trial, the Defendant abandoned one item under purchase contract no. PEC 1015429 in its counterclaim. The total of the counterclaim is therefore reduced to HK$ 401,693.85. 

The Plaintiff’s Claim

Outstanding payment for goods sold and delivered

4. After admission made by the Defendant, there was only one item left for trial on the Plaintiff’s claim for outstanding payment.  Issue for the Plaintiff’s claim for outstanding payment is whether the goods under invoice no. 010173 were delivered to the warehouse on 29 March 2002?  The Plaintiff says that by virtue of a purchase contract no PEC 116520 [D105-107], the Plaintiff agreed to sell to the Defendant some garments. The delivery term was “FOB” and the original “shipment date” was 11^th February 2002. It is not disputed that the “shipment date” was later revised to 25^th March 2002 by mutual consent.   It is also not disputed that the goods were delivered to the assigned warehouse as instructed by the Defendant; and that the goods were subsequently put on flight for Paris on 3^rd April 2002 [B260].

5. The Plaintiff’s case is that the goods were delivered to the assigned warehouse on 29 March 2002 and admitted that they were 4 days’ late. It is also admitted that there should be a penalty by deduction of 5% of the total shipment value pursuant to clause 7 of the purchase order. But even taking the 5% deduction into account, there is still a balance of $28,83.71 outstanding.

6. No documentary evidence is produced to show the date the goods were sent to the warehouse. The only evidence came from Mr. Lau who was responsible for matters in connection with delivery of orders to customers of the Plaintiff.  He says he cannot remember the date of delivery however it was a practice to have the goods delivered the same day or on the following day after the location of warehouse was confirmed by the Defendant. At the same time, an invoice would be issued on the same day the delivery was made.   Counsel for the Plaintiff asked the Court to see for example documents for other delivery. They are at B21 & B26, B30 & B61, B35 & B62. It is submitted on behalf of the Plaintiff that all these documents show that invoices were issued on the same day the goods were delivered.

7. The Defendant says that since the goods were only put on flight on 3^rd April, the delivery was late by 9 days. First, it is submitted that since it was an f.o.b. contract, the date of flight was relevant rather than the date the goods were sent to the assigned warehouse. Or even that the date the goods were delivered to the warehouse was relevant, according to Miss Le Quellec, the goods were sent to the warehouse probably one day prior to the flight and therefore the delivery was still more than 5 days’ late.  The Defendant avers that it was entitled to enforce the penalty pursuant to clause 7 and since the Plaintiff was subject to a 10% deduction in the total shipment value, the payment made by the Defendant had fully discharged its duty. The interpretation of clause 7 is not disputed.  The dispute is whether the delivery was late by 4 days or was it late by 9 days.

8. There was no evidence from the Defendant to prove the date of the delivery. As said in the above, Miss Le Quellec of the Defendant says that she did not know when the goods were delivered to the warehouse, but doubted whether the warehouse was open for business during Easter Holidays between 29 March to 1 April 2002. And that usually, the goods would stay in the warehouse for just one day before they were taken out of Hong Kong.  Counsel for the Defendant in her submission points out that it should be for the Plaintiff to prove that the date of delivery was on 29 March 2002 and not at a later time before 3 April.

9. It may be convenient for me to deal with the Plaintiff’s claim for outstanding payment here and now for easy reading before I go on with the other claim by the Plaintiff and the counterclaim.  I should clarify that I made my findings on the claim for outstanding payment after I reviewed all evidence as put forward by parties for the entire matter.

10. I have to first deal with the pleadings. In paragraph 3 of the Amended Statement of Claim, the Plaintiff claims outstanding payments for goods sold and delivered, the relevant invoice was among 16 others pleaded. The Defendant in paragraph 30 of Re-Re-Amended Defence and Counterclaim admits goods sold and delivered but denies the claim. No positive case has been put forward for the denial.

11. Counsel for the Plaintiff submits that since the Defendant has failed to plead a positive case in its Re-Re-Amended Defence and Counterclaim, it should therefore not be allowed to adduce evidence to show that the Plaintiff delivered the goods on 3 April 2002 or a day before. He refers the Court to a passage in paragraph 18/7/7 in Hong Kong Civil Procedure 2004. I find the following relevant:

“Each party must plead all the material facts on which he means to rely at the trial; otherwise he is not entitled to give any evidence of them at trail…Similarly a defendant may be prevented from relying at trial on a ground of defence not pleaded by him.”

12. It is further submitted by Counsel for the Plaintiff that as the Defendant has failed to plead a positive case, the situation would be like that the Plaintiff is put on strict proof of its case and as there is evidence on the contract price and the non-payment of the outstanding balance, the Plaintiff’s case has been proved.

13. Counsel for the Defendant submits that since it is the Plaintiff’s case that they delivered the goods not on time but 4 days later on 29 March, the Plaintiff has to plead this case and prove it. As this was not pleaded, they could not adduce evidence on that the goods were delivered on 29 March and it has therefore failed to prove why the outstanding balance was HK$ 28,637.71.

