RICHMOND (H.K.) LTD. AND ANOTHER v. WING ON CHEONG WATCH INDUSTRIES LTD.

HCA16479/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.16479 OF 1998

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J U D G M E N T

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The claims

1. The 1st plaintiff claims against the defendant the sum of HK$81,900 being the price of the spare parts of watches sold and delivered to the defendant. The amount is not disputed by the defendant whose defence is that some of the spare parts, namely, straps, were defective. It seeks to set off the claim by reason of the damages it had suffered and it also counterclaims for damages.

The defendant's case

2. The parties agreed that the defendant should open the case. The defendant is a manufacturer of watches. The 1st plaintiff is a manufacturer of watch spare parts, such as cases, straps and crowns. The defendant acquired the spare parts from the 1st plaintiff, assembled them together with watch movements and sold the finished products for profit.

3. Both the parties are reputable companies in the watch trade. The defendant's witness, Mr Cheng Lung Sang, Nelson ("Mr Cheng") had, before joining the defendant, worked as a general manager for the 1st plaintiff. He was familiar with Mr Leung Kwok Ming ("Mr Leung") of the 1st plaintiff who is the son of the owner of the 1st plaintiff. In fact, it was Mr Leung who invited Mr Cheng to work for the 1st plaintiff.

4. In the beginning of 1998, Mr Cheng had discussions with Mr Leung about, among other things, acquiring plastic straps made with solar active or "UV" (ultra-violet) materials which would change colour under the sunlight. The 1st plaintiff supplied samples of transparent plastic straps which would change to pink, blue or yellow colours respectively. It also supplied samples of orange colour watch case to the defendant. After acquiring these samples and confirming that the straps could change colour under the sunlight, Mr Cheng discussed with the defendant's customer in Italy, namely Nuova Equipe Service SRL ("Nuova") on these items. Eventually, Nuova selected a strap which would change to yellow colour. Mr Cheng then discussed with Mr Leung about the terms of the contract. Initially, the defendant wished to acquire three types of products from the 1st plaintiff including 26,000 pieces of the orange watch case and the straps which would change to yellow colour ("the goods"). Eventually, as the 1st plaintiff was unable to meet the delivery schedule of the two other products, the parties finally agreed on only contracting on the 26,000 pieces of the goods at HK$3.20. The defendant issued a Revised Contract No. PO97/1984 dated 5 May 1998 to the 1st plaintiff. The contract provided that the delivery of the first 300 sets would be on about 8 May 1998 and the balance before 13 May 1998. The delivery was to be made in Dongguan in the Mainland where the defendant's factory was located. The number of watches that the defendant would sell to Nuova were 25,000 watches. The first delivery to Italy would be by air while the balance would be by sea.

5. The 1st plaintiff had problem in delivering the straps on time and it delivered the watch cases to the defendant first. When Mr Cheng pressed Mr Leung for the delivery, he was told by Mr Leung that in the first production, there was problem with the material and he had asked the Taiwan supplier to personally come and test the material. Eventually, the straps were delivered to the defendant's factory. Mr Cheng was present at the delivery. He took 8-10 straps and placed them under the sun. When he confirmed that they could change to yellow colour, he ordered the straps to be added on to the watches which the defendant had already begun to assemble after it received the watches cases. The assembled goods were delivered to Nuova.

6. Later Nuova complained by telephone to Mr Cheng that the straps could not change colour. Mr Cheng said that he usually had discussions with Nuova on the telephone. Mr Cheng asked Nuova to send back some samples of the defective goods. Three were eventually returned. They could not change colour under the sun. When Mr Cheng asked Mr Leung about the problem, he was told by Mr Leung that the surface part of the plastic might not have enough fluorescent material. Nuova also sent the defendant a letter of complaint dated 23 June 1998. It demanded a refund of US$25,000 which was said to be for the purpose of deleting the reference in the advertisement that the watches were able to change colour. Mr Cheng also asked the defendant's factory to send him the straps which were kept there for the defendant's future use. 52 straps were sent and they could not change colour under the sun. Further he discovered that these straps were covered with a film of white particles. At first, he thought that the first two straps he received from the factory which were covered with the white particles were not properly handled by the factory but he discovered all the other straps he later received also had the same problem. On 2 July 1998, the defendant agreed to deduct US$12,500 from the contract sum due to it from Nuova. The defendant then had discussions with the 1st plaintiff about the problem and asked compensation from the 1st plaintiff. The 1st plaintiff then commenced the present action seeking payment of HK$81,900 and other contract sums due to the 1st plaintiff under other contracts from the defendants. The 1st plaintiff had obtained judgment on these other sums against the defendant.

