KONG SUN WEAVING FACTORY LTD. v. EASTEXPORT ENTERPRISES (H.K.) LTD.

1991 No. A9828

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. These proceedings arise out of a contract entered into between the Plaintiff and the Defendant in 1991 for the sale by the Plaintiff to the Defendant of a total of 21700 yards of corduroy cloth printed with a design, the artwork for which was supplied by the Defendant to the Plaintiff, for delivery by 15th July 1991. There was to be 6700 yards of a design in a cream colour and 15000 yards on a black background. It is the black design which is the matter in issue in this case.

2. On 20th June 1991 the Plaintiff produced samples on what are known as "strike offs" for the Defendant's approval of the colour and design. As a result of the comments made by the Defendant's representative, inter alia regarding the texture of the material with the black design, changes in the colours were made and it was agreed that the black material would be printed only on one side, leaving the back the original white, in order to achieve a softer finish. On 8th July the Plaintiff produced further samples which were stamped by the Defendant on the back to show they were approved, although there is an issue as to whether this was as to colour and design only, and the Plaintiff immediately commenced printing the fabric. On 9th July, the next day, a Miss Chan of the Defendant company called Mr. Lau of the Plaintiff and asked him to delay printing and changed the delivery date to 20th July. However, Mr. Lau told her that printing had already commenced and could not be stopped. During the three weeks following this the Plaintiff requested the Defendant to take delivery of the completed cloth, which they failed to do, and on 30th July the Defendant informed the Plaintiff that as their buyer would not accept the black colour material, that part of the order was cancelled. They further informed the Plaintiff that the cream coloured material was accepted and, indeed, wished to place another order for more of it. The Plaintiff was not prepared to divide the contract and insisted that both coloured fabrics be accepted, and would not accept a further order until this was done.

3. The difficulty with the black material is obvious on close inspection of it. The dye used for printing the design on the initially pale material has not penetrated sufficiently deeply into the fabric, so that when the material is folded along the direction of the ridges in the corduroy, white shows as lines between the ridges. Thus when it is made into certain garments and it has to be folded for seams to be sewn, these white lines show wherever there is a seam.

4. The Plaintiff says that this was a sale by sample, that the sample was approved, and that the bulk is identical with the sample, and that the Defendant is accordingly in breach of contract in failing to accept it. The Defendant maintains that the goods are of an unmerchantable quality and not fit for the purpose intended, namely the manufacture of garments, that the sale comes under the provisions of section 16 (2) and (3) of the Sale of Goods Ordinance ("the Ordinance"), and that the Plaintiff cannot rely on the proviso to section 16(2) as the contract was made prior to examination of the sample.

5. First of all, what was the nature of the contract and when was it "made"?

6. The first contact between the parties in relation to this matter was on 18th May 1991 when Mr. Benjamin Lau, a director of the Plaintiff, was shown examples of a paisley print on paper and on a piece of corduroy by Mr. Kumar of the Defendant, and was told that the Defendant wished to order a quantity of 16 wales corduroy printed with these designs. 16 wales refers to the number of ridges per inch in the material, thus the fewer the number of wales, the thicker and coarser the material, and vice versa. After negotiations as to the price, Mr. Lau on behalf of the Plaintiff, and Mr. Kumar on behalf of the Defendant, signed a contract on 24th May 1991 for the purchase of 6700 yards of the material in the cream design and 15000 yards of the black design at HK$20.20 a yard with an additional 20 cents a yard for packing in cartons, for delivery in mid-July, a date that was later confirmed as 15th July. At this stage, although the type of cloth had been specified in the contract, and it has not been disputed that this was the cloth supplied, it must have been in the contemplation of both parties that it was subject to the Plaintiff producing a suitable sample for approval by the Defendant and the contract would then be for purchase of the cloth as approved. Although a contract was certainly made between the parties on 24th May, it can only have been a contract conditional upon the Defendant being satisfied with what the Plaintiff intended to supply, and was not therefore a complete contract until both parties were clear as to what were the precise goods to be supplied. It cannot be a sale solely by description, as the description in the contract was not complete, leaving the critical matter of colour and design to be agreed later. It is clearly a sale by sample, as to the design and colour, as well as description, as to the type of cloth specified in the contract. There can be no dispute here that the bulk corresponded with the description, and with the sample that the Plaintiff alleges is that approved by the Defendant. The only matter which in my view has to be decided as a question of fact is whether the Defendant did approve the sample.

