TUNG SHING METAL PRODUCT FACTORY LTD t/a TAI WANG METAL PRODUCT FACTORY v. ROYAL GLORY INTERNATIONAL LTD

DCCJ 5090/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5090 OF 2007

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BETWEEN

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JUDGMENT

1.  The Plaintiff is and was a limited company incorporated in Hong Kong carrying on the business of watch components manufacturing with a register address at Room 806, 8^th Floor, Wang Yip Industrial Building, 1 Elm Street, Tai Kwok Tsui, Kowloon. Tai Wang Timepiece Company Limited was a limited company incorporated in Hong Kong carrying on the business of watch components manufacturing (“Tai Wang Timepiece”). Its registered office was Room 1301, 13/F, Wang Yip Industrial Building, 1 Elm Street, Tai Kok Tsui, Kowloon before it was deregistered and dissolved on 3 April 2007.

2.  The Defendant is and was a limited company incorporated in Hong Kong with a register office at 19/F, Seaview Commercial Building, 21-24 Connaught Road West, Hong Kong (“Royal Glory”).

The Plaintiff’s Case

3.  In or about 2002, Royal Glory began placing orders for watchbands with Tai Wang Timepiece while orders for watch buckles were placed with Tung Shing Metal Product Factory (“Tung Shing”). Mr. Wang Kwun Hi (“Mr. Wang”) was a shareholder and director of Tung Shing and Tai Wang Timepiece, they were also operated by him. Because of the common ownership, Royal Glory subsequently placed its orders solely with Tai Wang Timepiece for the buckles manufactured at Tung Shing to be delivered to Tai Wang Timepiece for assembly before delivery to Royal Glory. Samples of watchbands with buckles would be sent to Royal Glory for approval before delivery of goods.

4.  Between May and December 2003, Royal Glory placed a number of purchase orders at Tai Wang Timepiece for watchband models B2091L and B2092L. Tai Wang Timepiece agreed to sell at the price of HK$55.00 per watchband and buckle at HK$12.00.

5.  Pursuant to the purchase orders placed by Royal Glory, Tai Wang Timepiece delivered watchband models B2091L and B2092L with buckles to Royal Glory between 17 July 2003 and 26 December 2003 and issued invoices for the goods sold and delivered to Royal Glory.

6.  In or about December 2003, Royal Glory alleged that some of the watchbands delivered under earlier invoices were defective and requested replacements. Though the allegation was disputed by Tai Wang Timepiece, it nevertheless agreed to deliver replacements for defective watchbands.

7.  Consequently, between 16 December 2003 and 10 January 2004, at the request of Royal Glory, Tai Wang Timepiece delivered replacement watchbands with buckles in the total value of HK$703,433.00.

8.  It is Tai Wang Timepiece’s claim that Royal Glory reached an agreement with Tai Wang Timepiece that the watchbands with buckles would be replaced on condition that the defective watchbands with buckles would be returned to Tai Wang Timepiece (“the replacement agreement”).

9.  It is not disputed that by 13 March 2006, Royal Glory had returned only 1,645 pieces of watchbands with buckles to Tai Wang Timepiece. Despite repeated requests from Tai Wang Timepiece, Royal Glory failed to return further watchbands to Tai Wang Timepiece.

10.  On 1 September 2004, the Plaintiff, Tung Shing Metal Product Factory Limited was incorporated (“Tung Shing Metal”). It took up all the businesses of Tung Shing and Tai Wang Timepiece. Tung Shing Metal claimed that notices were sent to Royal Glory and all customers of Tung Shing and Tai Wang Timepiece. They were informed of the incorporation and the taking over of the businesses of Tai Wang Timepiece and Tung Shing by Tung Shing Metal. An assignment was executed by Tai Wang Timepiece assigning all its assets and rights to Tai Wang Metal on 30 September 2004.

11.  Tung Shing Metal upon taking over the assets and rights of Tai Wang Timepiece subsequently issued invoices on behalf of Tai Wang Timepiece to Royal Glory for the payment of the replacement watchbands Tai Wang Timepiece had delivered to Royal Glory between December 2003 and January 2004. At the trial, the Plaintiff accepted a deduction of the price for the 1,645 pieces returned from the total sum claimed of $703,433.00.