The 1st plaintiff's witness

7. The only witness called by the 1st plaintiff was Ms Li Wai Kam ("Ms Li") who did not have personal knowledge of the dealings between Mr Cheng and Mr Leung. She only had personal knowledge after the defendant raised complaints about the products. Her evidence did not advance the 1st plaintiff's case. Mr Leung is said to have emigrated to Australia and has chosen not to return to Hong Kong to give evidence at the trial.

Assessment of Mr Cheng

8. In the cross-examination of Mr Cheng, it was suggested that he had not completed his contractual obligation during his employment with the 1st plaintiff and he only served half of his contract. This was denied by Mr Cheng who maintained that he left the 1st plaintiff after the end of his one year contract. The 1st plaintiff had not adduced any evidence on this issue, apart from some attempts from its manager, Ms Li who had no personal knowledge of the matter. Mr Cheng's past employment is irrelevant to this case. In any event, I find that he did not leave the 1st plaintiff under unpleasant circumstances. Despite his departure, he still carried on business with the 1st plaintiff and the present contract was the second transaction the parties had carried out.

I find Mr Cheng to be an honest witness who gave a truthful account of the events that had taken place in this transaction.

Sale by sample

9. The defendant relied on sale by sample and that the goods did not correspond with the sample. Section 17 of the Sale of Goods Ordinance provides that :

" (1) A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied, to that effect.

(2) In the case of a contract for sale by sample-

(a) there is an implied condition that the bulk shall correspond with the sample in quality;

(b) there is an implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

(c) there is an 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."

A sample is simply a way of describing the subject matter of the bargain, and the principles which are applicable to contracts to sell and sales by description are applicable : Benjamin's Sale of Goods, 5th Edn, para. 11-091. The mere fact, however, that a sample is exhibited during negotiation for a sale does not necessarily mean that the sale is by sample, it is only such if the contract made is for goods in agreement with the sample: para 11-092. This is clearly a sale by sample. Although there is no reference to sample in the contract, the special feature in this sale is that the straps should change colour. The purpose of the defendant requesting the 1st plaintiff to provide the sample is to show that the straps could change to yellow colour under the sun and the contract was for goods to be made in accordance with the sample. The sample would be meaningless if the parties did not intend that it would serve such a purpose.

10. Mr To, counsel of the 1st plaintiff , referred to the printed word "World" on the sample strap which was absent in the actual straps produced by the 1st plaintiff. He submitted that is an indication that the goods produced were not intended to be in accordance with the sample. It is true the word "World" is not found on the actual straps. However, it is clear from the hand-written amendments on the contractual documents that there had been numerous revisions on the terms of the contract. According to a letter dated 20 April 1998 from the defendant (page 42 Agreed Bundle), it was recorded that the customer no longer required words to be printed on the strap. In any event, as far as the special feature of the straps changing to yellow colour under the sun is concerned, there is no doubt that the goods produced are intended to have this special feature found in the sample.

Goods not correspond with sample

11. In my view, the defendant has proved that the bulk of the goods did not correspond with the sample in quality, namely they could not change colour under the sun. The 1st plaintiff complained that out of 26,000 pieces, the defendant had only returned three pieces of defective samples. I think this had overlooked the fact that Nuova had complained that out of 300 watches, "20 do not work, remaining simply transparent under the sunlight, instead of turning into yellow colour". By a Debit Note dated 29 September 1998, Nuova stated "all the watches remaining simply transparent under the sunlight, instead of turning into yellow colour!" The defendant had kept a large number of the straps delivered under the contract, 52 of these were tested under the sunlight and they did not change colour. In my view, the evidence amply supports the defendant's case.

12. The 1st plaintiff stated that it had tested the straps under ultra violet light and they changed colour. What is glaring omitted in the 1st plaintiff's case is of any testing under the sunlight. What is more important is that the contract requirement was that the straps had to be changed under sunlight. I am satisfied that the discussions between Mr Cheng and Mr Leung were on the straps changing colour under the sunlight. The reference to "UV" in the contract actually is a reference to sunlight activated change. This is clearly demonstrated by the certificate of quality issued by the 1st plaintiff which stated the straps "mean the relevant specification and quality required of material 'SOLAR ACTIVE'."

13. The 1st plaintiff argued that the straps could still be used as simple transparent straps. In Aswan Engineering Co. v. Lupdine Ltd [1987] 1 WLR 1, it was held that where goods have more than one normal purpose they passed the merchantability test. I think this argument had overlooked the fact that parties had clearly intended and agreed that the straps should have the specific feature of changing colour under the sunlight and the matter must be looked at in that context.

Further defect

14. A further defect is the white dust-like particles that had formed on the straps. The original sample of the 1st plaintiff, which is produced in court, remains to be in clear transparent colour. However, the straps under the contract supplied by the 1st plaintiff contained the white particles. At the trial, it was shown that the white particles on two of the straps could be removed by tissue paper, both dry and wet respectively. But even after the white particles were removed, the straps remained opaque and not transparent. Ms Li suggested that the white particles were moulds due to improper packing of the straps, for example, by sealing the bags containing the straps. I think this is a far-fetch suggestion. The bubble paper holders used by the defendant to store the straps were not sealed at all.

