CROCODILE GARMENTS LTD. v. LAW KWAI YUK t/a WINFUL FASHION CO.

HCA2923/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2923 OF 1996

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J U D G M E N T

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1. After the unsubstantiated claims had been abandoned at trial, the plaintiff's claim may be summarised as follows.

2. In August 1995, the plaintiff and the defendant entered into an agreement under which the defendant was to manufacture for the plaintiff 6,900 boys' and little boys' long sleeved woven flannel shirts at the price of $220 a dozen, making a total contract price of $126,500. They were to be delivered to the plaintiff on 25 October 1995.

3. The agreement was made partly in writing, partly orally and partly by conduct and/or a previous course of dealing between the parties. The agreement was evidenced in a Purchase Order No.926336, issued by the plaintiff to the defendant on 15 August 1995. Condition 2 of this provided that :

" The quality of all goods delivered should be in accordance with the approved sample supplied and any defects or deviations from the said samples in respect of either workmanship, material or quality should be made good by the supplier notwithstanding whether the goods have been sold by Crocodile or not. Crocodile further reserves the right to deduct the prices of goods supplied for inferior goods supplied."

The defendant had produced garments for the same sub-buyer of the plaintiff before and was familiar with the sub-buyer's quality requirements.

4. Sometime in early August 1995, before the plaintiff issued the Purchase Order, Mr Peter Li of the plaintiff and Mrs Petty Law of the defendant, in a series of conversations, agreed on the following terms in respect of the manufacture of the shirts.

(1) The plaintiff would supply to the defendant the fabric and all necessary accessories.

(2) A quality audit would be carried out jointly by a quality controller provided by a plaintiff's sub-buyer and the plaintiff's sales executive and the defendant would manufacture the shirts to their satisfaction.

5. Mr Li had informed Mrs Law that the shirts were required by Fortune Seven Limited, a Hong Kong agent of the Westport Company in the United States, for its onward sale of the shirts to Lands End Company, also in the United States. This was under two separate contracts, No.1257 for US$16,335 and No.1258 for US$27,720.

6. On or about 3 October 1995, the defendant produced samples. These were approved by Fortune Seven, subject to certain corrections. The fact of approval was communicated to Mrs Law by fax message on 3 October 1995.

7. On or about 11 October 1995, an interim inspection report was made by Mr Li of the shirts so far produced by the defendant. They did not meet with the requirements of the samples in that the stitching requirement of 14 stitches per inch was not met; the front pocket did not measure 11/4 inches as required; the placket measured 1/4 inch and not 1/8 inch or 3/6 inch as approved; the front of the shirts were not of matching pattern; fabric defects were not avoided when the fabric was cut; the collar measurement differed from the approved samples. They also suffered from open seams, broken stitches, incomplete stitches, skipped chain stitches, damaged button holes, loose buttons, raw edges, fabric holes, insecure labels, pleated armholes, mismatching of colour between the collar and body and frayed side seams.

8. Because of the defects found in the shirts, the plaintiff incurred extra costs of $3,120 in employing quality controllers to sort out goods that might be acceptable to Fortune Seven. Out of the 6,900 shirts produced, only 700 were found to be acceptable.

9. Out of the remaining 6,200 shirts, 30 random samples were sent to Westport for approval. They replied that only the boys' shirts would be accepted subject to further improvement, but not the little boys'. Westport, through Fortune Seven, asked for the shipment of as many boys' shirts as were available. The plaintiff asked the defendant to ship the 700 selected shirts and for the remaining boys' shirts to be improved and shipped to Westport at a later stage. The defendant refused to improve the remaining boys' shirts or ship the 700 selected shirts. It requested the plaintiff to either accept the whole 6,900 shirts or reject them. If this was not satisfactory, the defendant would only repay the plaintiff for the fabric and accessories it had supplied, less the amount of extra labour costs allegedly incurred by the defendant in making good the garments.

10. As a result, no shirts were shipped to Westport in accordance with the contract made between Westport and the plaintiff. On 5 December 1995, Fortune Seven on behalf of Westport, cancelled the order with the plaintiff, reserving its right to take action for breach of contract.

