ARMA FAR EAST LTD. v. UNI FIT GARMENT FACTORY LTD.

HCA 13201/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13201 OF 1998

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REASONS FOR JUDGMENT

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Introduction

1. The plaintiff commenced this action claiming US$75,663.50 from the defendant on the ground that the defendant failed to pay for the price of goods sold and delivered earlier. The defendant denied the claim and counterclaimed for loss and damages for non-delivery and defective goods and repayment of money overpaid to the plaintiff.

2. At the end of a 4-day trial, final judgment was entered in the plaintiff's favour on its claim. The counterclaim was dismissed. The following are the reasons for the decision.

The Plaintiff's Case

3. The plaintiff is a Hong Kong company engaged in inter alia the manufacture and sale of garments. The plaintiff's majority shareholder is a Netherlands company which has a joint-venture business in Shenzhen called "Teger-Arma Leather Company Limited" (深圳泰格阿瑪皮草有限公司) ("Shenzhen Teger"). Shenzhen Teger has an office in Shenzhen. It also has a factory in Shenzhen until about January/February 1997 when that factory was closed down.

4. Mr Yervan Aykaz (also known as Jerry Aykaz) ("Aykaz") has been the plaintiff's director. Mr Pan Feng Lei (潘風雷) ("Pan") was the general manager of Shenzhen Teger until 1997.

5. In March 1997, a Shenzhen Lung Kong District Bou Fu Dat Leather Garment Manufacturing Factory (深圳龍崗區寶富達皮衣廠) ("Bou Fu Dat") was formed. Pan later became Bou Fu Dat's factory manager. Bou Fu Dat was the manufacturer of the defendant's goods.

6. Pan met Mr Leung Chun Por ("Leung") of the defendant in a trade fair in Hong Kong in about April 1997 when Pan was still with Shenzhen Teger. The defendant later wanted to purchase double-faced leather garments and approached Pan for that purpose. Leung also visited Pan in the mainland in about July 1997. Pan told Leung Shenzhen Teger did not have the funds to purchase the raw materials and asked the defendant to place the order with the plaintiff. The arrangement was that the plaintiff would become the seller of the leather garments as well as the buyer of the raw materials from South America. The garments would be manufactured by the mainland factory. Leung agreed to this arrangement and Pan informed Aykaz of this accordingly.

7. Aykaz met Leung and a Mr Ng in the defendant's office in Hong Kong in July 1997. After discussion, the above arrangement was agreed to by the plaintiff and the defendant.

8. On about 28 July 1997, the plaintiff sent a "Proforma Invoice" to the defendant for payment of US$267,000, setting out the details of the goods. On about 31 July 1997, the defendant asked the National Commercial Bank Limited to open a letter of credit in the plaintiff's favour.

9. A substantial part of the double-faced leather garments was ready for delivery by about mid-October 1997. However, the defendant only accepted 173 pieces. Further, 205 pieces and 61 pieces (a total of 266 pieces) of goods were delivered on 24 and 27 October 1997 respectively.

The Defendant's Case

10. While the defendant accepts that an agreement was made under which it was the purchaser of double-faced leather garments, the defendant denies that the agreement was made with the plaintiff. It was instead made between the defendant and Shenzhen Teger in July 1997.

11. The defendant explained that the plaintiff's "Proforma Invoice" of 28 July 1997 was sent unilaterally by the plaintiff and was unknown to Leung, who was responsible for making the agreement with Shenzhen Teger. The letter of credit was issued in the plaintiff's favour as requested by Shenzhen Teger because Shenzhen Teger claimed that the plaintiff needed the money to purchase the raw materials from the South American supplier.

12. Great emphasis has been placed by the defendant on a number of the defendant's pro forma contracts which were sent to, and signed by, Pan. These written contracts named Shenzhen Teger as the seller. It is undisputed these documents were received by Pan some time in September 1997 and signed by him. The address of Shenzhen Teger in those documents was that of Bou Fu Dat.

13. Further, there were other documents which indicated that the seller was Shenzhen Teger, for example, the letters dated 4 October 1997 and 26 November 1997.

14. The admission by Pan in his testimony that Shenzhen Teger did not have the financial means to take up the defendant's order supports the defendant's case that the plaintiff was only brought in by Shenzhen Teger to provide the finance for purchasing the raw materials from South America. The defendant's letter of credit and cargo receipt, and the plaintiff's invoices were only to assist the plaintiff financially so that the plaintiff could place an order for purchasing the leather materials from South America.

