NATOMATE CO LTD v. ANSON MANUFACTURING CO LTD

A4434/89

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

-----------------

----------------------

J U D G M E N T

-----------------------

1. In this action the plaintiff claims against the defendant for damages for breach and repudiation of contract and the defendant counterclaims for damages for breach of the same contract by the plaintiff.

2. The subject matter of the claim and the counter claim is a contract which was evidenced by Purchase Contract No. 107 dated 8th January 1988 whereby the plaintiff agreed to buy, and the defendant agreed to manufacture and sell 3,200 pieces of gent's and 2,150 pieces of lady's 3-links Rolex type solid stainless steel watchbands in accordance with the terms and conditions stated in the contract. Thiscontract is admitted by the defendant. Apart from that and the fact that 400 pieces of gent's watchbands were delivered by the defendant to the plaintiff on or about 10th June 1988, almost every fact and event which took place is disputed. That is one of the reasons why the trial has taken much longer than anticipated.

3. The plaintiff is a watch dealer and the sole exclusive agent for certain watch movements and watches in Japan. According to Miss Sindy Wu, the managing director of the plaintiff, in about late December 1987 she was approached by Mr Takani of Cowa Jewellery Company in Japan for the supply of approximately 3,200 pieces of gent's and 2,150 pieces of lady's 3-links Rolex type solid stainless steel watchbands, delivery of which should be made by instalments starting in March 1988. She instructed her staff Mr Danny Lai to make enquiries of local manufacturers for these watchbands. Later, Danny Lai reported to her about the result of his enquiries and recommended the defendant because it could give better delivery dates. Based on the enquiries made by Danny Lai, Sindy Wu gave certain quotations to Mr Takani on the phone and the latter agreed to place an order with the plaintiff. This order was subsequently evidenced by a fax from the plaintiff to Mr Takani dated 9th January 1988.

4. According to Danny Lai, he went to see Mr Yeung of the defendant at the end of December 1987. Before that time Danny Lai had known the defendant through dealings with the defendant while he was working with another company. Danny Lai said that when he saw Mr Yeung he showed him some samples of watchbands which were supplied from Mr Takani. He also told Mr Yeung about the quantity of watchbands he required, the time of delivery and that these watchbands were required by his Japanese customer. Danny Lai said that Mr Yeung told him that there would not be any problem with the delivery dates. They also discussed other details. After that, the plaintiff prepared Purchase Contract No. 107 on or around 8th January 1988. A copy was sent to the defendant by fax and this was followed by a telephone conversation between Danny Lai and Mr Yeung whereby Mr Yeung confirmed that the terms set out in the purchase contract were agreeable to the defendant. The original purchase contract was either sent by mail or delivered by Danny Lai personally to the defendant. The purchase contract appears on p.2 of the plaintiff's bundle.

5. According to the contract, the price of a gent's, watchband was HK$43 and that of a lady's watchband was HK$40. Delivery of the watchbands was to be made by instalments as follows:-

By March 1988, 1,200 pieces of gent's and 1,150 pieces of lady's;

By April 1988, 1,000 pieces of gent's and 500 pieces of lady's, and

By May 1988, 1,000 pieces of gent's and 500 pieces of lady's.

Payment for these watchbands was to be made by means of a letter of credit at sight to be issued on behalf of the plaintiff in favour of the defendant. The contract contained a remarks column. Paragraph 1 provided that:-

                "Other detailed specifications are provided on the attached sheet in Chinese"

and paragraph 2 said:-

                "The watchbands must fit the watch case sample provided by the buyer."

