KEYMARK TEXTILES LTD v. MANWAY TEXTILES CO LTD

HCA1610 / 2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1610 OF 2007

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J U D G M E N T

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A.  Introduction

1.  Keymark Textiles Ltd (the Plaintiff) was a yarn trader and supplier before it ceased its business in late 2006.   Before then, Manway Textiles Co Ltd (the Defendant) was one of Keymark’s contractors for processing the fabrics.

2.  By the time of trial, this action concerns:

(1)   Keymark’s claim against Manway for damages in the sum of HK$800,000.00 odd for shortfall of fabrics after they had been processed by Manway following a procedure called weaving.   Manway denies that there was any real shortfall of the fabrics as Keymark had looked at the way the shortfall was calculated in the wrong way.   Manway however says it will not dispute the quantum of damages claimed if the shortfall is in fact proved.  I will explain in greater detail this defence below.

(2)   Manway’s counterclaim for 14 outstanding invoices for its charges in processing Keymark’s fabrics in the total sum of HK$1,143,605.32.  In relation to this counterclaim:

(a) Keymark does not dispute its liability to pay the sum of HK$735,605.32 under 13 of the 14 invoices.  I will call these the “13 Invoices”.  Keymark only seeks to seek set-off the 13 Invoices against its above claim for damages.

(b)    Keymark however does not accept that the items listed under the 14^th invoice (“the 14^th Invoice”) dated 30 November 2006 (of the sum of HK$408,000.00) had been ordered by it or in fact processed by Manway.  Keymark therefore puts Manway to strict proof of the 14^thInvoice, although it would not dispute the quantum if Manway could show that those items were in fact ordered by Keymark and processed by Manway.   The 14^th Invoice was the last invoice issued by Manway before Keymark ceased its business.

3.  In light of the above, the principal issues that call for determination at trial are:

(1)  Whether there was any real shortfall of the subject matter fabrics after they had been weaved by Manway.

(2)  Whether Keymark had in fact ordered and Manway had processed the items of fabrics listed under the 14^th Invoice.

4.  To better understand the issues and the disputes in proper context, I will first set out below the background.

B. Background

5.  Unless otherwise stated, the following are the relevant uncontroversial factual background leading to the present disputes.

6.  Keymark was a trader in yarns and fabrics.   Before Keymark on-sold or supplied the fabrics to its customers, the yarns needed to be processed, which involved the following 3 procedures:

(1)  Sizing and dyeing (漿染):  this is the first procedure, which involves immersing certain lengths of raw yarns in a large container (缸) for dyeing and “stiffening”.  The usual maximum length of yarns that could be sized each time in such a container is about 20,000 yards.   Each such dyeing container for each of the sizing and dyeing procedure bears a specific number, known in the trade as the “sizing batch number”  (漿次編號).  In other words, even when the same container is used for the next sizing procedure for, say, the next batch of yarns, a new sizing batch number would be allocated to it.

(2)  After sizing, the yarns, which is now called raw fabrics (胚布), would then be taken to the procedure of weaving (織布), to make them into weaved fabrics.

(3)  After weaving, the weaved fabrics would undergo the third procedure known as shrinking and finishing to render them into finished fabrics. 

7.  It is common ground that there could be loss of fabrics under the processing procedures of both weaving and finishing.    What this means is that at the end of each of these 2 procedures, it is accepted that the length of the processed fabrics may be less than before the procedure.  It is also undisputed that it was agreed between the parties before they commenced their business dealings that the accepted maximum tolerated loss of fabrics under each of these 2 procedures is 12%.   In other words, there was an agreed maximum tolerance rate of 12% of weaving loss and a maximum tolerance rate of also 12% of finishing loss.   In this trial, we are only concerned with the 12% maximum weaving loss.

8.  In between 2003 and end of 2006, Keymark had:

(1)  engaged Manway to carry out all the above 3 processing procedures for the yarns it had delivered to Manway. 

(2)  also engaged two other factories known respectively as Eastern Legend (東譽) and Kou You (國友) to carry out the weaving procedures for some of the yarns it had delivered to Manway.

9.  For Eastern Legend and Kou You, on the instructions of Keymark, Manway would from time to time deliver some of the sized fabrics to them for weaving.  And after weaving, Eastern Legend and Kou You would re-deliver the weaved fabrics back to Manway to undergo the finishing procedure.