7. The Plaintiff's director, Mr. Lau, who had conduct of this sale, said in evidence that, after making the corrections to the colour and printing that had been discussed with Mr. Kumar in respect of the first sample, he had several yards printed, although there was no evidence as to precisely how many, and took a sample to Mr. Kumar's office. Mr. Kumar examined the samples, including taking them in his hands, said that there was no problem, that they were correct, and the samples were chopped with a mark for approval on the back by his assistant Miss Pancy Chan. Mr. Lau said that he told Mr. Kumar that he would start production right away and Mr. Kumar raised no objection.

8. Mr. Kumar on the other hand says that the "second" sample was a piece about 15 inches square which he placed on the desk and only examined for colour and design, which he and Miss Chan approved, and that he could not ascertain anything else about it at that stage. He said that nothing was said about whether this was the cloth to be used in the final product. Although he said that the piece he examined was only 15 inches square, he said that he also received the same day from the Plaintiff a further 6 or 7 yards. Mr. Lau's recollection was that he had taken about that amount with him for Mr. Kumar to examine. Be that as it may, there is no dispute that on that day Mr. Kumar was given at some stage several yards and he had ample time, had he wished, to examine them. As it is, he said that he only looked at the cloth for about three minutes. He says that these were further "strike offs" and he did not consider them to be samples of the final product and that he expected Mr. Lau to produce further samples of what the cloth would look and feel like for him to approve before he began production. He said that he would not accept any cloth until a "shipping sample" or a "pre-shipment sample" had been approved by him and tested by a laboratory. What is meant by a shipping or pre-shipment sample was not clear. The Plaintiff's witnesses were cross-examined on the basis that this was a sample cut from the finished goods prior to shipping for the buyer to approve. However, it defies common sense that a manufacturer would complete the whole order before finding out from the buyer whether what he is making is going to be acceptable, particularly where the product is a length of cloth in excess of 12 miles long with a design another customer may not want, as turned out to be the case here. The Defendant's own witness, Mr. Ng, I believe gave evidence which reflects the usual situation; that is that after the strike offs are produced to check colour and design, a small quantity is produced of the finished product for final approval. This is what Mr. Lau says happened here.

9. For a number of other reasons I am unable to accept the evidence of Mr. Kumar in its entirety, and where it differs from that of Mr. Lau, I accept that of Mr. Lau.

10. First, as to whether final approval was being given to the Plaintiff's samples. That meeting was on 8th July. The date for delivery of the finished goods under the contract was 15th July, just one week later. There is no evidence of any discussion then about a later delivery date, or when a final sample would be ready for approval and laboratory testing, and yet, if what Mr. Kumar says is right, this could not possibly all be completed in time for delivery the following week. Mr. Lau, on the other hand, was satisfied that he had approval of his samples, and proceeded immediately to commence printing in order to comply with the dates on the contract. Mr. Kumar said that he did not expect production to begin until he had approved another sample, yet he asked his assistant Miss Chan to telephone Mr. Lau later that day to ask him not to start printing until he had his buyer's approval. As it happened, Miss Chan could not telephone Mr. Lau until the next day, by which time production was well under way, and could not be stopped and restarted easily. But Mr. Kumar was unable to explain why he had asked for printing to be delayed while at the same time maintaining that he did not expect it to begin. Whether or not he had his buyer's approval is not a matter which need concern me. The contract here is between the Plaintiff and the Defendant, and it is only their conduct and what inferences I can draw from that which is relevant.

11. Neither do I accept Mr. Kumar's evidence that in every purchase of cloth he would require a laboratory test. Mr Lau gave evidence that if a buyer wanted a test done on the cloth he would ask when he placed the order and ask for a sample for this purpose, and the test would take one or two weeks for the results. He said that there was no request for testing here and I accept that evidence. If I needed further support for this view, it is supplied by the admitted fact that no test was required or done on the cream coloured material. Yet this was accepted by Mr. Kumar and his buyer without reservations and, indeed, a further order for that cloth was proposed during negotiations following rejection of the black cloth.

12. Meanwhile Mr. Kumar left Hong Kong on holiday, not returning until 18th August, leaving Miss Chan and his co-director Mr. Chulani dealing with the matter. It is significant that there is nothing in the correspondence with the Plaintiff after rejection of the goods by the Defendant's buyer to indicate that the goods had been produced without the Defendant's approval, and both Miss Chan and Mr. Chulani appear to believe that the buyers themselves had approved the cloth sample. Mr. Kumar says that this cannot be right as the buyer's representative was not in Hong Kong at the relevant time, and this may well be the case, however, neither Miss Chan nor Mr. Chulani, who did not give evidence as to the events surrounding the matters in dispute, were apparently in any doubt at that stage that approval had been given, and Miss Chan had been present at the meeting on 8th July.

