DAVINA PACKAGING CO LTD v. O MARK HDPE SUPPILES AND ENTERPRISES CO

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

___________

JUDGMENT

___________

1. The plaintiff in this case Davina Packaging Co. Ltd. carries on business as a manufacturer of plastic bags. The defendant 0 Mark HDPE Supplies and Enterprises Company is an exporter principally of plastic bags to Europe, and is owned by a Mr. Wu. Between June and. November 1983 six contracts were entered into between these parties. Each provided for the manufacture and sale by the plaintiff to the defendant of a quantity of plastic bags. It is not in dispute that at the end of 1983 a sum of $75,813.30 was nominally owing by the defendant to the plaintiff in respect of the unpaid price of the bags supplied under these six contracts. In fact this very sum had been deducted deliberately by the defendant from the last group of invoices he received from the plaintiff, because he said he had suffered loss in that sum arising out of one of these contracts. So that this case which was brought by the plaintiff for the balance of the price of goods sold and delivered gave rise to no issue on the claim at all.  The only question was, whether or not the defendant could prove his counterclaim, and prove that he had suffered loss in respect of two out of these six contracts.

2. The first contract he complains of, is the first contract which was a contract for vest bags dated 17th June. The second contract in which complaint is made, is the third contract of 30th August 1983, and was for what is called butcher bags. Before considering that I think it is convenient to look first at the contractual chain. That was like this. It started in each case with the plaintiff who manufactured the bags in question, and sold them to the defendant. The defendant then sold these bags on for export to Europe, and shipped them to Europe. His customer, in each of the two cases with which I am concerned, was a Belgian firm by the name of Embdef SPRL. The name on the letter paper is Andre Defour. The firm I understand is controlled by two Defours, father and son. The relevant Defour in these deals was Patrick and he, in fact, gave evidence before me.

3. In the case of the vest bags the Defours sold on to a Belgian Company called Unisac, which are apparently one of the biggest manufacturers in Belgium of plastic bags, but when they need more than they can produce, they buy in. That is what they did in this case.   Unisac in turn sold on to a supermarket chain in Belgium.  The vest bags were intended to be used at the check-out points in these supermarkets.  That was the chain in respect of the vest bags.

4. In the case of the butchers' bags it was very much shorter. Again the buyer from the defendant was Embdef, the Defour Company.  The Defours in turn sold on to a Dublin company called R. J. Sales, which is apparently controlled by the McKenna Brothers.

5. What happened in the case of both these contracts is that the ultimate buyers, in one case the supermarket, in the other case the McKennas, complained bitterly about the goods and rejected them in part. Samples of these goods were then returned to the Defours and indeed in some cases direct to the defendant and then by the Defours to the defendant.  At the start of this case, some time was taken up with the defendant producing a number of the samples of these defective goods explaining to me why it was suggested that those goods were defective, and we spent sometime looking at experts' reports on the examination of these goods. It turned out in the end that there was absolutely no issue at all that the samples produced to the Court were in fact samples of defective goods. They all bore or manifested the same defect, which was that they had not been produced at the right temperature. In order to produce a butcher's bag, you have to have one welded seam formed by fusing two pieces of plastic together: no seam no bag.  In order to produce a vest bag you have to have more than one welded seam. You have to have a seam to form the bag itself. And you have to have two more seams to form the handles of the bag so that it can be used for carrying. The phrase singlet vest or vest bag was derived from the fact that the resulting bag looks in shape like a singlet vest, and the handles are, as if it were, the shoulder straps of this vest. It is rather important that the handles are properly fused. It turned out to be common ground between all the parties that these samples had not been made at the right temperature, with the result that there was no strength in the seam. This was graphically demonstrated by Mr. Ng, the plaintiff's director in the witness box, who took one of the allegedly defective samples and it just pulled apart in his hands.

6. It transpired that the sole issue in the case was in fact an issue of identification. The plaintiff's answer to this counterclaim was these are not our goods, and you have failed to discharge the onus of proof which lies upon you to show that they are. These goods are so bad that they could never have got past our very detailed quality control system, and the various safety devices which are built in to our machinery. Not so, say s the defendant in answer. First no system is fool-proof. All systems are subject to human error, and in this particular system it was a human being who had to adjust the temperature control.  You, said the defence, have grossly exaggerated your quality control. If your manager really did what she said in the witness box, it would have taken her 14 24 hour-days to carry out the inspections she claims.  But more significantly, the defence says look at the facts here, look at the documentary evidence, it is overwhelmingly sufficient to show that the goods complained of by the ultimate buyers and users in Europe were the same goods that you manufactured. That is the crucial issue in the case which is now I must consider and attempt to resolve.