10.  It had also been the practice that Manway would issue separate invoices for each of these 3 processing procedures, usually twice a month, on the middle and last day of the month.  In other words, each 15 days of so, Manway would issue to Keyway:

(1)  Sizing invoices to charge for the sizing fees for the yarns it had sized over that period of time;

(2)  Weaving invoices to charge for the weaving fees for the fabrics it had weaved over that period of time; and

(3)  Finishing invoices to charge for the finishing fees for the fabrics it had shrunk and finished over that period of time.

11.  Similarly, Easter Legend and Kou You would respectively issue their own weaving invoices directly to Keymark for the fabrics they respectively had weaved for Keymark over that period of time covered by the invoices.

12.  Apparently towards the end of 2006, due to certain shareholders’ disputes, Keymark decided to cease its business and to transfer the same to a newly set up company called Keymark Textiles (HK) Ltd (“the New Keymark”).  Manway was also informed of this arrangement around that time.

13.  Keymark formally ceased its business operations on 30 November 2006. 

14.  However, in January 2007:

(1)  Keymark had still not settled the 13 Invoices issued by Manway between August 2006 and November 2007.

(2)  Keymark had also not settled Manway’s 14^th Invoice issued on 30 November 2007.

(3)  Keymark asked for general and various information from Manway concerning the quantities of yarns supplied to Manway by Keymark for processing, the quantities of such fabrics/yarns produced under each of the procedures and the actual weaving losses and finishing losses for each of the products for the period from April to November 2006.

15.  It is now Keymark’s case that, after checking all this information and records, it has noticed that the weaving losses referable to 13 specific sizing batch numbers are much more than the 12% maximum weaving loss rate.   The losses of these 13 sizing batches range from 18.17% to 99.65%.  From the records, all these fabrics were weaved by Manway alone.  These represent a total shortfall of 176,095.45 yards of yarns even after taking into account of the 12% weaving loss rate.  

16.  In May 2007, Keymark brought the present claim against Manway for an account of the shortfall in the yarns, or alternatively for damages.    By the time of the trial, Keymark no longer asks for an account but only claims damages in the sum $801,041.73 as the loss of value for the shortfall of the yarns. 

17.  As mentioned above, Manway counterclaims for the total outstanding sum of $1,143,605.32 under the 14 invoices, and Keymark seeks to set off against the 13 Invoices with its damages and puts Manway to strict proof of the 14^th Invoice. 

C.  The issues

C1.    Whether there was shortfall of the weaved yarns

C1.1  The contentions

18.  The real and principal contentions between the parties under this issue are within a narrow confine.

19.  Manway does not dispute that, from the records traceable through the various weaving invoices and delivery notes concerning the 13  individual sizing batches, as a matter of arithmetic, there were those shortfalls in the weaved fabrics as identified by Keymark, which were more than the 12% maximum weaving loss.

20.  However, it is Manway’s case that the 12% maximum weaving loss should not be looked at or calculated by reference to each  individual sizing batch.  Instead it should be calculated as a global sum of all the fabrics weaved not only by Manway but also Eastern Legend and Kou You, and for the entire period from the beginning of the business relationship until the time of complaint.  If the rate of loss was to be calculated this way, the resultant weaving loss was only 5% odd, which was well below the maximum weaving loss rate of 12%.

21.  In relation to this, it is Manway’s latest pleaded case^[1] that it was an express term of the agreement between one Mr Thomas Chan of Keymark and Mr Woo Kwok Sang of Manway made in about mid 2003 that the “the wastage on yarns for all cloths produced between the stage of sizing/dying and weaving was no more than 12%”.  

22.  Keymark denies any such express agreement on the calculation of the 12% weaving loss rate as suggested by Manway.  Keymark’s latest pleaded case^[2] is instead that it was:

(1)  An express agreement between Keymark and Manway that the 12% maximum weaving loss rate was for weaving loss calculated by reference to each individual sizing batch; or

(2)  Alternatively, an implied term by reason of business efficacy or common intention that the 12% maximum weaving loss rate was to be calculated by reference to each individual sizing batch.

23.  In light of their respective cases which were only presented and became clear at trial, the fundamental question that calls for determination is what was the term  (express or implied) governing how the 12% maximum weaving loss rate was to be applied.

C1.1.1 Was there an express term

C1.1.1a   Manway’s evidence

24.  Manway’s case on the term of the 12% maximum weaving loss rate relies solely^[3] on the express agreement as pleaded and mentioned above.