11. By reason of the defendant's alleged breach of the agreement, the plaintiff claims to have suffered the following damages : the loss of two contracts with the United States by Westport in the total sum of US$44,055 or HK$341,426.25, less the contract sum in Purchase Order No.926336 which the plaintiff has to pay the defendant for the costs of manufacture of the shirts $126,500, making a total $217,129.

12. By a separate claim, the plaintiff says that under Purchase Order No.926334, the plaintiff supplied fabric for the manufacture of other garments to the defendant. Out of this, there were 2,730 yards of fabric worth $37,025.63 unused, and the defendant has wrongfully retained it. The plaintiff claims an amount equivalent to the value of this fabric from the defendant. In a further separate claim, the plaintiff says that the defendant has wrongly and unreasonably retained 1,220 shirts of Style 48685-95 worth $45,856.75 which belong to the plaintiff.

13. The defendant's defence to the main action essentially is that the plaintiff delayed in providing the fabric and accessories for the manufacture of the shirts and delayed in approving the samples the defendant produced. The shirts produced were of sample quality, but the plaintiff and Fortune Seven unreasonably demanded modifications to the finished shirts which went beyond the specification the parties had agreed and which was incorporated in the approved samples.

14. The defendant accepts that by virtue of the previous course of dealings between the parties and the trade customs of the garment manufacturing industry, they were subject to an implied term that throughout the process of manufacture, they would exercise a reasonable standard of skill and workmanship in the manufacture of the shirts and act upon any reasonable requests or requirement from the plaintiff in a reasonable and practical manner, and so far as it was reasonably practically possible, remedy any defects in the shirts, regardless of whether the defects were attributable to the material supplied, or to the defendant's fault. But, the defendant says, the requests made went beyond what was reasonable.

15. The defendant further says that the plaintiff never told them the identity of their customer, Westport, or Westport's customer Lands End. The defendant alleges that during an inspection of the shirts in September or October 1995, the plaintiff's Mr Li told the defendant's Mrs Law that this was the final dealing the plaintiff would have with Fortune Seven, implying that the plaintiff accepted that Fortune Seven's demands for improvements in the manufacture of the shirts were unreasonable.

16. As to the claim in respect of 2,730 yards of fabric, the defendant accepts that remains in its custody. It says that a woman employee of the plaintiff called Kitty left it with them until such time as the plaintiff needed it. The plaintiff never made any request for its return until a pre-action letter from their solicitors on 13 November 1995. The defendant is willing to return the fabric to the plaintiff at its cost.

17. As to the claim in respect of the 1,220 shirts, the defendant says that under an oral contract made in early September 1995 between the plaintiff's Mr Li and the defendant's Mrs Law, 6,000 shirts were delivered to it by the plaintiff for packing. This was evidenced by their Invoice No.11642. The agreed price was $11,000, plus the costs of packaging materials of $2,794.72, making a total of $13,794.72 and this sum remains unpaid. The defendant agreed that it still retains the 1,220 shirts. The plaintiff made no request for their return until the pre-action letter. In reply to that letter, the defendant gave the plaintiff seven days to make arrangements to collect them. They said that if this was not done, the plaintiff would be liable for any expenses incurred by the defendant in disposing them. There was no further response from the plaintiff. The defendant is willing to return the shirts to the plaintiff at its cost.

18. By way of counterclaim, the defendant claims against the plaintiff :

(1) Loss of profits of $126,500 arising from the plaintiff's breach of the agreement with the defendant.

(2) As the plaintiff provided that the defendant with fabric having an excessively fluffy nap with which to manufacture the shirts, the defendant says it had to incur further time in finishing the goods and additional labour costs of $73,740 in trimming and cutting off the fluff on the nap.

(3) Transportation costs of the fabric and the remaining 1,220 shirts of approximately $700 and $500 respectively, incurred when the defendant moved its factory in March 1996.

(4) Storage fees of $1,000 a month for the fabric, and the remaining 1,220 shirts since 15 March 1995.

(5) A total of $13,794.72 in respect of the agreed fee of $11,000 and the cost of materials of $2,794.72 for the packing of the 6,000 shirts.