14. In my view, it suffices if the Plaintiff has pleaded the cause of action and the amount claimed. The material facts are that there was an outstanding payment at such amount arising from such invoice for goods sold and delivered. These have been pleaded. The rest would be evidence which the Plaintiff would not be required to plead. I do not agree that the Plaintiff has to plead specifically the concession of 5% deduction. On the contrary, if the Defendant says that the Plaintiff is not entitled to this outstanding balance, the case has to be pleaded if the Defendant wishes to adduce evidence at trial for late shipment to justify non-payment of an amount. At the trial, the Defendant tried to say that a 10% deduction was justified by late shipment pursuant to the purchase contract. This is however not pleaded. As the Defendant has failed to plead late shipment for the deduction of 10%, it could not adduce evidence to prove such assertion. There is no application to amend the Defendant’s pleadings in this regard. 

15. On the evidence of Mr.Yeung and Mr. Lau, I am satisfied that there was an outstanding payment of HK$28,837.71 still being owed to the Plaintiff.

16. In case I am wrong on the point of pleadings, I do not find that the Defendant has made out its Defence on evidence. But before I deal with the evidence of the Defendant, I find it appropriate to deal with the burden of proof here. Parties dispute the burden of proof. Counsel for the Plaintiff contends that the Defendant should bear the burden of proof whilst Counsel for the Defendant says that the burden is on the Plaintiff.  

17. The general principle is that the burden of proof lies upon the parties who substantially asserts the affirmative of the issue. In the present case, the Plaintiff relies on goods sold and delivered and asks for the contractual sum. In the Re-Re-Amended Defence and Counterclaim, such fact is admitted by the Defendant, but the claim is denied. In my view, Plaintiff has the burden to prove its entitlement on the contractual sum.  When this is done, it is then for the Defendant to prove why the Plaintiff is not so entitled unless it is admitted by the Plaintiff. The Plaintiff admits that they were late by 4 days, so the Defendant would have to prove that the delivery was late by 9-10 days. I therefore find that the burden of proof is on the Defendant for this particular issue.

18. The delivery date was material because there was a provision in the purchase contract [D107] stipulating that

“Late shipment penalties:	3 to 5 days	5% of the total shipment value
	6 to 10 days	10% of the total shipment value
	11 days and over	to be confirmed by Lantex Holding Ltd”

19. Putting aside the issue on pleading for the moment, I do not think the evidence adduce by the Defendant could offer much assistance in proving its case. The evidence on this has been set out in paragraphs 5-8 above. In gist, neither party could produce any objective or independent evidence like a warehouse receipt to prove the delivery date. The Plaintiff asks the Court to infer by reading the invoice for the goods [B48-49] bearing the date of 29 March 2002 that they were delivered on the same day. On the other hand, the Defendant asks the Court to infer by the fact that the goods was put on flight on 3 April 2002, they therefore had probably been delivered by the Defendant about a day at the most before they were put on flight.

20. From evidence before me, I would say that the evidence of Miss Le Quellec on the delivery date was unsubstantiated and therefore unreliable. It was at best a speculation or something she heard from a source not disclosed to the Court. She was not the one who handled delivery and freight arrangement. On the other hand, Mr. Lau of the Plaintiff, who was responsible for delivery of goods and gains some support from documents of similar nature to establish a usual practice of the Plaintiff that an invoice would be issued on the same day of delivery.

21. The criticism on the Plaintiff for its failure to produce a warehouse receipt is unfounded as the Plaintiff has not been put on guard by the Defendant’s pleading that the Defendant would rely on the Airway Bill to make out the allegation of late shipment.  In fact, as mentioned above, late shipment has not been pleaded as a Defence by the Defendant. From evidence before me, the Defendant has not discharged its duty of proof on balance of probability that the goods were sent to the warehouse after 29 March 2002.  Even if the onus is on the Plaintiff, I am satisfied on balance of probability with evidence before me that the goods were sent to the warehouse on 29 March 2002.

22. The Defendant also makes an attempt to argue that since the purchase contracts were on “F.O.B” terms, the duty of the Plaintiff would be discharged only as and when the goods were put on a flight, and therefore the date the goods were put on the flight was the effective delivery date. In the present case, 3 April 2002 was the relevant delivery date. The principle as cited is paragraph 20-015 at page 1396 of Benjamin’s Sale of Goods, 6^th edition, reads as follows:

“Thus the buyer cannot normally demand delivery short of the ship; in this sense he cannot not “waive” the contractual stipulation as to delivery. However, if the buyer asks for delivery short of the ship he can be said to have “waived” delivery f.o.b. in the sense that tender of delivery at the point requested by the buyer will amount to performance of the seller’s duty to deliver the goods.”

23. To apply the above principle to the present case, I am of the view that as the Plaintiff has no say in the choice of warehouse for delivery; takes no part in the flight arrangement and in fact has no control as to what would happen after the goods are taken by the warehouse; the delivery at the point requested by the Defendant amounted to performance of the Plaintiff’s duty to deliver the goods. The date of delivery to the warehouse should be taken as the relevant delivery date. In my view the f.o.b. term could not assist the Defendant in denying the claim.

24. In my judgment, the Plaintiff should be awarded the claimed sum on outstanding payments. The matter of interest would be dealt with at the end together with other claims.