25.  It has called Mr Woo Kowk Sun to give evidence in support of its case.  Mr Woo is the managing director of Manway.  His relevant evidence for the alleged express agreement is set out at paragraph 2 of his Amended Witness Statement as follows^[4]:

“…民匯是一間加工廠，把客人送交的棉紗代客人進行漿染、織布、及縮水等加工，直至最後代客人將成品出口。至於原告人基譽紡織有限公司(‘基譽’)由本廠開始成立時 (2003年)，已在本廠進行有關之生意來往。於2003年中本人與基譽陳裕波先生洽談加工事宜。雙方同意漿染至織布的損耗不多過12% …”

C1.1.1b   Keymark’s evidence

26.  Keymark has called Ms Jeanne Wong to give evidence.  Ms Wong was the Financial Director of a group of companies which indirectly held the majority share in Keymark. 

27.  Her relevant evidence in support of Keymark’s case on an express term is contained in her supplemental witness statement as follows:

“2.    When I commenced my employment with the East Asia Textile Group (of which the Plaintiff was a member) in 2002 as the Group Financial Controller, I had the duty to monitor the payments made to our various sub-contractors.  I then enquired about the calculation of wastage rates in the production cycle of the production of the SD-1039 fabrics being handled by the various sub-contractors.  I was told by an employee in the Production Department, whom exactly I can no longer remember, that a maximum 12% tolerance rate for weaving loss on an individual order basis was agreed between the Plaintiff and all its sub-contractors.

3.  In 2004, the Defendant became one of the sub-contractors of the Plaintiff.  I enquired again and was told by an employee in the Production Department of the Plaintiff, whom exactly I can no longer remember, that the same maximum 12% tolerance weaving loss rate had been agreed between the Plaintiff and the Defendant, on an individual order basis.

4.  During my employment with the East Asia Textile Group, I had consistently applied this term to my monitoring of the performance of and payments to all sub-contractors, including the Defendant.

5.  It was also with this same understanding of the term that I used to investigate and negotiated with the Defendant in early 2007.

6. All employees left in late 2006 when the Plaintiff decided to cease its textile production business.  Not long afterwards, the Plaintiff started proceedings against, inter alia, some of its ex-employees for siphoning off the Plaintiff’s business.  The details of the relevant agreement back in 2004 should be within the knowledge of these ex-employees but they are unwilling to be co-operative.”

28.  When questioned by the Court, she also says when she asked the employee she mentioned at paragraph 3 of the supplemental witness statement as to what was the arrangement between Keymark and Manway when they started the business relationship, she was told that it should be the same. 

C1.1.1c   Discussion

29.  In my view, Keymark has failed to prove on the balance of probabilities its express term on the application of the 12% maximum weaving loss rate.   I reject Ms Wong’s evidence on this because:

(1)  Her above evidence is entirely hearsay, possibly of multiple hearsay.    It is simply unsafe and unreliable to rely on such evidence, in particular, as she could not even remember from whom of Keymark she had been told about this alleged agreed term.   It is not even known whether the employee who said to have told her the agreement was someone who had directly negotiated with Manway’s counterpart (who is also unidentified) or had direct knowledge of the arrangement.    There is nothing upon which the Court could place confidence in this part of the evidence.

(2)  For the same reason, I am also of the view that it would be unfair to Manway for the Court to rely on this part of the evidence, as it was not offered any real opportunity to cross-examine effectively on this matter.

(3)  I also do not find Ms Wong’s evidence on her usual practice on how to calculate the 12% loss with other operators of such a significant weight to enable me to find that there was an express agreement between Keymark and Manway on the term as to how the 12% weaving loss rate was to be applied.  Afterall, this was about an express agreement, and there is nothing to suggest that there might not be separate arrangements with different operators.   The fact that, according to her own evidence, she found it necessary to ask a colleague to confirm what arrangement was in place when Keymark started to do business with Manway shows that it might be possible to have separate arrangements.

30.  For these reasons, I find that Keymark has failed to prove its case on the express term on the application of the 12% maximum weaving loss rate.

31.  At the same time, I also come to the view that Manway has failed to prove its case on the express term of how the 12% maximum weaving loss rate should be applied:

(1)   Mr Woo’s evidence set out in his witness statement (as quoted above), even taken to the highest, does not support the case that the 12% maximum weaving loss rate was to be calculated by reference to all the fabrics weaved by all the weavers, and over the entire period of the business relationship.  There is simply no reference to the important term of “all” in his evidence.