13. In the circumstances I am satisfied on a balance of probabilities that the sample produced by Mr. Lau to Mr. Kumar on 8th July was approved by him on behalf of the Defendant and was the sample with which the final product had to correspond as to quality. As there is no contention on the part of the Defendant that the goods did not correspond with the description, apart from a suggestion by Mr. Pirie on behalf of the Defendant that the word "Printing" means printing to a certain, albeit unspecified, depth and quality, which I reject, the sale comes wholly under section 17 of the Ordinance and the implied conditions thereunder. There has been no suggestion that the first two implied conditions have not been met, namely, that the bulk shall correspond with the sample in quality, and that the buyer shall have a reasonable opportunity of comparing the bulk with the sample. The only issue here is under the third implied condition that the goods shall be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample.

14. There is no doubt that the black cloth is defective. It has serious drawbacks from the point of view of making garments from it as it is inevitable that the unsightly white lines would show through. Yet that defect is apparent on a comparatively cursory examination by anyone, and ought to be immediately obvious to an experienced buyer of cloth for use in the garment industry, which Mr. Kumar holds himself out to be. The appearance of the white lines was the only reason given for rejection of the cloth at the time and any buyer handling that cloth, feeling its quality, and making a simple fold, would be aware of that fault, or could be aware if he took advantage of the opportunity for reasonable examination which I have found that Mr. Kumar had in this case. Even, therefore, if the defect is such to make the cloth unmerchantable, I am satisfied that not only would it be apparent on reasonable examination, but that the Defendant had an opportunity to make such an examination. If he did not take advantage of that examination, or if he realised belatedly that he ought to seek the approval of his sub-buyers before giving approval, he cannot on that basis now avoid liability to the Plaintiff.

15. Before leaving this part, I should deal with a further claim by the Defendant that the cloth had a latent defect in that the colour fastness was poor and unacceptable when tested by the wet rub test or crocking. This allegation was not made at the time of rejection of the goods, and was only added to the defence by an amendment in April 1994 as a result of a test carried out on the cloth in May 1993. That test report says simply :- "The sample fails in colour fastness to crocking. All the other performance test results are commercially acceptable." Crocking I understand is rubbing the material against a piece of wet white cloth to see if any of the colour of the sample transfers to it. Clearly in this case it did. However, we are not told by how much or whether this made the cloth unusable for the purpose it was intended, or whether it would only result in any garment made from it having to have specific instructions on its washing label about washing with other garments, as is the case so often with many garments available commercially. In short, there is no evidence that this defect, if it is a defect, is such as to make the cloth unmerchantable.

16. I have had drawn to my attention on behalf of the defence evidence of lengthy negotiations between the parties following rejection of the cloth in which both sides sought to resolve the matter by either finding a buyer for the black cloth as it was, or on the part of the Plaintiff, attempting to find a way, either by redyeing the fabric to effect a deeper penetration of the dye or otherwise, to make it acceptable for garment making. I am told that one suggestion was to have each garment made treated by someone with a black felt pen covering the white lines; one which I am sure the Plaintiffs themselves realised on reflection was ludicrous. Mr. Pirie urges me to treat these negotiations as evidence that the Plaintiffs knew that they were at fault and were trying to extricate themselves as cheaply as possible. I am not able to draw such a conclusion from the evidence. All that it shows to me is two parties with a long and amicable business relationship trying to assist each other in a difficult situation and retaining that amicable relationship until resort to legal proceedings. In any event, on the facts as I have found them, and the law that applies to those facts, any belief held by the parties at the time as to where liability lay is of little relevance.

17. It follows that I am satisfied that this was a sale by description and sample, the smple being that approved by the Defendant on 8th July 1991, that the goods supplied by the Plaintiff corresponded with the description and sample and were free of latent defects making them unmerchantable, and the Defendant accordingly was not entitled to reject the cloth and is in breach of contract in so doing. However, for the sake of completeness I will deal with the allegations of the Defendant that they had a right to reject the goods under section 16(2) and (3) of the Ordinance.

18. Section 16(2) provides for an implied condition in a sale in the course of a business that the goods shall be of merchantable quality except : "if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal."