The Defence’s Case

12.  Royal Glory admitted that orders were placed with Tai Wang Timepiece for the manufacture of watchbands and buckles model numbers B2091L and B2092L. It found some of the watchbands were defective and Tai Wang Timepiece had agreed to deliver replacements for them. Royal Glory, however, denied it was a term of the agreement that the replacement was conditional upon the return of the defective goods to Tai Wang Timepiece. It claimed there was an implicit understanding and/or agreement between the parties that they would not claim against each other because Royal Glory had also incurred delivery costs to its customers in Italy in the sum of HK$40,000.

13.  Alternatively, Royal Glory alleged it was not under a duty to return the defective goods to Tai Wang Timepiece other than making them available for Tai Wang Timepiece’s collection.

14.  It was Royal Glory’s claim that the watchbands were defective because the length of the bands could not be adjusted. It accepted there was no defects with the buckles attached to the watchbands. So far as the invoices issued by Tai Wang Timepiece for the replacement goods are concerned, Mr. Gary Wong of Royal Glory (“Mr. Wong”) claimed that Mr. Wang of Tai Wang Timepiece had informed him they were issued for internal accounting record only and Royal Glory could ignore them.

15.  Royal Glory denied that between January 2004 and July 2005, Tai Wang Timepiece or Tung Shing had ever requested Royal Glory to return the defective watchbands.

16.  Royal Glory further denied the notice dated 16 September 2004 was a valid notice of assignment. It claimed it was merely a notice of change of company name. As to the document of assignment dated 30 September 2004, Royal Glory disputed its authenticity and validity.

17.  Royal Glory admitted that in or about the end of 2005 Mr. Wang of Tung Shing did request Mr. Wong of Royal Glory to locate and return the defective watchbands. As a gesture of goodwill, Royal Glory arranged for the return of some of the defective watchbands to Tung Shing. Royal Glory further agreed that the parties were still doing business in February and March 2005. Royal Glory relied on Tai Wang Timepiece’s monthly statement to Royal Glory that did not specify the alleged payment for the replacement goods as outstanding payment to Tai Wang Timepiece.

18.  It is Royal Glory’s defence that even if it was liable for its failure to return the defective watchbands to the Plaintiff, it was only liable for the scrap value of the defective watchbands which amounted to no more than $8,000 to $10,000.

Validity of the document of Assignment of Assets and Rights of Tai Wang Timepiece dated 30 September 2004

19.  Mr. Wang admitted he had executed the document of assignment prepared by the Plaintiff’s accountant in September 2004. The Plaintiff further relied on the two notices dated 16 September 2004, one issued by Tai Wang Timepiece Company Ltd. and the other issued by Tung Shing Metal Product Factory on the same day. Both notices informed their respective customers that as of 1 October 2004, the company name would be changed; in the first notice from Tai Wang Timepiece to Tai Wang Metal Product Factory and the second notice from Tung Shing Metal Product Factory to Tung Shing Metal Product Factory Ltd. These two notices further informed their customers that for future payments, cheques should be settled in the new names of the respective companies.

20.  The issue of these 3 documents indicated that Mr. Wang was restructuring his companies. The intention that Tai Wang Timepiece’s businesses would be transferred to the new company by the name of Tai Wang Metal Product Factory had been expressly stated in the notice issued by Tai Wang Timepiece on 16 September 2004 (page 304 of bundle B). Even though Tai Wang Timepiece was only deregistered on 10 August 2007, the issue of the 16 September 2004 notice to customers including Royal Glory, is sufficient evidence of the expressed transfer of business to the new company. I am satisfied on the evidence adduced that there was a true intention of transfer of business including all company assets and rights of Tai Wang Timepiece to the new company ‘Tai Wang Metal Product Factory’ commencing on 1 October 2004. On that basis, there is no reason for Mr. Wang to produce a forged document of assignment at page B237 when the restructuring of his companies was prepared and executed on the advice of a professional firm of accountants.