15. The exact nature of these white particles cannot be determined. According to the test report of the Hong Kong Standards and Testing Centre dated 20 November 2000, it is said that the white particles "partly consists of PVC and it may be the come (sic) from mixture of decomposed/detached material of the PVC straps". Whatever may be the nature of these white particles, they did not manifest themselves when the straps were delivered to the defendant and only appeared on the straps later on. In my view, this is a latent defect of which the 1st plaintiff is responsible.

16. The 1st plaintiff submitted that even in the Debit Note of 29 September 1998, Nuova did not complain about the white particles. I accept Mr Cheng's evidence that Nuova had made such complaints to him on the telephone. In its letter dated 3 September 1998, the defendant had already informed the 1st plaintiff that its customer had discovered that dirt appeared on the surface of the straps. This was a reference to the white particles.

1st plaintiff in breach

17. There is no doubt that the 1st plaintiff was in breach of the contract. Although Mr Wan, counsel for the defendant, submitted that the defendant was entitled to treat the contract as being discharged by the breach, the fact is that the defendant did not reject the goods when the defects were discovered and it is only entitled to treat the breach as a breach of warranty which will entitle it to seek damages arising from the breach.

Settlement with Nuova

18. The defendant had agreed to deduct US$12,500 to resolve the matter with Nuova. The 1st plaintiff complained that the defendant accepted the deduction at a short span of time. I think the fact is that when Mr Cheng agreed to a deduction, he realised that the complaints were genuine. Apart from the samples returned from Nuova, he also had the samples in the defendant's factory which confirmed the defects. Nuova had previously had dealings with the defendant valued at US$700,000. The defendant obviously wished to maintain a good business relationship with Nuova. It could not send a technician to Italy to replace the straps because of the expenses both for the technician and for hiring local assistance to help him remove and reassemble 25,000 pairs of straps (the straps had two separate parts). Furthermore, there was the problem with finding replacement straps at such a short time. The 1st plaintiff had by then disinclined to discuss further on producing goods for the defendant. In my view, the settlement with Nuova was a reasonable one.

Is the defendant entitled to recover the compensation from the 1st plaintiff

19. In my view, the defendant is entitled to recover the compensation it paid to Nuova from the 1st plaintiff. Such a sum is recoverable if :

".... at the time of making the contract, that : (a) the buyer would, or probably would, resell the goods to a sub-buyer; and (b) that the contract of sub-sale would, or probably would, contain the same, or a similar, contractual undertaking as to the description or condition of the goods; and (c) that it was not unlikely that a breach of the seller's undertaking would cause the buyer to be in breach of his undertaking to the sub-buyer who would claim damages from the buyer for the loss or damage he suffered. .. " (Benjamin Para.17-072)

20. The straps are spare parts of a watch, they are clearly intended to be assembled into a watch for the purpose of re-sale. Furthermore, Mr Cheng had expressly informed Mr Leung that the goods were for the same Italian customer who had previously placed orders with the defendant. The defendant had on that occasion also contracted with the 1st plaintiff in order to perform the orders.

21. The 1st plaintiff suggested that the defendant's claim is not genuine because although it had only paid US$12,500, in its demand of 18 August 1998, it stated that it had already paid US$25,000. The letter may be incorrect but I am not convinced that the defendant was acting in bad faith. At that time, Nuova had demanded US$25,000 from the defendant and the defendant after paying the US$12,500, asked the 1st plaintiff to pay US$10,000 to resolve the matter. This approach was taken because the defendant wished to keep the business relation with the 1st plaintiff as well. As that letter explained, "Otherwise we will charge all (US$25,000) on your company's account". In its subsequent demand, Nuova sought a compensation of US$30,000.

Future contract and loss of goodwill

22. The other items of damages sought by the defendant are the loss of future contract with Nuova and loss of goodwill. Nuova had stopped all trading with the defendant. No doubt the two items claimed by the defendant are recoverable items : Benjamin para 17-066. However, in this ever-changing business world dictated by fluctuating market conditions, there is no guarantee that Nuova would continue trading with the defendant even without the current problem. There is no evidence that Nuova would have carried on trading with the defendant in any event. The defendant is not entitled to these two claims.

Conclusion

23. The defendant is entitled to set off the US $12,500 against the HK$81,900 due to the 1st plaintiff and recover the difference from the 1st plaintiff. Using the exchange rate HK$7.8 to US$1, the defendant is entitled to judgment in the sum of HK$15,600 together with interest at judgment rate from the date of service of defence until payment. The 1st plaintiff's claim is dismissed.

24. The defendant is entitled to costs of the action to be taxed at District Court scale.