SOURCE SMART ASIA LTD v. NEW ELEGANT GARMENT LTD

CACV 267/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 267 OF 2009

(ON APPEAL FROM HCA NO. 847 OF 2007)

BETWEEN

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of Mr Justice Sakhrani given on the 20 November 2009. The plaintiff’s claim in this case was in respect of losses that had arisen because of the failure of the defendant to supply women’s woven tank tops made with YKK zippers. The garments that were supplied had counterfeit zippers. The judge awarded a total of US$152,054.13 in damages.

2.  At the conclusion of the hearing of this appeal, the appeal was dismissed with costs. The reasons were to be given in writing which we now do.

The background

3.  In setting out the background to this matter I take the facts as found by the judge in the judgment, which it must be observed is remarkable for its clarity and precision of findings of fact.

4.  By a contract contained in purchase order number 5718 dated 13 February 2006 (“the contract”) the plaintiff purchased a total quantity of 44,058 pieces of printed yoryu cami, which were apparently otherwise known as women’s woven tank tops, style no. M5152 from the defendant at a price of US$3.95 per piece. It was a specific condition of the contract that the garments were to be made with YKK invisible zippers. The contract was made by the plaintiff as purchaser and the defendant as seller after the plaintiff had received the relevant purchase order from Assoluto Inc (“Assoluto”). That purchase order was placed pursuant to an agency agreement. The judge found as facts that, when the contract was entered, the defendant knew that the relationship between Assoluto and the plaintiff was one of principal and agent and that the plaintiff was the sourcing company set up to supply garments to Assoluto and that the plaintiff was the buying agent for Assoluto. The judge also held that there could be no doubt that the garments purchased under the contract were intended for a well-known retailer in the United States, namely J C Penney Corp Inc (“JCP”); it can be added that the contract states that the fabric must meet “JCP” requirements.

5.  The judge found that the defendant had selected the factory in the Mainland that manufactured the garments. There was no dispute between the parties that the garments supplied had counterfeit YKK zippers and that, as a result, the garments were seized by the US customs. Naturally, JCP could not then take delivery of the garments. There was a very long delay in securing the release of the garments from the customs. That was eventually secured on condition that the mark YKK would be ground off the zippers.

6.  The judge found that JCP’s loss would have been in the region of US$403,030.70 and that it was reasonable that Assoluto had agreed to pay and did pay JCP US$100,000 in settlement of its claim. The judge also was satisfied that the resale price of the garments to JCP after the marks had been removed was US$3.50.

7.  The judge accepted the plaintiff’s contention that it had been at fault in failing to carry out reasonable efforts to discover that counterfeit YKK zippers had been used in the production of the garments and it was for that reason that the plaintiff had compensated Assoluto. The judge also said, at paragraph 95 of the judgment, that he was satisfied that Assoluto had lost US$152,220.42 as its loss of profits and that the plaintiff had paid that sum to Assoluto. The judge further held that the plaintiff itself had lost its commission on the supply of the garments which amounted to US$17,402.91.

8.  There were further items in respect of which the judge held that the plaintiff could claim and others which the defendant could set off. Those are not relevant for this appeal and are set out in the judgment below.

This appeal

9.  On this appeal Mr Chiu, who appeared on behalf of the defendant, raised as his main point the argument that there was a break in the chain of causation of the damage by reason of the fact that the plaintiff, itself, had been at fault. It was said that had the plaintiff carried out its obligation to check the garments properly the matter would have been discovered and put right.

10.  Even assuming it is right to say that acceptable garments would have been delivered on time if an inspection by the plaintiff had revealed the use of counterfeit zippers, the basic argument on behalf of the defendant on this appeal appears to me to be flawed. The contract provided for the supply of garments with YKK invisible zippers. That must have been garments with genuine zippers. I cannot see how it can be said that the plaintiff was under any obligation to the defendant to check whether the zippers used on the garments were genuine or otherwise. The plaintiff owed its obligation to its principal, namely Assoluto. Mr Chiu accepted that it remained a term of the contract that YKK zippers would be used. The plaintiff, as the contracting party, was entitled to sue for breach of contract. It was entitled to damages which arose as a result of that breach of contract.

11.  In determining what damages are recoverable I can do no better than to refer to the same passages from the speech of Lord Reid in Koufos v C. Czarnikow Ltd (The Heron II) [1969] 1 AC 350 to which the judge himself referred. At page 382 Lord Reid said :

“So, the question for decision is whether a plaintiff can recover as damages for breach of contract a loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from a breach of contract causing delay in delivery.  I use the words “not unlikely” as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.”

And at page 385 he said :

“The crucial question is whether on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”

12.  On the findings of fact by the judge, which were not challenged on this appeal, I can see no ground for saying that the judge erred in principle. On the judge’s findings, the damages which were the subject of this appeal quite clearly fell within what ought to have been realised was not unlikely to result from a breach of contract.

13.  What appears to have lain behind the defendant’s arguments on this appeal was the fact that when originally framed the plaintiff’s claim was based upon the assertion that the garments were to be sold by the plaintiff to Assoluto. As is recorded in the judgment, it became clear on the evidence that the plaintiff was Assoluto’s agent. The judge then allowed the plaintiff to amend the pleadings accordingly. The way the matter was put in argument was that the claim in the case was, in effect, the principal’s claim, i.e. Assoluto’s claim, and, had the claim been made by Assoluto, the defendant would have been entitled to claim contribution from the plaintiff under the Civil Liability (Contribution) Ordinance, Cap. 377. Such a claim would be on the basis that the damage occasioned to Assoluto should be treated as having been caused by the plaintiff’s negligence as well as the defendant’s breach of contract. In my view, the answer to that point, quite apart from anything else, is that an agent who makes a contract,albeit as part of his duties as agent, is entitled to sue the third party in accordance with the terms of the contractual engagement. As already noted, the plaintiff owed no duty to the defendant to examine the garments, but the contractual requirement for the garments should be made with YKK zippers remained.

Hon Le Pichon JA:

14.  I agree.

Hon McMahon J:

15.  I agree.