(2)   His evidence is thus at most equivocal as to how the 12% should be applied and is, in my view, equally capable to accommodate Keymark’s case. 

(3)   Moreover, when asked by the Court, Mr Woo fairly and frankly accepted that the maximum weaving loss of 12% should apply by reference to a specific sizing batch if it could be shown that there was only one contractor, such as Manway, who had carried out the weaving procedure under that particular batch.   This is contrary to Manway’s own case of the express term.

(4)   In any event, I also find Manway’s case on how the 12% rate should be applied inherently incredible and should be rejected as it is contrary to commercial sense:

(a)  For example, assuming that there had been a dealing of 100 sizing batches, if Manway had been able to produce close to 100% efficiency weaving say for 88 batches, it could then sit back and not produce any weaved fabrics for the other 12 batches and still said that there was no shortfall beyond the 12% maximum loss rate.  

(b) Similarly, assuming Kou You and Eastern Legend had been very efficient in their weaving procedures and produced say close to 100% efficiency. Manway would then also be entitled to sit back and not even produce any weaved fabrics in some of the sizing batches, without having been in breach of the 12% loss rate. 

(c)  That in my mind could not have been the objective contemplation or intention of any reasonable commercial parties negotiating for the application of the 12% maximum weaving loss rate.

32.  I therefore also find that Manway has failed to prove its case on the express term of how the 12% maximum weaving loss rate was to be applied.

C1.1.2 An implied term

33.  Failing an express term, Keymark says such a term that the 12% maximum rate should be applied by reference to individual sizing batches should be implied by reason of business efficacy or obvious implication to reflect the parties’ intention.

34.  It is well established that to reflect the objective intention of the parties:

(1)  A term will be implied if it is necessary, in the business sense, to give efficacy to the agreement.  The courts are prepared to add a term on the ground that without it the contract will not work.

(2)  Similarly, a term which has not been expressed may also be implied if it was so obviously a stipulation in the agreement that the parties must have intended it to form part of their deal. 

See: Chitty on Contracts (30^th ed), paras 13-004 to 13-007.

35.  In my judgment, I agree that such a term should be implied to give either business efficacy to the agreement on the 12% maximum weaving loss rate and/or to reflect the obvious objective intention of the parties.  My reasons are as follows:

(1)   The operational arrangements of the weaving procedure show that it was only practicable and operational to apply the 12% loss rate by reference to each and individual sizing batch:

(a) As a matter of practice and procedure, the sized yarns from each sizing batch was intended to be taken to one designated contractor to carry out the weaving process.   Thus, the sizing batch was generally referable to a designated and identifiable weaver.

(b)    As a matter of practice and procedure, Keymark’s contractors, including Manway, Kou You and Eastern, would each issue separate weaving invoices, which contained references to documents and information traceable to each sizing batch number.

(2)   For the same reasons set out at paragraph 31(4) above, such mechanism of application was necessary to render the 12% calculation workable and must reflect the obvious objection intention of the parties.  The only other means of application as suggested by Manway is, as explained above, contrary to commercial sense, illogical and impracticable.  Other than the examples I have raised above, one only has to consider also how impracticable it would be if the business had lasted for some substantial length, say, 10 years.  It is difficult to imagine that, in those circumstances, in order to determine whether the 12% weaving loss rate was breached, the parties would have to look at all the records of all the fabrics/yarns weaved by Manway, Eastern Legend and Kou You for the past 10 years.   That in my view could not possibly be the intention of the parties in agreeing to the maximum weaving loss rate, nor could that give efficacy to its operation.

36.  Further, it is Mr Woo’s own evidence[5] that the maximum weaving loss of 12% should apply by reference to an individual sizing batch if it could be shown that there was only one contractor, such as Manway, who had carried out the weaving procedure under that particular batch.  This, coupled with the operational procedures set out at paragraph 35(1) above, show clearly that such an application of the 12% weaving loss rate reflected the objective and commercial intention of the parties.

37.  I therefore conclude that, in order to give business efficacy and/or to reflect the obvious intention of the parties, it was an implied term of the agreed 12% maximum weaving loss rate that it was to be applied and calculated by reference to each individual sizing batch. 