Expenses incurred for wrongful rejection and return of goods

25. It is the Plaintiff's case that the goods were wrongfully rejected by the Defendant first because on facts there were no grounds for doing so and secondly in law it has no right to do so.  The Plaintiff says that the goods did not have a bad smell nor were late to warrant such rejection. Further the Plaintiff relies on s. 37(4) of Sale of Goods Ordinance (“SOGO”) and says that the Defendant was deemed to have accepted the goods when after the lapse of a reasonable time it retained the goods without intimating to the Plaintiff that the goods were rejected. Moreover, the Defendant was deemed to have accepted the goods as when the goods were delivered to it, it did acts inconsistent with the ownership of the seller and is therefore caught by s. 35(1) of SOGO.

26. The claim for damages for wrongful rejection and return of goodsis to be dealt with together with the Defendant’s Counterclaim in below.

The Counterclaim by the Defendant

27. It is not disputed that the Defendant was a trading firm which bought goods from local manufacturers and sold them to overseas buyers. In the present case, the counterclaim arises because goods supplied by the Plaintiff have allegedly been rejected by the overseas buyer, who in turn refused to make payment to the Defendant in full or at all for certain items. The Defendant therefore says that they were entitled to deduct such short-payments from the contractual sums.

28. According to the Defendant, the goods were complained by the overseas buyer on the following grounds.

(i)	Defects:
	(a)	Bad smell in the goods
	This concerned 200 pieces of garment of style 5069 delivered on 5 April 2001 under purchase order 021806. They were shipped back to Hong Kong to the Plaintiff in May 2002 [A18].  The claim under this head is US$ 5,480.00 inclusive of loss of profit suffered by the Defendant.
	(b)	PU circles fallen off from garment
	Allegedly, the overseas buyer had to hire workers to secure those fallen PU circles.  The defects allegedly affected 290 pieces of style 6065 under purchase contract 059428 and 059428(A); 606 pieces of various styles under purchase contract 0610428 [A18-20]. The claim under this head is US$ 4,483.90 inclusive of loss of profit suffered by the Defendant.
(ii)	Late shipment:
	(a)	228 pieces of style 6293 ordered under purchase contract PEC 0610428, contractual shipment date on 15 September 2001, actual delivery date on 4 December 2001, 161 pieces rejected and returned to Hong Kong; value of the rejected goods amounted to US $ 3,059 and the Defendant claimed damages for the same as the overseas buyer had refused to pay.
	(b)	1025 pieces of style 6291-6294 ordered under purchase contract PEC 0813628, contractual shipment date on 10 November 2001, actual delivery date on 4 December 2001, 800 pieces rejected and returned to Hong Kong; value of the rejected goods amounted to US $ 17,265 and the Defendant claimed damages for the same as the overseas buyer had refused to pay.
	(c)	1890 pieces of style 6086, 6087 and 6294 under purchase contract PEC 0914925 ordered, contractual shipment date on 10 November 2001; 603 delivered on 23 November 2001, 1308 delivered on 4 December 2001; 995 rejected and returned to Hong Kong in May 2002; value of the rejected goods amounted to US$ 21,343.70 and the Defendant claimed damages fo the same as the overseas buyer had refused to pay.
	(d)	The counterclaim for loss and damages under purchase contract PEC 01015429 was abandoned by the Defendant at the trial.

29. It is alleged that the above shipments were so late that they missed the seasons for the goods to be sold, and they were returned to the Plaintiff after the overseas buyer had sold as much as possible.

30. To establish the counterclaim, Miss Le Quellec gives evidence on behalf of the Defendant. She is a director and shareholder of the Defendant. Her main duties at the material time were to look for overseas buyers for some fashionable garments made in Hong Kong and to negotiate the terms for purchase agreements between those overseas buyers and the Defendant. On the other hand, the local manufacturer / supplier would be left to the merchandisers of the Defendant to deal with.  Her evidence on the counterclaim is summarized below.

Goods with a bad smell

31. Miss Le Quellec says that she was informed by the overseas buyer that there was a bad smell on some items under purchase contract PEC 021806. She remembers that it was some time in mid August 2001 (4 months after delivery). There was no decision from the overseas buyer as to how this should be dealt with. Pending a final decision, she asked Ritty a merchandiser to inform the Plaintiff of the complaint and subsequently a letter at B209 was issued to the Plaintiff on or about 28 August 2001. In the letter, the Defendant indicated that the goods had to be sent back for rewash and the goods would be kept in Hong Kong waiting for the next spring / summer and they would be sent back to the buyer. The reply from the Plaintiff at B211 was that any deduction in price would not be acceptable to them but it was suggested that the items be sent back for a rewash and be shipped back to France again.

32. Unfortunately, such suggestion was not accepted by the overseas buyer and they decided that the items be rejected. She therefore asked Gary another merchandiser to pass the message to the Plaintiff that the goods would be rejected and there would be a deduction of such amount from the payment. Gary later reported to her that the proposal seemed not to be accepted by the Plaintiff [paragraph 38 of witness statement, A109]. She goes on to say that there were two meetings held in February and April of 2002, where parties had finally reached an agreement that the items with a bad smell, and those which were shipped late would be rejected and there would be a deduction of payment. Parties also agreed that there would be a deduction for items with fallen PU circles.

33. She also says that at the February meeting, Mr. Yeung was shown the fax of the overseas buyer at D140 which set out the break down for items to be returned by the style and colour. She says that at the April meeting, Mr. Yeung was shown a Debit Note at B268 issued by the Defendant (a reproduction of content of the fax at D140 mentioned above with an added section stating the amount to be deducted). She says that the said agreement between parties at these two meetings explained why the surveyor later employed by the Plaintiff was not asked to check whether there was a bad smell on the goods but just counted the number of relevant returned items.