7. I start with the first contract of the 17th June 1983. Now these contracts were all in the same form which was in fact the defendant's printed form. Their layout is the same, and for this purpose its the left hand column of the contract document which is the crucial one.  That is headed "Mark and Numbers".  Underneath that in the first contract one finds this - "2000 PCS"; underneath that "REF 5702", and underneath that again "27 x 14 x 48 cm" and after that ''16 MU. Now the 27 x 14 x 48 were the dimensions of the bag, and the 16 MU was the thickness of the plastic material of which it was made.  Now that was the contract mark in this case; specified in the contract; provided by the defendant, and which the plaintiff caused to be printed on the outside of the cardboard boxes into which these bags were packed. The precise quantity required in each cardboard box is sot out again in the contract. So each cardboard carton was to contain 2000 pieces, and that reference number and the dimensions and the thickness of the plastic were printed on the outside of the carton.

8. The other material contract term for this purpose is the last, which simply says "certificate GSP form 1". This is the certificate of origin which is required by the Hong Kong Authorities in respect of any exported item. The document is to be found at pages 32 and 33 of the bundle. The reverse side contains the certificate of origin given by the plaintiff and signed, he said, by Mr. Ng himself, Mr. Ng said he signed this in blank, I hope that is not true because it will be an extremely irresponsible thing to do.  But if he did sign this in blank he signed it as certifying the origin of the goods produced by his firm under that contract, and therefore he can hardly complained about the details which were included thereafter, on this story, by the defendant, because they precisely followed the terms of contract, and they contained the contract mark which I have already read out.

9. The next material document is the Bill of Lading produced by the Maersk Line in respect of this consignment, showing that it was loaded on board the Alva Maersk. This precisely ties up with the vessel named on the front of the certificate of origin. The Bill of Lading again contains this contract description or mark.  So that it is prima facie clear from those documents, that these particular bags were packed in a particular way, identified on the outside of each of the cartons, and that that quantity of cartons was loaded on the Alva Maersk for consignment to Antwerp.

10. It is at this point that Mr. Defour's evidence takes over. He said that this consignment arrived in Antwerp in about mid September It is not their practice to break open these containers and inspect them. They trust their sellers. The goods were passed on or delivered by his firm to Unisac without further inspection. Indeed the probability is that Unisac did exactly the same to its supermarket, because the first complaint came from that supermarket and related to the first load of goods that were unloaded. This was said to be very poor. What Mr. Defour told me about that was this.

11. He first had a complaint on the telephone. The first person to investigate it was his father, and he went down and inspected some, I think, ten to fifteen cartons. Patrick Defour, the son, felt that this was not enough. He went down himself and spent a day opening fifty to sixty cartons at random, and in particular opening new cartons and breaking the plastic wrapping or binding which had been put round them originally. He found the situation to be quite hopeless.  The effects of these inspections were recorded in two documents which appeared on pages 35A and 36 of the bundle. 35A was a report by Unisac and Mr. Defour, I think correctly said, that they were experts in this field, and knew what they were talking about. Mr. Defour passed on the results of his own examination in the letter at page 36.  If anything, he said, they understated rather than overstated the position.

12. Now it was put to him: how could he be sure that the consignment which he had spent a day inspecting was in fact his goods. He looked almost in disbelief when he was asked this question.  A flurry of words came out of which I only wrote down these "Sure came from shipment.  I am only dealing with one Hong Kong supplier.  All cartons bear marks of origin.  Absolutely positive." I think he thought the suggestion that he was spending a day examining a consignment when he had any doubt at all about whether they were his, was positively absurd.  I minded to take the same view. When he talks about bearing marks of origin, I have no doubt that he was referring to the marks printed on the outside of the cartons as specified in the contract, and which he could see for himself before he broke the original contract binding.  I have no doubt at all that those goods were the goods which had been consigned to him from Hong Kong, and originally had been manufactured by this plaintiff.

13. Something had gone seriously wrong, not with every phase of manufacture because some of the parcels were perfectly good as the inspection report showed.  But Mr. Defour, 1 think is quite right in saying, no consumer is going to accept a messy lot like this which he has to go through and chock every one, to see if he can use it, before releasing it to the check-out point for his customers.

14. There was only one thing to do sensibly, that was to try to remainder these goods for the best price that they could fetch in Belgium. The cost of returning them to Hong Kong was quite ridiculous.  Mr. Defour first found a buyer in that remainder or scram market who said he prepared to pay 290 Belgian francs (the figures are in thousands).  That compared with the original selling price of the order of 450. But when that buyer had a closer look at the goods, he had second thoughts and said "No, they are much worse than you lead me to believe; now that I know how bad they are, I am only prepared to pay 120." Mr. Defour again went down to see the goods and had another look at them. He came to the conclusion that this man was right, and that the price that he had to accept was 120 Belgian francs.  This translates into the precise figure of HK$75,813 if converted from Belgian francs to Hong Kong dollars at 6th January.  The details are set out on page 18 of the bundle in the calculation which appears in the defendant's debit note of 6th January.