C.1.3 Conclusion under issue 1

38.  For the above reasons, I make the following findings under issue 1:

(1)   Both parties have failed to prove the express term on the application of the 12% weaving loss rate.

(2)   There was an implied term of the 12% maximum weaving loss rate that it was to be applied and calculated by reference to each individual sizing batch.

(3)   As a result, Keymark has proved (as it is not disputed insofar as arithmetic and quantum are concerned) that:

(a) even after taking into account of the 12% maximum weaving loss rate, there was a total shortfall of 176,095.45 yards of yarns in relation to the subject matter 13 sizing batches after the weaving procedure carried out by Manway,

(b)    Keymark has thereby suffered loss and damage in the sum of $801,041.73 by reason of Manway’s breach of the 12% maximum weaving loss rate.

C2.    Whether Keymark had in fact ordered and Manway had processed the items of fabrics listed under the 14^th Invoice

C2.1  Manway’s evidence

39.  In relation to 14^thInvoice, in summary Manway relies on the following evidence to support its counterclaim:

(1)  The 14^thInvoice itself.

(2)  Various delivery notes which on the face of them confirm the “delivery” of those finished items set out under the 14^th Invoice. 

(3)  Mr Woo’s evidence that:

(a)  It had been the practice between Manway and Keymark that Manway would store the finished fabrics at its factory, and would only issue invoice (on finished products) for those when Keymark asked them to be delivered.  Thus, there would usually be certain “stocks” of finished fabrics kept at Manway’s factory before they were asked to be delivered and their invoices issued.

(b) Keymark had two personnel stationed at Manway’s factory to overlook all the processing of the yarns and fabrics, and would give instructions from time to time on behalf of Keymark.

(c)  In about October or November 2006, Manway was informed by Keymark that Keymark would soon cease its business and operation.

(d) As a result, Manway issued the 14th Invoice (dated 30 November 2006) to Keymark to charge for all the “stock” of finished products still kept at the Manway’s factory.

(e)  He however could not remember or explain why the delivery notes were only signed but not stamped with Keymark’s company chop.

40.  It is important to note that Mr Woo’s above evidence at paragraph 39(3)(a) to (c) is unchallenged under cross-examination.   I  therefore accept it. 

C2.2  Keymark’s evidence

41.  Ms Wong gives the following evidence to challenge the 14^th Invoice:

(1)   In the limited records that have been kept by Keymark, she could not find anything to link Keymark’s orders for those items set out under 14^th Invoice.   The records are limited because, given the shareholders’ dispute of Keymark (which led to its ceasing of business), some of the records apparently had been take away by some shareholders.

(2)   She had been asking for supporting documents from Manway, but has not received any.  

(3)   She could not confirm or accept the authenticity or accuracy of the delivery notes because:

(a) There are no corresponding copies of the same kept by Keymark.

(b)    This is inconsistent with the usual practice that the delivery notes were attached to the invoice which covered them.  When the 14^th Invoice was handed to her personally at a meeting on 15 January 2007, no such delivery notes were attached to it.

(c) Keymark’s company chop was not stamped on these delivery notes, which is also different from the practice where the delivery notes were stamped with Keymark’s chop.

42.  Keymark further disputes the authenticity of these delivery notes on the basis that they were only disclosed a few days before the trial but not before.

C2.3  Discussion

43.  On balance of probabilities, I am satisfied with the evidence that Manway has proved that it had produced the finished products listed under the 14^th Invoice per Keymark’s orders.  My reasons are as follows.

44.  First, the 14^thInvoice and the delivery notes are consistent with a letter from New Keymark dated 13 December 2006 addressed to Manway. The letter confirmed that Keymark had sold to New Keymark various quantities of finished fabrics (8 oz and 9 oz denim) and yarns, which were stocked and stored at Manway’s factory.   The letter stated as follows:

“We hereby inform you that the following stocks of Keymark Textiles Ltd. (KTL) [i.e, Keymark] stored at your mill were sold to our company  [i.e, New Keymark] as per S/C #KTL-001 dated Dec 12, 2006.  Please amend your record of ownership to ‘Keymark Textiles (HK) Ltd.[New Keymark]’ for the stated stock accordingly with effective today.