34. On this, the Plaintiff’s saying is that the agreement between parties was for the goods allegedly with a bad smell to be shipped back to Hong Kong for rewash and to be sent back to France before the next season and therefore, the surveyor was not asked to check whether there was any bad smell. Mr. Yeung of the Plaintiff says that he himself found no bad smell on these items. He says that he heard nothing after he suggested that the items were to be rewashed. He denies there was a meeting in February 2002 and denies that he was shown the Debit Note at B268 in the meeting held in April 2002. He further denies that he had at any of the meetings agreed deduction in relation to rejection of goods or in relation to repair of fallen PU circles.

Goods with fallen PU circles

35. The goods in questions were delivered to France in September, October and December 2001 under different purchase contracts. Miss Le Quellec says in her witness statement that she received a complaint sometime in mid November 2001 from the overseas buyer that the PU circles on the garments delivered by the Plaintiff were falling off. It was again not yet decided as to how the matter should be dealt with but whatever decision it would be, there was likely to be a deduction on payment due.

36. She asked Gary to inform Mr. Yeung. Gary subsequently informed her that Mr. Yeung would discuss the matter with her later. On 17 November 2001, the Defendant received a fax from the overseas buyer [D134] showing the breakdown on the garment with fallen PU circles. Gary was instructed by her to send the same to the Plaintiff. Gary returned to her shortly afterwards saying that Mr. Yeung would not accept any deduction but suggested that the garment be sent back to the Plaintiff for repair or the Plaintiff would send some workers over to do the repair work. The proposal was turned down by the overseas buyer on 11 December 2001 saying that the restriction on foreign labour would not allow workers of the Plaintiff to work in France without a permit, and it would take too much time if the goods were sent back to Hong Kong for repair.

37. At the same time the overseas buyer decided to do the repair work by hiring some workers in France and to make a deduction of 20% from the invoice issued by the Defendant. As a matter of tactics, the Defendant suggested to make a deduction of 30% from the invoice of the Plaintiff [B228], but this was rejected by the Plaintiff through a letter dated 12 December 2001 [B230].

38. It is the Defendant’s case that notwithstanding the objection of the Plaintiff, the Defendant issued a debit note on 13 December 2001 for 30% deduction of payment [D157] but had such debit note dated back to 30 November 2001 because it was in November 2001 that they learned about the decision to impose a 20% deduction from the overseas buyer. The Plaintiff responded almost immediately on 13 December 2001 objecting to the deduction [B229]. The Plaintiff also wrote to the Defendant on same day reiterating the suggestion that the garment be sent back to Hong Kong for the Plaintiff to see and to repair [B233]. The Defendant passed this message to the overseas buyer only to learn that the defects had been made good already and a deduction of 20% would be imposed on the Defendant. The Plaintiff had then been informed accordingly. It followed by the alleged agreements reached at the two meetings in February and April 2002 as mentioned in paragraph 32 above.

39. Mr. Yeung’s version on this is that Gary called in or around October 2001 and relayed to him the complaint of the overseas buyer. He was surprised but suggested that if that was the case, the goods should be sent back to him for repair. He heard nothing further but in December 2001, he received a fax from the Defendant suggesting a deduction of 30% from the invoice. He spoke to Gary again and Gary said that a debit note would be forwarded to them. There were some exchange of correspondence and he heard nothing further. He suddenly in April 2002 received two Debit Notes from the Defendant. Although the Debit Notes were dated 30 November 2001, it was the first time he saw them in April 2002. He emphasizes that he had never seen the Debit Notes in December 2001 as alleged by Miss Le Quellec. Then there were two letters dated 12 and 13 April of 2002 at [B238 and B239-240] sent to him by the Defendant. Mr. Yeung called Queenie of the Defendant to clarify the position. He was informed that the Defendant wanted to keep 1,096 pieces of garment but would impose a 30% deduction on the contract price (US$ 5,325.29), also 2,316 pieces would be rejected and returned for defects, they amounted to US$ 43,041.12.  He turned down the proposal of Queenie.  Queenie’s letter on 13 April 2002 [B239] mentioned above said the goods were returned for being defective.  In May 2002 he received more debit notes but they seemed to be a revision on the previous ones.  He says there were one or two meetings in April and May 2002. At the meetings, the Plaintiff insisted on full payment without deduction and the Defendant insisted that there were defective goods. There were no agreement reached but arguments. At the end, as the Defendant insisted that the garments were to be sent back to Hong Kong, out of good will Mr. Yeung suggested that a surveyor would be arranged to survey the garments. If there were defects on the majority of the goods, a discount would be negotiated on the extent of the defects. The Plaintiff would also bear the costs of their being returned and inspected. If the majority of the goods were found without defects, the Defendant would take the goods back and bear such costs and expenses. A survey was done in May 2002 in the office of the Plaintiff. It was attended by a staff of the Defendant. The report turned out to be in favour of the Plaintiff in the sense that no serious fallen PU circles or loosen sequins were found on the garments. The Defendant however refused to honour their promise to take the goods back and shoulder the costs.

40. The reply of the Defendant is that the goods inspected by the surveyor were not returned for their being defective but for their being late except 200 pieces were said to have bad smell. The surveyor’s report was therefore of no avail to the Plaintiff.