15. It is in those circumstances that I am unable to accept Mr. Ng's evidence that when tackled about this in December he denied indignantly that the bags that were then produced to him, were his bags.  On the contrary I think he recognised them as his bags and he recognised that the only course to take was that they should be remaindered in Belgium. The telex at page 39 inviting Mr. Defour to do what he did, was, I am sure, sent with his approval, and Mr. Wu was entitled to write on 6th January on page 19 the words "according your instruction, our customer has done the best .....". Likewise I am unable to accept the plaintiff's account of the inspection which took place shortly after this manufacture.  I am satisfied then that defects were found.  I am equally satisfied that Mr. Ng has such confidence in his manufacturing processes at that time that he would be able to identify and remove the defective goods before delivery. That confidence unfortunately was misplaced because he failed to de that.  Therefore it seems to me that the defendant was entitled to set off this loss of $75,000 odd against the unpaid balance of the purchase price as he did, when be raised this debit note en 6th January. Those are in my conclusions in respect to the first contract.

16. I turn now to the contract of august which was the contract for the butcher bags. In this particular case the contract marks set out in the contract, themselves demonstrate the ultimate origin of the goods, because they all end up with the words 'Dublin No. 1'. Now, in this particular case Mr. Defour tells me that these goods he wanted to be consigned direct to Dublin, because they were for re-sale to this firm R.J. Sales. I accept that these goods were shipped direct to Dublin for that purpose. There were five parcels of goods in the original contract, and complaint is made about two of those parcels only about two sizes the 25 x 30 cm, size bag, and the 20 x 25 cm size bag. What happened was this. Mr. McKenna complained about the quanlity of a number of these bags, and of the insufficiency of the seams for the reasons that I have already explained. Mr. Defour went to Dublin that December, 1983, inspected the goods, and was satisfied that they were in fact defective. He was not actually asked in that particular case how he war able to identify these goods, as his goods, from that particular consignment.  Counsel having asked the question in relation to the first consignment was understandably reluntant to risk it again. But I infer that he identified them in exactly the same way by reference to the self same identification marks, the contract marks, on the outside of the cartons because I am quite satisfied that Mr. Defour was not going to accept responsibility for defects, without plainly satisfying himself that they were his obligation, because they were goods which he had himself sold.

17. The defects of which Mr. McKenna complained are all set out in a telex at page 48 sent by McKenna to Defour. The same story is set out by McKenna in a letter, pare 47 of 6th January 1984, addressed direct to Mr. Wu. What Mr. McKenna was saying is that out of the 1½ million bags; size 20 x 25, 197,000 were totally unfit; and out of 1 million consignment of 25 x 30 bags, 422,000 were quite unfit. He reclaimed from Mr. Defour the price that he had paid Mr. Defour for these items, and the dollar figures are set out in that letter. Mr. Defour likewise reclaimed those sums from Mr. Wu and recovered them by direct cash payment or by allowance on other contracts. The Hong Kong equivalent to those U.S. dollar figures in the telex at page 48 appear in para. 20, sub-pares. 1, 2 and 3 of the counterclaim. The first item is the contract price paid. The second item is the difference between the contract price and the re-sale price Wu to Defour. The third item is the sum which was being paid by Defour to McKenna. Those all total $16,716.09. I leave out the figure $456 which appears in the pleading but does not seem to have been supported by any evidence.

18. In these circumstances it seems to me that both these counterclaims are made out.  I am quite satisfied that in both instances the goods that were ultimately rejected by the customers, one in Dublin and the other in Belgium, were the self same goods that were manufactured by this plaintiff company under those two contracts. I do not think there is any reasonable doubt at all left simply upon the documentation in this case, and certainly none in the light of the evidence I have heard from Mr. Defour which I accept without any hesitation at all.  In these circumstances 1 think that the proper order is that I should dismiss the plaintiff's claim; give the defendant judgment on the counterclaim for the balance which has not been set off which is $16,716.09; and give the defendant the costs of the action with one qualification. That is this. A large bundle of documents was prepared and put in front of me, labelled "bundle of documents relating to loss of future profit and schedule," all of which must have been put together in support of the abandoned claim for lose of good will in paragraph 20, sub-paragraph 4.  I do not think that the defendant should recover any costs in respect of that bundle or any other costs raferrable to that claim.