(6) The sum of $63,580 in respect of an unpaid Purchase Order No.926332 dated 24 August 1995 between the plaintiff and the defendant for the production of 3,468 women's woven flannel sport shirts. These shirts were made and delivered to the plaintiff on 29 September 1995 under Invoice No.11646, requiring payment on 30 October 1995.

19. In its reply, the plaintiff denies the defendant's allegations and puts the defendant to proof of the claim in respect of the treatment of the fabrics' nap. The plaintiff accepts that it owes the defendant $13,794.72 for the costs of packing the 6,000 shirts and packing materials, but disputes the defendant's claims for transport and storage charges in respect of the remaining 1,220 shirts, and puts the defendant to proof of these. Likewise, the plaintiff puts the defendant to proof of the storage charges incurred in respect of the fabric.

20. In respect of the defendant's claim under Purchase Order No.926332 for the women's flannel sport shirts, the plaintiff admits that it placed such an order. 641 shirts were defective, which resulted in a loss of $52,154.06 to the plaintiff. By a fax of 12 July 1995, the plaintiff informed the defendant that this loss would be deducted from amounts owing under another order. The defendant raised no objection to that course of action.

21. The plaintiff accepts that the balance of $11,425.94 under the purchase order remains owing to the defendant. The plaintiff offers to set off the amounts it admits owing to the defendant, both in respect of packing charges for the 6,000 shirts and in respect of the balance owing under Purchase Order No.926332, amounting to a total of $25,220.66 from the amounts claimed. The plaintiff is prepared to accept the return of the remaining 1,220 shirts and the fabric from the defendant at its own cost and if this is done, will abandon its claims in respect of them.

22. After having heard the parties' witnesses, I am satisfied that the defendant failed to manufacture the shirts to the standard required by the plaintiff as examplified in the approved samples and failed to make good the manufacturing defects as it was obliged to do so under the agreement it had entered into with the plaintiff. I am satisfied that the demands as to quality of workmanship made by the plaintiff were not unreasonable, as the defendant claimed. I am not satisfied that the plaintiff's delay in providing the fabric for the shirts' manufacture, or in approving the samples produced by the defendant, either caused or contributed to the defects in manufacture. Neither am I satisfied that the defendant expended $73,740 in remedying defects on the nap of the fabric supplied. Preparation of cloth must be a necessary part of the production of finished garments. I am satisfied that the defendant unilaterally breached the terms of the agreement it had with the plaintiff. The plaintiff is entitled to recover the damages of $217,129 it has claimed against the defendant.

23. As to the other claims, the defendant has not satisfied me that it expended any sums of money in transporting and storing the remaining 1,220 shirts and the fabric. The documentation produced in support of these claims is unspecific as to purpose. It could be attributable to other transport and storage charges incurred by the defendant. The defendant's counterclaim in respect of these matters fails.

24. As to the women's flannel sport shirts under Purchase Order No.926332, the evidence satisfies me that this contract was comprised by agreement between the parties. A balance of $11,425.94 remains owing to the defendant under this agreement and the plaintiff acknowledges this. The defendant is entitled to set this sum off against the sum awarded under the main claim. Likewise, the defendant is entitled to set off the costs of packing the 6,000 shirts of $13,794.72 against the sum awarded under the main claim.

25. The parties appeared to have agreed that the defendant will return the remaining 1,220 shirts and the fabric to the plaintiff at the plaintiff's expense. I therefore see no need to make any award in respect of these claims. If this is not done within 28 days from today's date, the parties have liberty to reset these claims down for further argument before me.

26. The amount awarded to the plaintiff is therefore $191,908.34. A claim for interest was included in the Statement of Claim and the plaintiff is entitled to interest on this sum from 5 December 1995, the day Fortune Seven on behalf of Westport cancelled the order, to today's date. This is awarded at the rate of 2% above prime rate and thereafter at the judgment rate until payment. I now propose to hear the parties on costs.

27. [Submissions on Costs]

28. I order that the defendant pay the plaintiff's costs. These are to be taxed on a party and party basis by the Registrar of the High Court or one of his deputies. He is to allow 80% of the costs taxed in favour of the plaintiff.