41. Again I find it appropriate to deal with the Defendant’s counterclaim on defective goods here before embarking on the evidence of late shipment.

42. The issue for the counterclaim under this head is (a) Whether there was a bad smell in the goods that the Defendant was entitled to rejecting the same and claims damages? (b) Whether there were PU circles fallen off the garments as alleged so that the Defendant was entitled to a 20% deduction from the contract price?

43. The Defendant relies on the complaint of the overseas buyer and a subsequent deduction made on it as the basis of the counterclaim. The Plaintiff denies these allegations.  Counsel for the Plaintiff submits that the Defendant has failed to prove defects in the goods (bad smell and fallen PU circle). The Plaintiff also relies on the inspection carried out by the Defendant’s staff to rebut the Defendant’s allegation on defective goods.

44. Miss Le Quellec admits that there were inspections done by the Defendant’s merchandisers during the mass production and that approval from the merchandisers was necessary before the Plaintiff could release the goods for delivery to a warehouse assigned by the Defendant or by the overseas buyer through the Defendant. It is further admitted by Miss Le Quellec that she had made no investigation on whether the complaint were substantiated and whether the assessment of damages was reasonable. It seems that what she had done was to pass along the liability onto the Plaintiff. Not only that, she added a 10% on what had been suggested by the overseas buyers “as a matter of tactics”.

45. The complaint about bad smell on garments lacked particulars. There is nothing to indicate what kind of bad smell it was if any. Was the bad smell originated from the yarn, the dye, the wrapping, or caused by contamination on the flight, during storage or at the retail? Even there was a bad smell, it does not have to be the responsibility of the Plaintiff. There was no evidence before me to persuade me that there was a bad smell in the goods that the Plaintiff should be held reliable for loss and damages arising therefrom. The lapse of 4 month’s between the delivery and the complaint and 9 months between the complaint and the final return of the goods cast further doubt on the reliability of the complaint.

46. Mr. Yeung’s agreement to have the items with a bad smell shipped back would not have compromised the Plaintiff’s position. I accept Mr. Yeung’s evidence that he only agreed to have the items shipped back for rewash and then the Defendant would have them shipped back to the overseas buyer for the next season. His evidence is supported by documents [B209 and B211].  I accept that he never agreed to rejection and deduction.

47. The overseas buyer’s complaint to Miss Le Quellec on fallen PU circles was unchallengeable because the complainant did not attend Court for cross examination, he did not even make a statement or declaration under oath for the Court to consider, there was nothing to establish that the assertion of the complainant was reliable, the Court was not told how the complainant got the information; there was no independent reports or photographs to support the complaint. In the circumstances whatever weight I could give to the complaint by the overseas buyer would have to be weighed against the fact that the goods had been inspected before they were released and there was only very little said in the reports about such defects. If there was problem in quality so serious that it would warrant a deduction of 20% of the contract price, this could not have escaped the notice of the merchandisers. Or alternatively, such defects, if any, must have been found acceptable by the merchandisers or rectified before delivery. Otherwise, there was no reason for time and effort spent on inspections. I am not saying that such inspections could be taken as evidence of acceptance of the goods by the Defendant. This is only one of the factors I have to weigh together with other evidence before me when deciding whether the complaint of defective goods could be made out.

48. Finally, another difficulty the Defendant has to face is that even the Court admitted the evidence of the overseas buyer and accorded weight to the complaint that there were fallen PU circles, there is however no evidence the Court could rely on to make an independent assessment on damages. The Court is not told how the 20% came about as there was no statement on expenses incurred by the repair except a breakdown in D134-139. The breakdown only shows the quantity of garment repaired or needed to be repaired without setting out how and why the overseas buyer asked for 20% deduction. The Defendant’s case is more or less like since there was a deduction imposed by the overseas buyer, it should be borne by the Plaintiff as supplier. This is not sufficient to prove the counterclaim.

49. After hearing parties, I do not believe Mr. Yeung would have accepted liability for the rejected and returned goods without taking a look and being satisfied that there was a problem on the garment as alleged by Miss Le Quellec and the overseas buyer. Mr. Yeung’s version at the trial was consistent with what he had told the merchandiser Gary at the time, verbally and in writing, this was not disputed by Miss La Quellec. He had all along maintained the same position and there was no reason suggested why he should change his stance from disputing rejection and deduction in a threatening manner to accepting the same at the meetings as alleged by Miss Le Quellec.

50. For reasons in the above, I find that the Defendant has failed to prove their counterclaim for loss and damages arising from defective goods be they with a bad smell or with fallen PU circles. The Defendant’s counterclaim on defective goods is therefore dismissed.

51. From the content of the series of exchange of correspondence on 11, 12 and 13 December 2001 at 228, B230, B233 and B229 (in chronological order) and the wording in the heading and title of Plaintiff’s letter at B229, I find that it is more probable that Mr. Yeung had received the Debit Note at D157 (for fallen PU circles) in December before his reply in B229 but it would not affect my judgment on the counterclaim on the defective goods as the knowledge of the Debit Note did not play an important role in my decision of the matter. Further, I cannot infer by Mr. Yeung’s denial of receiving the Debit Note to say that he is totally incredible in this regard.  He admits that he received a letter in December from Gary suggesting a deduction of 30%.  He did not seek to hide his knowledge of complaint from the Court.  More importantly, my decision reached as stated above is on the basis that the Defendant has failed to prove its’ case on its evidence produced.  