21.  There was no evidence adduced by the Defendant to show the assignment of 30 September 2004 was not a genuine document. Mr. Wong in his evidence in Court admitted that he thought the notices indicated the change of name of the companies. He further admitted under cross-examination that the two notices at pages B304 and B305 also indicated that the two new companies had taken over the businesses of the two old companies. It is not disputed that the Plaintiff, Tung Shing Metal Product Factory began trading as Tung Shing Metal Product Factory Ltd. after 1 October 2004 and that Royal Glory did continue to do business with the new companies after 1 October 2004 in the Plaintiff’s name.

Whether the watchbands were defective?

The Plaintiff’s evidence

22.  It was the evidence of Mr. Wang that Royal Glory had been purchasing watchbands from Tung Shing Metal Product Factory since April 2001. In October 2002, it began to place purchase orders for buckles from Tai Wang Timepiece. As the common director of the two companies, Mr. Wang handled all the orders placed by Royal Glory dealing directly with its director Mr. Gary Wong who indirectly controlled 50% shareholdings of Royal Glory. At a later stage, to simplify the procedure and at the request of Royal Glory, Royal Glory’s purchase orders for both watchbands and buckles were placed directly with Tai Wang Timepiece. Based on Royal Glory’s purchase orders, Tai Wang Timepiece would assemble the buckles from Tung Shing on the watchbands manufactured by Tai Wang Timepiece before delivery to Royal Glory.

23.  It was Mr. Wang’s evidence that between June and November 2003, Royal Glory placed various purchase orders with Tai Wang Timepiece for watchbands model numbers B2091L and B2092L. Before delivery of the goods, in or about May and June 2003, samples of the watchbands were delivered to Royal Glory for approval. Upon the approval of the samples, delivery of the purchase orders for the two particular models began between 17 July and 26 December 2003. According to the understanding of Mr. Wang, all goods delivered were examined and inspected by Royal Glory; they were then further examined and inspected by the representative of ‘Binda’. It is the understanding of Mr. Wang that Binda had an office in Hong Kong with staff to supervise and monitor all purchase orders for watches with bands and buckles to be shipped to Italy. Consequently, Mr. Wang presumed the watchbands and buckles delivered to Royal Glory were free from defects because it was only upon Binda’s acceptance of the goods that shipments would be forwarded to Italy.

24.  Mr. Wang agreed that from time to time, Royal Glory would request replacements if some of the goods were found to be unsatisfactory; these were usually in small numbers and it was usual practice for Royal Glory to return defective watchbands to Tai Wang Timepiece for appropriate repairs and corrections before they were sent back to Royal Glory in the next delivery. Support for the practice of returned goods delivered to Royal Glory after repair can be found in the ‘excel report’ for models B2091L and B2092L. The report recorded the model number of the returned goods, the quantity returned, the date of return, the date of redelivery after repair and the quantity of the redelivery to Royal Glory by Tai Wang Timepiece. The record also showed these were for goods returned from 21 July 2003 to 17 March 2004, that repairs and returns were done within two to three weeks of return for repair between 7 August 2003 and 23 March 2004 and the total numbers were 1,967 pieces.

25.  According to Mr. Wang, as Royal Glory was a regular customer of Tai Wang Timepiece and Tung Shing, in spite of his doubts on the allegation of defects, Mr. Wang acceded to Mr. Gary Wong’s request for replacement. He claimed it was a term of the replacement agreement between the parties that the alleged defective watchbands would be replaced with the same quantity of new watchbands with buckles and the replacement value of each band was $67.00, the same price as the new orders. Furthermore, Royal Glory agreed to return all defective watchbands at its own cost.

26.  Mr. Wang claimed that at the time the replacement agreement was reached, Royal Glory had only requested replacement of about 4,000 pieces of watchbands. A few days later, Mr. Gary Wong directly contacted the factory manager of Tai Wang Timepiece, Mr. Xia, and requested replacements for 10,499 pieces of watchbands. It is the Plaintiff’s claim therefore that under the replacement agreement, replacement watchbands with buckles would be delivered on condition that equal numbers of defective watchbands be returned to Tai Wang Timepiece. It was on that basis that between 16 December 2003 and 10 January 2004, 10,499 pieces of replacement watchbands were delivered to Royal Glory by Tai Wang Timepiece.