6. A signed copy of the contract was later returned by the defendant to the plaintiff. Pursuant to the contract, the plaintiff had on about 8th January 1988 applied for the issue of a letter of credit and one was duly issued by the Bank of Credit and Commence in favour of the defendant for the contract price. The application and the letter of credit appeared from p.3 to p.6 of the plaintiff's bundle.The Chinese Specification referred to in the contract was not attached to the contract. It was in fact sent by the plaintiff to the defendant on or around 22nd January. That appears on p.7 of the bundle. Item 1 of the Chinese Specification asked for the goods to be made acccording to the size of the sample of watch case provided. Item 6 stated that the size of grains of sandblast was to be in accordance with "watch case sample (to be provided later)" Item 7 provided that the delivery of goods must not be late. According to Danny Lai, and this was confirmed by Mr Takani who gave evidence on behalf of the plaintiff, at the beginning of January, around 10th January, one gent's and one lady's watch case sample were supplied by Mr Takani to the plaintiff and the same were in about the middle of I January but before the Chinese Specification, delivered by I Danny Lai to Mr Yeung of the defendant. They were the samples referred to in Item 1 of the Chinese Specification. The samples referred to in Item 6 were described as sandblast samples. According to Danny Lai, and this was supported by Mr Takani, the sandblast samples consisting of one gent's and one lady's watchbands were sent by Mr Takani to the plaintiff in early March and Danny Lai gave the gent's sample to Mr Yeung and kept the lady's sample for comparison at a later stage. Danny Lai said that in about the middle of January, Mr Yeung gave him a watchband sample to be forwarded to Mr Takani. It was a sample which Mr Yeung had manufactured for his other customers. It was of the same type as that ordered in the contract but with a different buckle. It also bore the logo of a different brand. Danny Lai sent this watchband sample to Mr Takani straight away.

7. According to Danny Lai, from the beginning of January to March, he contacted Mr Yeung of the defendant and enquired the latter of the progress. He was also taken to see the materials in the defendant's factory and was told many times of the progress on the telephone. Danny Lai also visited the defendant's factory in about March when he was told that the goods were not manufactured there but were done in the defendant's factory in Lantau Island. When he asked to go there to have a look, he was not told the address.

8. No delivery was made by the defendant in March despite repeated requests by the plaintiff. Sometime in April, Danny Lai said that he was informed by Mr Yeung that about 500 pieces of watchbands were ready and he was asked to go to the defendant's factory to inspect the goods before delivery. So he went and inspected the goods but found that they were of poor quality. I shall deal with the alleged defects at a later stage. Danny Lai said he asked Mr Yeung why this was the case. He was told that the goods were just like that. Danny Lai then reported this to Sindy Wu. Meanwhile, Mr Takani had chased the plaintiff several times for delivery. And so Sindy Wu rang up Mr Takani to tell him about the conditions of the watchbands and said that if he was really concerned, he could come and look at them in Hong Kong and choose some of the watchbands if he liked.

9. In the early part of April, Mr Takani then came to Hong Kong. He was accompanied by Danny Lai, Sindy Wu and one Stephen Tang of the plaintiff to the defendant's factory. In the presence of Mr Yeung, Mr Takani examined the watchbands and pointed out some defects. Although Mr Takani spoke in English, Danny Lai and Sindy Wu told Mr Yeung in Chinese what was said. They said that Mr Yeung was shown the defects and at all times he knew what the complaints of Mr Takani were.

10. Mr Takani complained that the watchbands were crooked and not straight, that they were not properly tapered and not symmetrical, that they were not fully, polished and not smooth, and that the spaces between the links were inconsistent.

11. According to the plaintiff's witnesses, Mr Yeung did not say whether he agreed or not to these alleged defects but promised to remake them and deliver about 2,000 to 3,000 pieces in May. The 500 pieces were of course not accepted by Mr Takani and the plaintiff.

12. On or about 10th June, 400 pieces of gent's watchbands were delivered by the defendant to the plaintiff. According to Sindy Wu and Stephen Tang of the plaintiff, it was a Saturday afternoon and they were the only persons in the office when the goods arrived. They had a look at some of the 400 pieces and found the same alleged defects. They did not want to accept the goods and so told the delivery man to take them back to the defendant. However, the delivery man asked them to ring up his boss on Monday and refused to take them back. So what happened was Mr Stephen Tang of the plaintiff acknowledged receipt of these 400 pieces by putting a chop on the invoice of the defendant. This is p.12 of the defendant's bundle. The chop was signed by Mr Stephen Tang and was dated 10th June 1988. There were two remarks on the chop saying that the delivered goods were accepted temporarily and that acceptance was to be confirmed pending inspection.