Late shipment

52. The issue under this head of the counterclaim is whether the shipment date appeared in each of the purchase contracts were agreed by parties.

53. The evidence of Miss Le Quellec on late shipment is that there were numerous occasions where the Plaintiff had failed to make delivery on time and as a result about 2,000 pieces under the purchase contract as set out in paragraph 28(ii) herein had been rejected and returned. The Defendant says it suffered loss and damages as a result of the rejection and now asks compensation from the Plaintiff.

54. In paragraphs 8 to 18 of her witness statement, Miss Le Quellec sets out the work process of the Defendant after an order has been intended by an overseas buyer. In gist, it is her evidence that after the Defendant got an indication or enquiries on certain items, the merchandisers would liaise with some local suppliers for production of initial samples. At this stage, they might approach more than one supplier for different styles of garment. On completion of the initial sample, she would then liaise with the overseas buyer for further progress for a firm order for mass manufacturing and to settle the particulars of the items. On the other hand, the merchandisers would liaise with the local suppliers on the terms and conditions for the mass manufacturing of the item. If things progressed satisfactorily, written contracts would be concluded between the Defendant and the overseas buyer and likewise, similar written contracts would be concluded between the Defendant and the local suppliers.

55. She however adds that before there were written contracts, she would start requesting the local suppliers through the merchandisers to prepare for the mass manufacturing after the Defendant had got some verbal confirmation from the overseas buyer. So when the written contract was prepared, parties had started with some preparation work and that the date of the contracts would be dated back to the day when she got the verbal agreement according to her memory. For ease of reference, she would put down the same date on the two set of contracts, the one between the Defendant and the oversea buyer and the one between the Defendant and the local supplier. She says the date on the contract was therefore not the date on which the contract was singed.

56. She says that there were random inspections of the goods at various stages of the production. The approval for the goods to be released for delivery was however not evidence of their acceptance of the same and it was so stated on each and every inspection report.

57. Miss Le Quellec says that on or about 3^rd December she received a phone call from the overseas buyer saying that they were considering rejecting the garments under repeat order for Style 6075 and 6079 in purchase contract PEC 1015429 (the abandoned item in counterclaim) not shipped as scheduled. A warning letter was then sent to the Plaintiff on the same day (B227) pressing for an actual delivery date and warning that the overseas buyer might cancel the order or impose a deduction. Then later on 11 December 2001, she instructed Gary to issue another letter to exert pressure on the Plaintiff saying that the Defendant would withhold payment for the repeat order and reserve the right of having discount of these 2 orders until it received the confirmation from oversea buyer that all the goods were sold out or no discount would be imposed [B228]. The Plaintiff wrote on 12 December saying that they had said unless full payment would be received, they would not make any delivery and asked whether the Defendant would cancel the order [B231].  The message was repeated again in the Plaintiff’s letter dated 13 December 2001 [B232].

58. Then by end of January 2002, she received a fax from the overseas buyer containing an initial breakdown of the garment which they intended to ship back to Hong Kong [D140]. It was sent to the Plaintiff and within a few days, Mr. and Mrs. Yeung came to the office of the Defendant for a meeting. (This was the February meeting mentioned in paragraphs 32 and 38 above). At the meeting, she made it clear to the Yeung’s couple through interpretation of the merchandiser that the Defendant would make deduction from the contract price to compensate the Defendants for the loss and damages suffered by reason of the rejection of the goods for defects as well as for late shipment. She says that the Plaintiff had agreed to shoulder such liability but asked that the deduction be made later as the Plaintiff’s cash flow was tight near Chinese New Year. And she agreed therefore to make full payment for the goods under the repeat order to be delivered.

59. On 6 March, the Defendant received a fax from the overseas buyers setting out the quantity of the returned goods for late shipment and their value, that total amount set out therein was US$56,880.20 (D142). A corresponding Debit Note was prepared and issued to the Plaintiff [D158] (for rejection of goods for bad smell and late shipment) at the same time. Again this was dated back to 30 November 2001 to correspond with the earlier Debit Note for defective goods (D157 mentioned in paragraph 5 above). Having received the Debit Note at D158, the Yeung’s couple came to the office of the Defendant again and this was sometime in April 2002. (This is the meeting in April mentioned in paragraphs 34 and 40 above) The Yeung’s couple protested about the deduction. She explained the situation to them and said she believed that the merchandiser had also told them that. After discussion Mr. Yeung agreed to accept the rejected goods and shoulder the liability, but asked that the deduction be made on Debt Note at D158 first and by two installments, being 60% and 40% of the total deduction reflected in the Debit Note [D158].  Two further debit notes were issued to split the payments accordingly [D159-D160].

60. The process of work as suggested by Miss Le Quellec is not much disputed by the Plaintiff.  The Plaintiff's saying is that there had never been any serious complaint about late shipment. In fact, the goods which were rejected for reason of late shipment had been inspected by the Defendant. During the inspections at different stages, there was no mention of problem in late shipment. Instead, the merchandiser of the Defendant signed to approve release of the goods and gave them instructions on delivery such as the name and address of the warehouse assigned by the overseas buyer.