15. The plaintiff's case that Shenzhen Teger has ceased business is doubtful. According to Pan, Shenzhen Teger ceased business in July 1997. However, Aykaz alleged that it was closed in March 1997 and there was no business activity since then. Aykaz's allegation is inconsistent with the participation of Shenzhen Teger in the leather exhibition in Hong Kong in April 1997.

16. In any event, the plaintiff failed to supply part of the goods ordered by the defendant. The delivered goods were defective and the defendant suffered loss as a result.

The Issues

17. The determination of this action depends substantially on the assessment of the witnesses' credibility. The plaintiff has called Aykaz and Pan to testify whereas the defendant has called Leung and a Mr Lau Yiu Cheung ("Lau") as its witnesses. Lau is put forth by the defence as an expert witness.

18. In short, I accept the plaintiff's witnesses to be truthful and reliable and reject the defendant's witnesses as untruthful and/or unreliable. This aspect will be dealt with in more details under the sub-headings below. For the avoidance of doubt, even though this judgment may only refer to specific parts of a witness's testimony, credibility has been assessed (a) from a global point of view and (b) in the light of the totality of the evidence, including documentary evidence.

(1) Between Whom was the Agreement Made?

19. It is undisputed that an agreement for the sale and purchase of double-faced leather garments was made in July 1997 and that the buyer was the defendant ("the agreement"). The identity of the seller is however disputed. It is for the plaintiff to prove that it was the seller of the agreement. The parties called witnesses and adduced documents at trial in support of their respective cases on this point.

20. The document which was closest in time to the agreement was the plaintiff's "Proforma Invoice" dated 28 July 1997. This set out the particulars of the goods in question. It is undisputed that this was sent to the defendant in July 1997. Other contemporaneous documents which were consistent with the plaintiff's case include the defendant's letter of credit dated 31 July 1997, the defendant's cargo receipt dated 13 October 1997 and the plaintiff's invoice dated 14 October 1997. Similarly, there is no dispute they were received, or issued, by the defendant (as the case may be). In short, they indicated that the plaintiff was the supplier of the goods.

21. When Leung testified, he claimed that the plaintiff's said invoices were unknown to him or his department. He said they were probably sent to the defendant's accounts department. When asked further, he disclosed that the defendant's Hong Kong operation was a relatively small one. There were only four staff in the accounts department and two in Leung's department. I find Leung's claim that he was unaware of the plaintiff's invoices to be incredible. With such a small operation, even if the documents had initially been sent to the accounts department, it is implausible that the staff there would not ask Leung (or the other staff in his department) about documents which were about a sale and purchase transaction involving the defendant. Further, I infer from these documents and the testimony of the plaintiff's witnesses that the defendant regarded the plaintiff as its seller.

22. Aykaz testified that he went to the defendant's office to meet Leung and Mr Ng to discuss (and finally agreed on) the transaction. Leung did not deny this meeting but was unable to give a satisfactory explanation as to why Aykaz met him and Mr Ng. The defendant also did not challenge the fact that Aykaz was present when Leung went to the mainland factory to inspect the goods. The defendant claimed that this was a coincidence but I find this explanation unbelievable.

23. As regards the defendant's written contracts which were signed by Pan, I find that the defendant requested Pan to do so because of either of the 2 reasons below. In relation to the first possible reason, it has to be borne in mind that neither party suggests that the plaintiff and Shenzhen Teger were in truth the same establishment, or that they were under the same management. In fact, although it was not expressly so stated by the defendant, it must be inherent in its case that the plaintiff and Shenzhen Teger were different entities. Otherwise, the defendant's case that it only contracted with Shenzhen Teger and not the plaintiff would make little sense. With this in mind, the defendant must have wanted Pan to sign documents which indicated that Shenzhen Teger was also the defendant's seller. The defendant must have thought that this would be to its advantage; if any problem should arise, the defendant could hold either the plaintiff or Shenzhen Teger responsible. The second possible reason must be that the defendant did not consider it important whether the identity of the seller was the plaintiff or Shenzhen Teger. Hence, it did not bother to correct the plaintiff when it received the plaintiff's invoices and instead proceeded to send (or cause to be sent) to the plaintiff the letter of credit and the cargo receipt.