13. On the following Monday, Danny Lai then inspected all the 400 pieces and found them to contain defects which were similar to those they found in April. He said that he rang up Mr Yeung of the defendant and told him that these 400 pieces were not acceptable. He said that Mr Yeung told him that there were about 500 pieces of gent's and 500 pieces of lady's watchbands ready for delivery soon and that they should be of better quality. Meanwhile, Sindy Wu informed Mr Takani about this. Since Mr Takani was anxious to get delivery, Sindy Wu told him to come to Hong Kong to have a look at the 400 pieces and see whether he would find them acceptable. So, sometime in the middle of June, Mr Takani came to Hong Kong. He saw the 400 pieces but found the same defects. He then went to the defendant's factory accompanied by a member of his staff and Danny Lai. There were about 1,000 pieces of gent's watchbands. Mr Takani examined them in the presence of Mr Yeung. He found no improvement in these goods which had the same defects as in those which he had inspected sometime in April. Danny Lai explained this to Mr Yeung. As a result, Mr Takani refused to accept the watchbands. So did the plaintiff.

14. On about 30th June, Sindy Wu and Danny Lai went again to see Mr Yeung to discuss the matter and to find out whether the defendant could produce another better lot. They said that Mr Yeung told them that he could only make the watchbands up to that standard and that the plaintiff could either take it or leave it. According to Danny Lai, Mr Yeung even refused to make any more watchbands. In view of this, Sindy Wu said that the plaintiff had to terminate the contract with the defendant and start looking for alternative goods to meet Mr Takani's order. However, after sometime the plaintiff could still not find any substitue. Hence Sindy Wu had to inform Mr Takani of this situation. Mr Takani in turn had to look for alternative watchbands in Japan in order to supply to his customers. A few months later, the plaintiff had paid some compensation to Mr Takani. In this action, the plaintiff now claims against the defendant for loss of profits and reimbursement of the compensation paid by the plaintiff to Mr Takani.

15. Mr Yeung gave evidence on behalf of the defendant. He said that the defendant was established in 1971 and. is a well-known manufacturer of watchbands with a large annual turnover and had never been involved in any disputes. He knew Danny Lai since about 1984 or 1985 when Danny Lai worked for another company as quality controller. It was on about 2nd January 1988 that Danny Lai contacted him and made enquiries of solid watchbands. They had a meeting on about 4th January. Mr Yeung said that when Danny Lai came to see him, Danny Lai was not able to tell him what type of watchbands he wanted and so he gave Danny Lai a catalogue and showed him some samples. The latter chose Item No.203. Mr Yeung also showed him a price list and they had a discussion on the price. According to Mr Yeung, Danny Lai saw some of the samples and noted that they were crooked. Mr Yeung then told Danny Lai that for this type of watchbands the structure was like that because of the presence of adjustable links and the use of pins which enlarged the heads. That was why when the watchbands were held up, one could see some crookedness but this could be reduced by using fewer adjustable links. Mr Yeung also showed Danny Lai some watchbands of a similar model but bearing the logo "Cyma". Danny Lai said he would like to order this and so Mr Yeung gave him two pieces of gent's and two pieces of lady's watchbands bearing the logo "Cyma". He also said that the defendant would take 75 to 90 days for delivery, and Danny Lai said there was no problem because his watch cases were not ready yet. Mr Yeung denied that Danny Lai had told him that the watchbands were required for resale to Japan. Nor did Danny Lai tell him the quantity required and the delivery date.