61. It was admitted that there was a letter pressing for delivery of goods under the repeat order for 6075 and 6079 (the abandoned item in counterclaim). In fact, according to Mr. Yeung, the goods were ready for delivery, it was withheld by the Plaintiff for threats of non-payment imposed by the Defendant. As a result of the strong protest and the threat to withhold delivery in case of storage of payment, the Defendant agreed to settle the outstanding payment in full and delivery was therefore made.  The goods were delivered on 15 December 2001.

62. Mr. Yeung further says that there was never a meeting in February 2001. Late shipment was never mentioned in the April meeting either. Only defective goods was mentioned, and that was why a surveyor was instructed to inspect the quality of the returned goods. He also says that on 4 April he received 2 debit notes [D157 and D158]. One of them appeared to suggest return of 2,316 pieces of garments, but no reason was stated on the debit notes. He therefore called Queenie, the accountant of the Defendant to clarify the situation.  He was given an answer that the goods were rejected for being defective. He refers the Court to the letter of the Defendant dated 13 April 2002 [B239] and said that the letter was issued by Queenie subsequent to their conversation and in it only defect was mentioned and never anything was said about late shipment. Mr. Yeung says that the first time the Defendant said that the goods were returned for late shipment was in its Defence and Counterclaim.

63. Moreover he says that he should not be held responsible for late shipment. He says that the shipment date stated on the purchase contracts were of a tentative nature. Actual delivery date would depend on how the work progressed.  In fact, there was an agreement that delivery could be made 60 days after approval of production sample by the Defendant or the overseas buyer. He says that the Defendant had been late in confirming the colour for the yarn concerning items in gold, red and marron under the three contracts mentioned in paragraph 28(ii) hereinabove, and that was the reason why the goods were not delivered earlier.

64. Mr. Yeung refers to purchase contract PEC 0610428 [B11] and invites the Court to note that the old gold colour for style 6293 was not approved until end of September 2001(in fact according to B224, the date should be 5 October 2001) but the shipment date on the purchase contract was 15 September 2001.Mr. Yeung says that this was strong proof on that his saying that the shipment date had not been agreed as it appeared to be and that the shipment date were put down tentatively as an estimate.

65. Mr. Yeung’s evidence is by and large confirmed by Mrs. Yeung who was responsible for production. She says that the Defendant had been fully informed of and was fully aware of the Plaintiff ‘s progress throughout and willingly accepted each delivery of order and each delivery order was accepted unconditionally. She says that no goods had been returned for reason of late shipment, and that the first time she learned about the complaint of late shipment was at the time the Defendant filed their pleadings.  She gives evidence on the process of work to explain why it would take 60 days to complete the mass production after approval of final sample.

66. On the issue of late shipment, it is not disputed that the actual shipment of the goods under the purchase contracts as pleaded by the Defendant were not in accordance with the shipment date as appeared in the purchase contracts. The dispute is on whether the terms of shipment date appearing on the purchase contracts were agreed by parties.

67. Submissions have been made by both Counsel on whether extrinsic evidence is admissible in view of parol evidence rule. Counsel for the Defendant says that the term and conditions were clear and unequivocal and therefore no extrinsic evidence would be allowed to contradict, vary, add or subtract from the terms of the documents. Further, Counsel for the Defendant submits that the Plaintiff has failed to plead an exception to parol evidence rule to allow them to adduce evidence in this regard.

68. In opposition, the Counsel for the Plaintiff submits that parol evidence rule does not prevent the parties from adducing evidence to show that the document was not intended to express the entire agreement between the parties.

69. Paragraph 12 of the Re-Amended Reply to Re-Re-Amended Defence sets out the following:

12.

The Plaintiff denies paragraph 12 (d) of the Re-RE-Amended Defence, the Plaintiff repeats paragraph 4(e)(ii) of its Re-Amended Reply and further avers the Defendant from time to time placed additional orders on exiting purchase contracts. Thus, the scheduled shipment dates in purchase contracts do not represent the actual agreed shipment dates between the parties.

70. From paragraph 12 in the pleadings, I do not agree with the Defendant’s complaint that the Plaintiff has failed to plead an exception to the parol evidence rule. I agree with the submission of Counsel for the Plaintiff as quoted in paragraph 69 above.

71. To decide whether parol evidence rule applies in this case, I find the passage in paragraph 12-096 in Chitty on Contracts, Vol.1, 28 Edition helpful.

“ It follows that the scope of the parol evidence rule is much narrower than at first sight appears. It has no application until it is first determined that the terms of the parties’ agreement are wholly contained in the written document. The rule only applies where the parties to an agreement reduce it to writing, and agree or intend that the writing be their agreement. Whether the parties did so agree or intend is a matter to be decided by the court upon consideration of all the evidence relevant to this issue.”

72. I note however that the agreement to deliver the goods 60 days after approval of garment sample as said by Mr. Yeung has not been specifically pleaded. I would allow evidence in this regard so far as it is part and parcel to the Plaintiff’s case that the shipment date appeared on the purchase contract is of a tentative nature, I would not allow such evidence if the Plaintiff goes so far as to establish an independent cause of action under a collateral agreement, as such has never been pleaded.