24. The above finding is supported by the defendant's fax dated 31 October 1997. This document was addressed to Bou Fu Dat (for the attention of Pan), which was not the seller, whether according to the plaintiff or the defendant. It was copied to the plaintiff/Aykaz (wrongly spelt as Akaz). The first paragraph reads:-

"PER OUR MEETING IN YOUR SHENZHEN FACTORY ON OCT 17, 1997., YOU AND YOUR MR JERRY AKAZ HAD PROMISE [sic] US THE FOLLOWING THINGS ... ".

When this document referred to "YOUR SHENZHEN FACTORY", it is unclear whether the author was referring to Shenzhen Teger or Bou Fu Dat. But the fact that the document was addressed to Bou Fu Dat (and copied to the plaintiff/Aykaz) shows that the defendant probably knew by that time Shenzhen Teger was no longer in operation. The reference to Aykaz in the body of the fax shows that the defendant treated Pan and Aykaz to be its seller.

25. The defendant also relied on its letter dated 4 October 1997. It was signed by Pan at the end of the letter to acknowledge some of the matters complained of by the defendant. This document referred to Pan's factory as "工場" (workshop), "貴廠" (your factory) or "工廠" (factory). It dealt exclusively with matters relating to the quality of the goods. I do not find that it can advance the defendant's case regarding this issue.

26. As regards the letter dated 26 November 1997, Pan denied he had written it. It was not signed and did not bear any mark or chop indicating the identity of the author. The defendant argued that Pan has accepted the correctness of the contents of that letter in his testimony. While that may be so, according to Pan, the letter referred to Bou Fu Dat, and not Shenzhen Teger or the plaintiff. Accordingly, Pan's testimony regarding the document does not show that the document is relevant to this issue. It therefore does not assist the defendant regarding the true identity of the seller.

27. The production instructions were sent to Pan and not the plaintiff. However, when a mainland manufacturer has been engaged to produce the goods, it is not unusual for a Hong Kong buyer to liaise with the mainland manufacturer instead of doing so through the seller in Hong Kong. This fact is thus only neutral.

28. Counsel (especially plaintiff's counsel) have referred to discrepancies between the witnesses' testimony and their respective statements. I do not propose to set them in detail suffice it to say they have been taken into account when assessing credibility.

29. One matter is telling on the defendant's bona fides in the sale and purchase transaction. The terms of the letter of credit required, among other things, an official cargo receipt certifying that the goods had been received in good order and perfect condition. The cargo receipt must also evidence the delivery of the goods with the specified style numbers. One of the style numbers was "590". The defendant's cargo receipt omitted to mention the goods had been received in good order and perfect condition. Further, the style number therein was "500" instead of "590". The bank refused to pay the plaintiff because of the discrepancies.

30. When Leung was cross-examined on this, he shifted the responsibility to the accounts department and said may be someone there had done that. In the absence of some plausible explanation, the accounts department would usually follow the wordings of letters of credit when typing out cargo receipts required for payment. The discrepancies found in the defendant's cargo receipt must have been intended to prevent the plaintiff from getting payment from the bank. I note that they were not waived by the defendant. By reason of the above matters, I do not find this line of defence to be credible.

(2) Was There Non-Delivery by the Plaintiff?

31. It is common ground that 439 pieces of garment were delivered to the defendant. The defendant's case is:-

(a) the plaintiff has in breach of the agreement failed to deliver 1,061 pieces of garment;

(b) 343 pieces of the said garments were still kept in the defendant's warehouse awaiting collection by the seller (Shenzhen Teger according to the defendant);

(c) of the remaining 96 pieces of the said garments, 35 pieces were sold by the defendant and the other 61 pieces were still in Russia.

32. By reason of the defendant's abandonment of its counterclaim (see below), it is unnecessary to determine this aspect of the action. This is because it is not the defendant's case that the alleged non-delivery by itself amounted to a repudiatory breach entitling the defendant to reject the delivered goods.

33. Leaving aside the abandonment of the counterclaim, there was in any event a lack of satisfactory evidence as to the loss said to have been suffered by reason of the alleged non-delivery of the goods. To avoid any doubt, I have taken this complaint into account when assessing credibility.

(3) Were the Delivered Goods Defective?