16. A few days later, Mr Yeung received a faxed copy contract from the plaintiff. Danny Lai also telephoned him to follow it up. After he had looked at the terms of the  contract, he agreed with them and signed the formal contract and returned it to the plaintiff on or about 11th or 12th January. There was no Chinese Specification attached to this contract. It was only on or about 22nd January that he received a copy of the Chinese specification but there was no watch case sample provided with it. He said that Danny Lai told him that once he had received the watch case samples from his customers, they would be sent to him. Thereafter, the defendant started to cut materials for the side links of the watchbands. It was at the end of January that Danny Lai, Sindy Wu and another came with Mr Takani to his factory. Mr Yeung showed them his samples and took them for a tour in the factory. This, he said, was the only time he saw Mr Takani. As a matter of fact, Mr Takani showed an interest in his drilling machines.

17. On about 3rd March, Danny Lai brought two pieces of gent's and one piece of lady's watch case samples to Mr Yeung. The latter found that the end of the watch case samples was too small measuring only 17mm wide and the space between the arms into which the watchband was to be fitted was too large measuring 7.16mm, and the edges of the arms were not smooth enough. As a result, when the watchband was fitted into the watch case, the first link would be bulging out. Mr Yeung then told Danny Lai to make improvements to the watch case. There was then a discussion as to whether the end piece of the watchband should be adjusted to accommodate the watch case or whether the watch case should be altered to accommodate the watchband. Mr Yeung said he could remember that that was 3rd March because, according to his practice, he stuck a label on the watch case to indicate the date of receipt of such sample. He said he did that on that occasion but at a later stage when he consulted his solicitors he was told that since the label was put in by him, there was no evidential use in such label and so he tore it off later. It was on about 18th March that Mr Yeung received proper watch case samples from Danny Lai. Again, he stuck a label on the sample indicating the date of receipt of the samples. Mr Yeung said that Danny Lai brought two watch case samples one gent's and one lady's but only left behind the gent's sample and took away the lady's sample. There were some changes to the watch case sample but the space between the two arms was still too wide.

18. Sometime in April, Mr Yeung telephoned Danny Lai and asked him whether there was any change in the plan but was told that the plaintiff was then moving office and that there would be no change.

19. Towards the end of May, Danny Lai called Mr Yeung and asked for delivery of 500 pieces as soon as possible. Mr Yeung said that there were 500 pieces ready for polishing and sand-blasting, and the rest were ready for pressing. On 9th June, Danny Lai telephoned Mr Yeung again saying that his customer had come to Hong Kong and asked for as many pieces as possible. At that stage, the defendant had only 400 pieces available. So, on 10th June the defendant delivered the 400 pieces of gent's watchbands to the plaintiff. About 3 to 4 days later, Danny Lai rang up and asked Mr Yeung to finish 1,000 pieces of gent's watchbands and deliver them by the end of June. He complained that the customer said that the sand-blasting was not well done and so Mr Yeung asked Danny Lai to come and see for himself. According to Mr Yeung, the defendant continued the production and it was estimated that the defendant could finish 1,000 pieces of gent's watchbands in about 2 weeks time.

20. On about the 20th June, Mr Yeung called Danny Lai, on the phone and asked him to come to look at the polishing work before the defendant would proceed to sand-blasting. On or about 22nd June, Danny Lai came with Sindy Wu and inspected the polishing for about 15 - 20 minutes, but they made no comments. Mr Yeung then asked Danny Lai whether the defendant could proceed with the sand-blasting but was then told that he would be informed later. On about 28th June, Mr Yeung chased after Danny Lai but was asked to wait. On about 30th June, Mr Yeung was informed by Danny Lai that there was no need to proceed any further as his customers had complained about the watchbands. Danny Lai also said that that was the customers' decision and that he knew nothing about it.

21. With regard to the alleged defects in the watchbands, Mr Yeung explained that because of the use of pins in relation to the adjustable links, the watchbands could not be entirely straight. He denied that there were any defects in the tapering work or in the tightness of the watchbands. However, under cross-examination, Mr Yeung admitted that there were some defects as described by Mr Takani in relation to the 400 pieces already delivered and the 1,000 pieces which were not accepted. However, he maintained that the watchbands were up to standard and were acceptable to other customers. He further said that for that particular price, there might be some defects.