Stock Fabrics & Yarns originally under KTL’s name	Quantity
8 oz St. Denim (SD004)	ALL (134,000 yds to 185,000 yds)
9 oz St. Slub Denim (SD1039)	ALL (500,000 yds to 630,540 yds)
16S cotton yarns	ALL (approx 35,600 lbs)
16S spandex yarns	ALL (approx 482,800 lbs)
10S Slub yarns	ALL (537,000 lbs to 554,000 lbs)
12S yarns	ALL (approx 221,200 lbs)”

45.  Further, it is Mr Woo’s unchallenged evidence that the 8 oz and 9 oz denim represent the finished fabrics listed under the 14^th Invoice (respectively as “88 x 48/10 + 12 x 16 +70D三片橡根藍牛布118A色” and “112x46/16 x 16+70D三片橡根淺藍牛布108色”).

46.  In light of this evidence and Mr Woo’s other parts of the unchallenged evidence set out above, in my:

(1)  The letter clearly supports that by the time when Keymark ceased its business operation (on 30 November 2006), there were those finished fabrics of denim (as listed under the 14^thInvoice) stocked and stored at Manway’s factory.  The quantity of these stocks (stated as 680,000 yards) is close to the range of quantity of the denim stated in the letter (a total of between 634,000 yards and 815,540 yards).    These were then sold to New Keymark as stocks.

(2)  This further shows that the stocks had been ordered by Keymark to be processed and made by Manway.

(3)  The items listed under the 14^thInvoice are those denims referred to in the letter.

47.  I also reject Keymark’s challenge on the authenticity of the delivery notes:

(1)  The reference numbers of all these delivery notes correspond with those numbered delivery notes already stated in the 14^th Invoice.  It is common ground that the 14^thInvoice was handed over to Keymark at the latest on 15 January 2007.  This must be looked at under the context that: (a) the parties had been having business dealings for a number of years with a turnover revenue of many millions of dollars each year, and (b) by that time, there was still the outstanding sum of some $700,000.00 under the 13 Invoices, which Keymark had not settled.  In light of these, prima facie, the delivery notes stated under the 14^th Invoice are contemporaneous in nature at the time of the 14^thInvoice.   In these circumstances, there would have to be overwhelming evidence before me before it can be shown that all these delivery notes were “fabricated” by Manway for the purpose of making up the claim for only $400,000 odd.  However, there is nothing before me which is remotely close to such overwhelming evidence.

(2)  Although it is true that Manway had not disclosed these delivery notes until a few days before the trial, Keymark’s counsel has not asked Mr Woo under cross-examination as to why Manway had failed to disclose these delivery notes earlier.  There may or may not be a good explanation for that.  But given that Mr Woo has not been given an opportunity to explain, I am unable to conclude that, merely because of the late discovery of these delivery notes, they are not authentic, in particular in light of my above observations.

(3)  Further, given that by around 30 November 2006, Keymark had practically and effectively ceased its business, and that it is Keymark’s own evidence that there was a shareholders’ dispute within Keymark which had rendered the record keeping of Keymark incomplete, the facts that these delivery notes were not stamped with Keymark’s company chop and that Keymark could not locate in its own records such delivery notes are not overwhelming evidence to show that these delivery notes are fabricated. 

48.  Given this conclusion, and together with Mr Woo’s above unchallenged evidence, I am satisfied that the 14th Invoice has been proved by Manway.   I accept Manway’s evidence that it was issued (as a final invoice) for the purpose of charging all the remaining stocks of those finished fabrics stored at Manway’s factory which Keymark had not yet asked for delivery upon Keymark’s cessation of business on 30 November 2006. 

C2.4  Conclusion under issue 2

49.  I therefore find that Manway has proved the 14^th Invoice and that Keymark is liable under it for $408,000.00.

D.  Conclusion

50.  Keymark has succeeded in its claim for damages in the sum of $801,041.73 and its set-off with this sum against Manway’s counterclaim for $735,605.32.

51.  Manway has also succeeded in its counterclaim for $408,000.00.

52.  As a result, after set-off, there is judgment in favour of Manway against Keymark for $342,563.59 ($1,143,605.32 - $801,041.73).  Manway is further entitled to interest on this sum from the date of Counterclaim to today at 1% above the prime rate as from time to time quoted by HSBC, and thereafter at judgment rate until full payment.

Costs

53.  This leaves the question of costs.

54.  At the end of the day, after set-off, Manway has obtained overall judgment in its favour.  

55.  Mr Lee for Keymarks however submits that as a substantial part of the trial was spent on the dispute on Keymark’s claim on shortfall of yarns (which is also the flip side of the defence of set-off against part of the counterclaim), notwithstanding the end result that Keymark has to pay to Manway under the judgment, Keymark should be entitled to 75% of the costs of this action.