27.  Mr. Wang claimed that after the delivery of the replacement watchbands he had repeatedly telephoned Mr. Gary Wong to ask for return of the alleged defective watchbands but Mr. Wong kept making excuses and told him his Italian customer would come to Hong Kong to clarify the matter. When efforts in chasing after the return of the alleged defective watchbands failed and no evidence of defects had been produced by Royal Glory or its Italian customer, Mr. Wang decided in July and August 2005 to issue invoices for the replacement watchbands. Subsequent monthly statements from the Plaintiff to Royal Glory therefore included the replacement watchbands with buckles pursuant to the replacement agreement.

28.  In or about March 2006, Royal Glory returned a total of 1,645 pieces of watchbands with buckles to Tai Wang Timepiece without demanding payment for freight charges. Subsequently, no further alleged defective watchbands were returned. As Mr. Gary Wong had refused to take his telephone calls after July 2007, Mr. Wong decided to take up legal proceedings.

29.  The Plaintiff accepted it would deduct the value of the 1,645 pieces of watchbands with buckles returned. The claim is for the remaining 8,854 pieces of watchbands at $67 per piece, the total sum claimed is HK$593,218.00.

Defendant’s evidence

30.  Mr. Gary Wong admitted that he came to know Mr. Wang in or about 1995 or 1996. He began to order watch buckles from Mr. Wang whom he knew as the proprietor of Tung Shing Metal Product Factory in or about 2001. At the end of 2002, at the introduction of Mr. Wang, Royal Glory began to order watchbands from Tai Wang Timepiece. He knew Mr. Wang was also a shareholder and director of Tai Wang Timepiece.

31.  In about mid June to mid November 2003, Royal Glory received purchase orders from its Italian customer, Binda, for 24,600 ladies watches. 15,770 were for model No. B2092L and 8,830 for model No. B2091L. Royal Glory then placed purchase orders with Tai Wang Timepiece for 24,995 watchbands in the said two models at $55.00 each. Delivery from Tai Wang Timepiece began in mid July 2004. Royal Glory admitted its quality control department had conducted inspections and tests on the samples delivered by Tai Wang Timepiece. These included assembling watches with watchbands and testing the adjustability of the watchbands, etc. It is not disputed the samples passed the quality control tests. However, no further detail inspection was conducted on the watchbands except visual inspections for scratch marks before Royal Glory fitted the watches with the watchbands. After the assembly procedure, watches were delivered to Binda in Italy or on about 24 August 2003 by air.

32.  Mr. Wong alleged that on or about mid November 2003, Royal Glory received a complaint from Binda that there were watchband adjusting problems on model Nos. B2092L and B2091L. He inspected the watchbands from Tai Wang Timepiece being assembled in Royal Glory’s factory at the time and confirmed some of the watchbands did have the said problem. He then informed Mr. Xia, the responsible person at the Tai Wang Timepiece factory in China of the complaint. He further informed Mr. Wang of the same and requested Mr. Wang to replace the defective watchbands for his Italian customer. Mr. Wong claimed that both Mr. Xia and Mr. Wang admitted there was indeed a problem with the production of the watchbands and agreed to replace the defective watchbands.

33.  On 21 November 2003, Royal Glory received an email from Binda requesting immediate shipment of 3,500 watchbands to Italy and a further 7,000 watchbands before 15 December 2003 making a total of 10,500 watchbands. Mr. Wong notified Mr. Wang that he required a replacement order for 10,500 watchbands as soon as possible. Mr. Wang agreed to commence delivery of the replacement watchbands from mid December and promised that all of the 10,500 watchbands requested would be delivered by early January 2004.

34.  Upon carefully examination of each watchband delivered by Tai Wang Timepiece, Royal Glory managed to fulfil Binda’s request for 3,500 watchbands by mid December with watchbands from later orders from Tai Wang Timepiece. As Tai Wang Timepiece did deliver replacement watchbands between mid December 2003 and early January 2004, a total of 10,266 replacement watchbands were sent to Binda by Royal Glory. With the delivery of some of the replacement watchbands, Royal Glory was able to fulfil the purchase orders from Binda for delivery in 2004.