22. With regard to the plaintiff's complaint that the defendant had failed to deliver the watchbands in time, Mr Yeung explained that according to the contract the watchbands were to fit the watch cases, and to do that the defendant required proper watch case samples. It was the plaintiff who failed to deliver proper watch case samples to him and thus made it impossible for him to finish the watchbands in time. He said that he could not have started cutting materials for the middle links of the"watchband s without having the proper watch case samples. He further said that the length of the middle links was usually about 7mm. He had a mould for the middle links but that was with a minus tolerance. However, the watch case samples produced by the plaintiff had a space with a positive tolerance, that is to say, more than 7mm, namely, 7.16mm. And so, his mould could not be used to manufacture the middle links. That was why the defendant had to use a new mould for the middle links in this case - a mould for 7mm with a plus tolerance - in order to fit the watch case samples. He had to spend about $8,000 on this new mould. However, at a later stage he corrected himself by saying that it was in fact an existing mould which was adjusted with spare parts, and this took him about one week.

23. When he was asked why it was only gent's watchbands that the defendant had manufactured, Mr Yeung explained that Danny Lai had only left behind the gent's watch case sample but had taken away the lady's watch case sample and so he could not manufacture the lady's watchbands. Furthermore, it was Danny Lai who told him to do the gent's watchbands I first, but did not tell him when the plaintiff would require the lady's watchbands. It was denied that the defendant had breached or repudiated the contract. On the other hand, it was the plaintiff who had failed to comply with the terms of the contract and to supply the defendant with the proper watch case samples. The plaintiff had also failed to pay for those watchbands which had been delivered. As a result, the defendant had incurred a loss and is now claiming damages from the plaintiff. That is basically the defendant's case.

24. Both counsel for the plaintiff and for the defendant had prepared lengthly written submissions (32 pages for counsel for the plaintiff and 50 pages for counsel for the defendant) regarding the various issues in this case and commenting exhaustively on the evidence. Without showing any disrespect to both counsel, I do not propose to deal with every point raised in their written submissions although I have considered them in relation to the issues I have to decide. In my view, three main issues have been raised in this case and fall to be decided. The plaintiff alleges that:-

(1)    the defendant was late in the manufacture and delivery of the watchbands under the contract;

(2)    the watchbands produced by the defendant ontained defects rendering them unmerchantable; and

(3)    the defendant had wrongfully refused to manufacture and deliver watchbands which would meet the required standard thereby repudiating the contract altogether.

In response, the defendant alleges that the late delivery of goods was due to:-

(1)    the plaintiff's failing to provide the defendant with proper watch case samples in time for the defendant to manufacture the watchbands; and

(2)    the plaintiff's instruction to the defendant to hold back the manufacture of part of the gent's watchbands and all of the lady's watchbands.

25. With regard to the defects alleged by the plaintiff, while the defendant admits some of these defects, it is the defendant's case that the watchbands produced so far were up to standard and were therefore merchantable within the meaning under the Sales of Goods Ordinance. As to the plaintiff's allegation of repudiation, the defendant denies this and alleges that it was the plaintiff which indicated that it no longer wanted the goods. I Shall deal with each of these issues one by one.

26. First, the question of delay.

27. It is alleged by the defendant that initially the plaintiff did not know details of its own requirements. Since the watchbands were to be manufactured for use in Japan, I shall start from Mr Takani. He told me that in Japan the workers were normally paid a bonus in the middle and at the end of the year. Hence, summer and winter were the peak sales seasons in Japan. Businessmen would try to turn out new goods during these two seasons. It was his customer's intention to sell watches with this type of watchbands during the summer sales season. That was why he approached Sindy Wu of the plaintiff to try to get this type of watchbands manufactured so that they could be used in time for the watches. This part of the evidence is not challenged and I have also no reason to doubt that he was tellingme the truth. According to him, watches with stainless steel watchbands were more popular during summer months and, therefore, if he missed the summer sales season it would mean loss of business for him. The time for delivery of the watchbands would naturally be important to him. He was an experienced businessman and I am sure that when he approached Sindy Wu to place an order, he must have informed her the type and quantity he wanted and must have made known to her the importance of the delivery dates.