73. On the documentary evidence before me, I find no complaint on late shipment except for the repeat order [B227 and B228], the counterclaim for that has been abandoned. To the contrary, the letter produced by Queenie of the Defendant and signed by Miss Le Quellec said clearly the goods, now the Defendant says were returned for being late, were returned for being defective [B239]. It is admitted that there were extension on the shipment dates in at least two purchase contracts, namely [PEC 0610428 [B11] and invoice no. 01073 [B48-49]]. Further the goods were inspected at various stages before released for delivery, the inspection reports bear no remarks on the slow progress on mass manufacturing, and the goods were eventually authorized by the Defendant to be released for delivery after the contractual shipment date.  Payments were made on each and every of the purchase contracts now in question.  Moreover, the work process involved certain procedures the Plaintiff had no control on timing such as the approval of various samples at various stages.  These facts support the assertion of Mr. Yeung that the date put down on the purchase contract was tentative depending on the progress of working including when samples could be finalized.  Last but not least, terms on the contracts were concluded by the merchandiser on behalf of the Defendant in the absence of Miss La Quellec, these merchandiser were not called by the Defendant to rebut Mr. Yeung’s assertion. For these reasons, I find on balance of probability that the shipment date appearing on the purchase contracts were of a tentative nature and not a delivery date as agreed to bind parties.  The counterclaim for damages arising from return of goods for late shipment is therefore dismissed.

74. For the sake of completeness, I find on balance of probability that there was no meeting in February 2002 as alleged by the Defendant.  According to Miss Le Quellec, the meeting was caused by a fax they received from the overseas buyer and sent to the Plaintiff by end of January 2002 [D140].  There was no amount mentioned I do not see why Mr. Yeung would seek a meeting immediately even if he received this.  I find it more probable that the Plaintiff was informed of a deduction when an amount was confirmed by a fax at D142.  That was after March 2002.

75. Further, the goods which the Defendant threatened to withhold payment and the Plaintiff threatened not to dispatch had been dispatched in mid December 2001.  I accept Mr. Yeung’s saying that only after the Defendant had agreed to pay, the goods were delivered and that was in December 2001 that she agreed to pay not sometime in February 2002 as said by Miss Le Quellec in paragraph 64 of her witness statement.

The Rejection of Goods

76. Since I find that there was no merit in Defendant’s counterclaim, the Defendant should also bear the expenses for rejection of goods as claimed by the Plaintiff (paragraphs 26 to 27 above).

77. Counsel for the Plaintiff submits that apart from having no merit in rejecting the goods in question, by the two deeming provisions in SOGO on acceptance and the right of rejection the Defendant should be deemed to have accepted the goods and thus lost its right to reject the goods.

78. Section 37(4) provides that: -

“The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he had rejected it.”

79. Section 37 (5) further provides that the questions that are material in determining for the purpose of subsection (4) whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2).

80. Regarding the goods with a bad smell rejected and returned, my finding on facts in paragraphs 42-46 and 49-50 herein above is relevant.  The Defendant surely has reasonable opportunity of examining the goods, as to how they took the opportunity to examine is irrelevant. The lapse of 4 months between the delivery and the complaint of bad smell could by no standard be a reasonable time. In fact at the time of first complaint there was no decision to have the goods rejected. Even if I accept the Defendant’s evidence, it was in the September 2001 that Gary had intimated this to the Plaintiff (paragraph 37 of Miss Le Quellec’s statement).

81. Regarding the goods complained of being late, the Plaintiff relies on the sub-sale to the overseas buyer by the Defendant as an act which is inconsistent with the owner of the seller and thereby the Defendant has lost its right to reject the goods. Mr. Wong for the Plaintiff relies on two authorities; MBA Tech HK Ltd. V. Yuen Nga Lan trading as Tat Shing Enterprise Co., HCA no. 15260 of 1998 unreported, 7^th February 2001 and Europsonic S.A. v. Uni-Art Precise Products Ltd., HCA no. 19340 of 1998, unreported, 22^nd December 2001. I accept his such submission.

82. As I have found on facts that there is no merit in rejecting the goods and that in law, the Defendant was deemed to have accepted both batches of goods, the Plaintiff is entitled to damages for wrongful rejection of the goods as claimed, including freight, local transportation and warehouse charges.

83. It is argued by Miss Fung for the Defendant that the Plaintiff has failed to mitigate its loss without selling them at a lower price in any market. Such complaint is unsubstantiated in the light of the warning given by the Defendant’s lawyer on the possible infringement of intellectual property right.  As I have found that Mr. Yeung has not been informed of the allegation of late shipment for the goods returned, the costs arising from appointment of a surveyor to inspect the quality of the goods should be borne by the
Defendant.

Conclusion

84. For reasons set out in the above, I enter judgment for the Plaintiff’s claim and dismiss the Defendant ’s counterclaim.

85. Judgment for the Plaintiff against the Defendant in the sum of

(a)	Outstanding payment		$238,562.37
(b)	Expenses
	(i)	Freight charges	$6,222.82
	(ii)	Transportation costs	$550.00
	(iii)	Surveyor’s costs	$7,919.00
	(iv)	Monthly storage charges	$22,000.00
		(27.5.2002 to 26.3.2003)
		2200 x 10M
	(v)	Monthly storage charges	$50,600.00
		(27.3.2003 to day of Judgment)
		2200 x 23M
		---------------------------------------------------------------------
		Total :	$325,854.19

86. I order that there is interest at half judgment rate from date of writ to judgment and thereafter at judgment rate until payment in full. The Defendant should also bear costs of this action, to be taxed if not agreed.