19. As to merchantable quality, I have to say immediately that it is clear that the black cloth produced by the Plaintiff cannot claim this definition. The cloth was intended for the use of making garments, and I have seen one produced as an exhibit which, although produced for the purpose of these proceedings, makes it obvious that the only garment which would be acceptable in this material is one which did not require any seams or folds. It is in my view therefore unsuitable for garments. Miss Ng, on behalf of the Plaintiff has sought to argue that there are other uses for which it could be sold such as fumiture fabric, or even a table cloth. This may be so, although in view of the nature of the defect I have grave doubts. In any event these are not cheap goods. The evidence is that the price was at the top of the range for such fabric, and thus clearly for use in the garment trade rather than for more mundane uses, and it therefore fails in the test as to whether a buyer would buy them at a similar price for another use. But what puts the matter beyond doubt in my mind is that fact that, after rejection of the goods by the Defendant, in spite of efforts by both parties to dispose of the cloth, they have been unable to do so, at any price.

20. As to whether the examination by the Defendant ought to have revealed the defect, from what I have said above regarding the meeting on 8th July it is apparent that I accept the evidence of the Plaintiff's witness Mr. Lau that Mr. Kumar had not only an opportunity of examining the sample, but that he did do so. If that examination was so cursory that it did not reveal the defect, or if Mr. Kumar then considered the defect sufficiently minor to approve the sample in spite of it, it would not now be reasonable to blame the result of his inattention on the Plaintiff. From what I have said above it is apparent that I consider that this contract was not a complete contract until the final approval by the Defendant, and accordingly, the examtination by Mr. Kumar falls within the exception in section 16(2)(b)

21. Defendant further contends that they were entitled to reject the goods under section 16(3) which requires goods to be fit for the purpose for which they are bought "except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's skill and judgment."

22. It is clear to me that Mr Lau of the Plaintiff knew the purpose for which the clothwa bought. There had been many previous dealings between the parties and almost always for cloth for garments. Mr. Lau said in his evidence that he guessed the cloth was for garments, so, although he denies he was told the specific purpose, it was at the very least implied. I have already found that the cloth was not fit for that purpose. The only issue therefore is whether the Defendant relied on his skill and judgment.

23. Mr. Kumar said in evidence that he had been in the garment and material rt/export business for many years and had been dealing with the Plaintiff for over six years. He said however that he usually dealt with Mr. Wong, the sales manager, or Mr. Lau's mother, another director, and that Mr. Lau had only come on the scene in 1990. From this evidence alone it is clear that the party with the greatest experience of the trade, and what is required for garments, is Mr. Kumar, not Mr. Lau, a comparative newcomer to the cloth trade. Further, the facts of this case themselves show that there was no reliance on the Plaintiff's skill and judgment, in the precise description of the cloth in the contract, and the insistence on samples to be approved, not only as to their colour and feel, but also, I am satisfied on the evidence, as to their suitability for the purpose the Defendant intended. The Defendant's contention under this subsection must also fail.

24. The last matter that I have to consider is that of mitigation of damage, and in particul whether the Plaintiff made adequate efforts to dispose of the defective material, and whether they should have accepted the offer of the Defendant to take the part of the order with which they were satisfied, the cream coloured cloth, albeit at a discount, and an additional order for more of the same cloth.

25. In respect of the first part, the efforts of the Plaintiff to dispose of the cloth, I have already referred above to the negotiations with the Defendant and their attempts to assist by trying, without success, to find a buyer. In addition, Mr. Lau gave evidence that he had tried to sell the cloth himself, sending samples to several companies that specialise in buying stock, again without any response. I am satisfied that his efforts in the circumstances were adequate. As to the offer made by the Defendant, the first, upon rejection of the black cloth, was to take only the cream cloth which had been accepted. The Plaintiff took the view that this was all one contract and they would not accept partial performance. I am unable to say that this view was unreasonable for parties in this situation. With the benefit of hindsight, and had they been lawyers, they might have accepted the Defendant's offer but only on condition that it did not prejudice their right to claim damages for breach of the balance of the contract. This was not however the offer that was made by the Defendant and I do not consider that failure to accept can amount to failure to mitigate in the circumstances of this case.

26. The later offers were to take the cream cloth at a substantial discount. Again, a lawyr might accept on condition that his right to claim the balance under the original contract was not affected, but I am concerned here with reasonableness not wisdom. Such a condition was not offered, and the failure by the Plaintiff to request it does not put them in a position of unreasonably failing to mitigate their loss.

27. The Plaintiff accordingly succeeds in its claim for damages as claimed in the statemen of claim, the quantum of which was not challenged at trial, except as to the claim for storage charges in (d) of the particulars of damage, which was withdrawn by the Plaintiff, with interest on the sum of $450766.80 from 15th July 1991 and on $6120.00 from 30th November 1991 both at 7.5% to the date hereof The Defendant's counterclaim is dismissed.

28. There will be an order nisi for costs in favour of the Plaintiff.

29. Non-documentary exhibits may be returned to the parties' respective solicitors upon the usual undertakings.