35.  Royal Glory incurred extra freight charges in order to deliver the replacement watchbands to Italy, the cost was about $41,000.00. Royal Glory claimed it did not demand the payment of these charges from Tai Wang Timepiece because Tai Wang Timepiece had admitted the defects and delivered replacements.

36.  Mr. Gary Wong denied Tai Wang Timepiece or Tung Shing requested for the return of the defective watchbands at the time of the delivery of the replacements. He agreed in July 2005 Mr. Wang personally delivered two invoices from Tai Wang Metal Product Factory for the 10,499 replacement watchbands in the sum of $703,433. As Mr. Wang had told him to ignore them, he did not inform Royal Glory’s accounts department to make an entry for them. Furthermore, Tai Wang Timepiece had also confirmed Royal Glory’s accounting report the outstanding credit to Tai Wang Timepiece at 31 December 2005, at which date the two invoices were not included as outstanding liability.

37.  On the request for the return of defective watchbands from Italy in July 2005, Mr. Wong claimed he had agreed to try his best to get them from his Italian customer. He admitted that Mr. Wang subsequently called him a number of times repeating the same request which he had passed on to Binda. As a result, on 20 February 2006, Binda returned some 1,645 watchbands to Royal Glory and 451 from other manufacturers. Royal Glory paid the freight charge of $6,563.53 for these watchbands and further costs were incurred by Binda to replace the watchbands in Italy. Mr. Wang was informed that Binda was not able to retrieve all the defective watchbands and that those returned included watchbands from other factories. Mr. Wang took delivery of the 2,096 watchbands on 13 March 2006. Mr. Wong did not dispute Mr. Wang had telephoned him on a number of occasions asking for the return of the rest of the defective watchbands. Unfortunately, no further defective watchbands were returned.

Findings

38.  The replacement agreement that the Plaintiff relied on is an oral one, the terms and conditions of the agreement cannot be found in any documents produced. On one hand, there was Mr. Wang’s evidence in Court supported by delivery notes for the 10,499 watchbands delivered to Royal Glory between mid December 2003 and early January 2004. These deliveries are not disputed by the Defendant. The Plaintiff relied on previous practices that defective watchbands were returned to Tai Wang Timepiece for repair before they were redelivered to Royal Glory. It is supported by the record kept by Tai Wang Timepiece for goods returned, repaired and redelivered to Royal Glory for watchband models B2901L and B2902L between 7 August 2003 and 21 March 2004 (P. B264). The number of bands returned and repaired were 1,967 pieces; these were small compared to the 10,499 out of 24,499 watchbands produced and delivered between mid June 2003 and mid March 2004.

39.  What is glaringly absent in the defence case is a survey report of the 10,500 watchbands that the defence claimed were defective. The number of defective bands claimed was a large percentage of the 24,499 pieces manufactured and delivered between June and November 2003. If a large percentage of defective watchbands were all shipped to Italy and distributed to Binda’s distributors, one would expect Binda to have obtained a loss adjustor or survey report on the details of defects as evidence. This is particularly so when Binda failed to return over 8,850 pieces of the 10,500 pieces alleged defective watchbands. Furthermore, Royal Glory should have carried out its own quality control of the watchbands either before or after assembling the bands to the watches, in any event, before shipment to Italy. Royal Glory claimed it was not able to conduct the required testing because it did not have the proper tool to remove the pin. The lack of a simple tool to carry out the test is a poor excuse for failure to conduct proper quality control.

40.  Furthermore, as Binda had a representative office in Hong Kong responsible for supervision of the production of watches and to monitor the quality control of the products before shipment to Italy, a responsible person from that office could have given evidence in Court on the particular incident where such a large percentage of the 24,499 watchbands were defective which Binda failed to detect until the watches were sold to Binda’s customers in Italy.