34. In short, I conclude that the plaintiff's cross-examination has shown that Lau was not an expert regarding double-faced leather. Over many matters, he would give an opinion as an expert and yet changed his opinion when it was challenged by plaintiff's counsel. Lau was not formally trained nor qualified. He was only educated up to GCE form six level. He claimed he had practical experience in double-faced leather. But in view of his appalling ability to answer questions relating to this area, this claim is rejected. His answers in cross-examination showed that he does not have any knowledge about the origin of double-faced leather, nor of its physical attributes or other basic matters such as the processing of double-faced leather.

35. Even if Lau can be regarded as an expert, by reason of the frequent change of his answers over many matters relating to double-faced leather, I do not find him to be a reliable witness. I find it incredible that he could conclude on the cause of the defects found on the leather even though the inspection was made more than 2 years after the goods were delivered. His testimony regarding the defects also differed from his inspection report over several points.

36. The only evidence of the alleged defective goods came from Lau's inspection report and his testimony. Having rejected him as an expert witness, alternatively, as an unreliable witness, there is no proper evidence to enable the court to find that the goods were defective. Leung has (correctly) not claimed to be an expert in double-faced leather. The defendant has accordingly failed to establish this part of its case, whether by way of defence or counterclaim.

(4) Were the Goods Accepted by the Defendant?

37. The plaintiff relied on s. 37, Sale of Goods Ordinance (Cap. 26) and contended that the delivered goods had been accepted by the defendant. The relevant parts of s. 37, Cap. 26 read:-

"(1) Subject to subsection (2), the buyer is deemed to have accepted the goods-

...; or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.

...

(4) 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 has rejected them".

38. It is undisputed that the delivered goods have not been returned to the plaintiff. The defendant's case is in essence that the parties agreed, at the time when the goods were delivered, that they could be returned to the seller after the defendant's attempt to sub-sell the goods failed. This was denied by the plaintiff. I do not accept this part of the defendant's case either. The alleged agreement did not specify the length of time which the defendant was allowed to attempt to sub-sell. It is inherently implausible for a seller to accept such an open-ended arrangement.

(5) The Counterclaim

39. In order to understand why the counterclaim was dismissed, the cross-examination of the plaintiff's witnesses has to be mentioned. As stated above, Aykaz and Pan were called to testify. Pan is a mainland resident. Despite it was part of the defence case that the plaintiff has failed to deliver 1,061 pieces of garment, this was never put to the witnesses by the end of the plaintiff's case. In fact, in relation to another matter, the court has earlier reminded the defence that all relevant factual disputes should be put to the witnesses in cross-examination. Defence counsel then put part of the defence case to them; but the above matter was still left out.

40. The importance of putting a party's case has been pointed out in Phipson on Evidence (2000) 15th Ed., para. 11-26:-

"... Duty to cross-examine

As a rule a party should put to each of his opponent's witnesses in turn so much of his own case as concerns that particular witness, or in which he had a share, e.g. if the witness has deposed to a conversation, the opposing counsel should put to the witnesses any significant differences from his own case. If he asks no questions he will generally be taken to accept the witness's account and will not be permitted to attack it in his final speech; nor will he be allowed in that speech to put forward explanations where he has failed to cross-examine relevant witnesses on the point. ...

Failure to cross-examine will not, however, always amount to acceptance of the witness's testimony, for example if the witness has had notice to the contrary beforehand, or the story itself is of an incredible or romancing character, or the abstention arises from motives of delicacy in the cross-examination of children, or to save time by not putting the same matters to several witnesses. It is open to counsel, and usually safer, to seek the judge's leave not to cross-examine ...

Where there is an omission to cross-examine on a particular matter by inadvertence, the problem can sometimes be overcome by recalling the witness ... ".

None of the exceptions referred to in the above passages applied to the failure to cross-examine by defence counsel herein.

41. When this failure to put part of the defence case was raised with defence counsel at the end of the plaintiff's case, Pan has already left Hong Kong. Defence counsel informed the court, after having taken specific instruction from the defendant, that the defendant would abandon its counterclaim. Accordingly, the counterclaim was dismissed.

Conclusion

42. By reason of the above matters, final judgment in the sum of US$75,663.50 (with interest thereon as agreed between the parties at the end of trial) was entered in the plaintiff's favour. The counterclaim was dismissed.