56.  Mr B K Ho for Manway in fact does not appear to dispute with Mr Lee’s submissions although he says perhaps the Keymark’s entitlement should be 70% instead of 75% of its costs.

57.  With respect to both Mr Lee and Mr Ho, I disagree.  

58.  As matter of principle, in the exercise of its discretion on costs, the starting point for the court is costs should follow the event, except when it appears that there are justifications that some other order should be made.    The general principles have been set out by Nourse LJ in Re Elgindata Ltd (No. 2) [1992] 1 WLR 1207 at 1214A-B as follows:

“(i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party's costs.”

59.  In applying the Re Elgindata principles, it has however been emphasized in Hong Kong by the Court of Final Appeal that, the Court should place sufficient regard to the starting position that costs should follow the event, and this is so even if a party raises issues on which he fails:  Heibi Enterprises Ltd v Livasiri & Co (A Firm) (unrep., FACV 23 & 25/2007, 5 December 2008, Bokhary, Chan Ribeiro PJJ, Nazareth and Sir Gerald Brennan NPJJ), para 17.

60.  Thus, in Commissioner of Inland Revenue v HIT Finance Ltd (unrep., FACV 8 & 7/2007, 26 June 2008, Bokhary, Chan, Ribeiro PJJ, Litton and Lord Hoffmann NPJJ), Bokhary PJ said at paras 6 and 7 as follows:

“6.  So the Commissioner is the real winner.  The general rule is that costs follow the event – in other words, go to the real winner – except if and when it appears to the court that in all the circumstances some other order as to costs should be made.  We heard argument on sections 16, 17, 61 and 61A of the Inland Revenue Ordinance, Cap.112.  Having done so, we decided in the Commissioner’s favour under s.61A.  We rejected her arguments under sections 16 and 17, and did not rule on s.61.  Not every point taken by the Commissioner proved to be a winning one.  But there is nothing exceptional about a case being won on only some of the winner’s points.

7.   There is a discretion in the court to deprive a successful party of the whole or part of his costs because he had caused a significant increase in the length or costs of the proceedings by raising issues on which he did not succeed.  That can be done even if it was not unreasonable to have raised those issues.  Whether or not it should be done depends on all the circumstances.  This discretion exists for the purpose of avoiding the rigour of too inflexible an application of the rule that costs generally follow the event.  It is to be approached with due circumspection so as not to undermine the utility of that general rule.  In the circumstances of the present case, after weighing the rival arguments on costs, we do not consider it appropriate to deprive the Commissioner of any of her costs.  We have set out, in paragraph 4 above, the order as to costs for which the Commissioner asks.  In our view, it is appropriate to make that order as to costs, and we do so.”   (emphasis added)

61.  Applying the above principles and looking at the present case in the round, I am of the view that Keymark’s claim for damages and Manway’s counterclaim based on the unpaid 14 invoices should be viewed as one “event” for the purpose of costs, as Keymark was seeking set-off with the damages as a defence against Manway’s counterclaim. 

62.  In the premises, Manway is the ultimate winner of the event, even though it has failed to defeat Keymark’s defence of set-off.  The starting position on costs is that Manway should be entitled to costs as it should follow the event.

63.  However, I would also take into account of the fact that a significant part of the trial was spent on Keymark’s claim for damages (and thus defence of set-off).   Applying principle (iii) under Re Elgindata and giving due regard to the principle of costs should follow the event, and having look at the matter in its entirety, I come to the view that the fair and just costs order in the present case should be that Keymark should pay half of Manway’s costs of this action.  

64.  And I so order.

[1] This proposed amendment was only made on the first day of trial, which I eventually gave leave with the consent of Keymark.

[2] Similarly, amendments were only made on the first day of trial, with consent of Manway.

[3] Mr Ho, counsel for Manway, confirms in his closing submissions that he is no longer pursuing an alternative case of implied term as pleaded by way of the latest amendment at para 2(f) of the Re-Amended Defence and Counterclaim.

[4] The amended witness statement was made and relied upon by consent after both parties have amended their pleadings on the first day of trial.  The unlined part of the quoted statement is the additional evidence.

[5] See paragraph 31(3) above.