41.  The only documentary evidence produced by the Defendant were the emails exchanged between Mr. Gary Wong and Binda’s staff in Italy. The Defendant exhibited a watchband sample at the trial to explain the defect in the bands, there is no evidence on the quantity of defective watchbands sold to Binda in writing. The emails produced were dated after 20 November 2003 (page A220) from Binda’s Mr. Luca Demarchi in Italy. They did not explain in what way the watchbands were defective, the emails were requests for immediately delivery of 3,000 bracelets for ‘purchase order 1361’. It is important to note that the 20 November 2003 email further requested Royal Glory to stop the assembly of further watches. In the next email of 21 November 2003, Royal Glory was informed that Binda would not accept any further delivery of ‘Race’ ladies watches until 2004, it only requested delivery of 3,500 watchbands. Under the heading of ‘replacement bracelets’, Binda asked for 7,000 extra watchbands, 1,000 more than the original request to be delivered before 15 December 2003 (page A218). The Defence based its case on these emails to conclude the number of defective watchbands were 10,500. In actual fact, these were merely the numbers requested by Binda from Royal Glory. These emails clearly stated the 3,500 watchbands were for pending orders, only 7,000 were replacements. For this reason, I am not satisfied the Defence has shown exactly how many watchbands were defective out of 24,499 watchbands delivered to Binda by November 2003.

42.  Mr. Gary Wong explained that the problem with the defective watchbands was caused by a missing step in the drilling process on the holes for pins to be fitted in each segment of the metal watchband. He was told by Mr. Xia and Mr. Wang that during production, the second drill step applying a larger drill head to enlarge the pin hole was not done, leading to difficulties in the removal of the pin for adjustments. If that was the cause of the defect, then as Mr. Wang suggested, the defective watchbands could be repaired by implementing the missing drill step. This was fully understood and agreed by Mr. Wong.

43.  Mr. Wong claimed that the pattern of the design of these watchbands belonged to Binda or Binda’s customer and the Plaintiff could not have repaired them and sold them to other watchmakers after Royal Glory stopped ordering further watchbands from Tai Wang Timepiece. That the only value the Plaintiff could have in the returned defective watchbands was the scrap value.

44.  On the other hand, Mr. Wang claimed that if the defective watchbands were returned to him on time, he could have repaired them as he had done before and returned them to Royal Glory. They could be used in the later orders of the same model of watchbands from Royal Glory. Furthermore, the buckles were not defective and could be refitted. As the majority of the alleged defective watchbands were not returned and it was only in March 2006 that the 1,645 pieces were returned, it is not surprising that the Plaintiff pursued and claimed for the value of the replacement watchbands that amounted to over $700,000.00.

45.  The watchbands were worth $55.00 plus a buckle with a value of $12.00 each, they cannot be regarded as low cost merchandise. On the basis that some 1,645 pieces of these watchbands were returned by air freight, it is obvious that so far as Binda, Royal Glory and the Plaintiff were concerned they were valuable merchandise. It is therefore reasonable for Mr. Wang to expect Mr. Gary Wong to return the alleged defective watchbands.

46.  I find Mr. Wang to be an honest businessman, he had been in the watchband and watch buckle business for many years and was on good business terms with Royal Glory. I accept he is an honest and a truthful witness. I am satisfied that the replacement agreement was that all defective watchbands would be replaced on condition the defective watchbands would be returned for repair. Due to the pressure of time, new watchbands were produced and delivered before the defective bands were returned. Unfortunately, Royal Glory failed to obtain from Binda the return of all 10,499 pieces of the alleged defective watchbands. I am not convinced by Mr. Wong’s evidence that the quantity of defective watchbands amounted to 10,500 pieces out of the bands delivered during the relevant period. I find his evidence unconvincing. The defence admitted there were 320 pieces of watchbands not delivered to Binda, however, Mr. Wong failed to explain why they were not returned to the Plaintiff in 2004 or at any later date. If they were not meant to be returned, then Royal Glory should have paid for them in the same way the 10,499 replacement watchbands should be.

Conclusion

47.  I hold there was an agreement and an understanding between the parties to replace 10,499 watchbands on condition that the defective watchbands would be returned even though the replacement watchbands were delivered before the return of the defective watchbands. On the basis that 8,854 watchbands were not returned by the Defendant, the Defendant is liable to compensate the Plaintiff’s loss of $593,218.00.

Interest

48.  Interest at half judgment rate from date of writ to date of judgment, thereafter at full judgment rate.

Costs

49.  Costs to follow the event. Defendant shall pay the Plaintiff’s costs to be taxed if not agreed with certificate for Counsel.