28. If Mr Takani had made known his requirements to the plaintiff, there is absolutely no reason why Danny Lai would not have passed on the information to Mr Yeung of the defendant when he went to make enquiries. It would be most surprising for Danny Lai to go to see Mr Yeung without any idea of what he was looking for and when the goods would be required. There is some dispute as to when exactly it was that Danny Lai first went to see Mr Yeung. But I do not think this is important. On the evidence before me, I am satisfied that at the end of December 1987 or the beginning of January 1988, Danny Lai went to see Mr Yeung and enquired about this type of watchbands. At that time, he had the requirements of Mr Takani and he told Mr Yeung those requirements. I also accept that there was a discussion about the time required for deliveries, and Mr Yeung had told Danny Lai that he would require 75 to 90 days. That is why the plaintiff was able to put down the proposed delivery dates in the purchase contract which was sent to the defendant later and Sindy Wu was able to suggest to Mr Takani, in the fax message dated 9th January, the dates on which the plaintiff would deliver the watchbands to Japan, namely, 10th April, 10th May and 10th June. In fact, the ability to make deliveries promptly and punctually was the main factor which made Danny Lai recommend to Sindy Wu to choose the defendant instead of another manufacturer. Almost all of the plaintiff's witnesses had heard and known of the defendant through reading magazines or brochures. They, particularly Danny Lai, would have an idea of the type of watchbands they required. I am therefore quite satisfied that before the purchase contract was faxed by the plaintiff to the defendant on 8th January, most of the essential terms must have been discussed between Danny Lai and Mr Yeung. That is why'the plaintiff was able to put down or propose the terms stated in the purchase contract.

29. It is also alleged that the plaintiff did not provide the defendant with the proper samples. There are a lot of disputes regarding who had provided samples to whom and when. As I said, it was the intention of Mr Takani, which I accept, that watches with this type of watchbands were to be marketed during the summer sales season. That being the case, I think it is more likely that Mr Takani and his customers had their plans ready and some watch case and watchband samples available. I am, therefore, more inclined to accept that Mr Takani had given some samples to the plaintiff and they were then forwarded to the defendant in January. This was confirmed by Mr Takani. It was agreed that the defendant had also handed some samples to Danny Lai and they were of the same model, i.e. model 203, but bearing the logo "Cyma". The defendant's samples had been forwarded by the plaintiff to Mr Takani. These would have happened before the Chinese Specification dated 22nd January.

30. I have referred to the terms of the Chinese Specification. Having looked at them, I believe that the purpose of such document is for the plaintiff to provide further instructions to the defendant, and to ensure that the defendant would carry out the contract to the plaintiff's satisfaction. If the plaintiff was so serious about it, one would expect that it would try to provide the defendant with the proper samples.

31. From the description of the manufacturing process given by the witnesses, especially Mr Yeung, it is quite clear that the watch case,samples referred to in Item 1 of the Specification and the sand-blasted samples referred to in Item 6 were different samples. These were required at different stages of the manufacturing process. While the watch case samples were required at the beginning, the sand-blasted samples were only needed towards the end when the sand-blasting process was done. From the wordings of Item 1 and item 6 of the Chinese Specification, it is also clear that a distinction was drawn between the sample provided for the making of goods and another sample to be provided for the sand-blasting. This shows that, contrary to the allegation of the defendant, the plaintiff did know something about the manufacturing process and was aware of what sample to be required for which stage of the process.

32. The plaintiff had, immediately after entering into the contract with the defendant, caused a letter of credit to be issued in favour of the defendant pursuant to the contract as a term of payment. It seems to me, and I accept, that the plaintiff was serious about proceeding with the contract as punctually as possible. Having heard the evidence of the plaintiff's witnesses, which accept, I am satisfied that the proper watch case samples had been provided by the plaintiff to the defendant either at the time of the Chinese Specification or shortly thereafter.

33. The defendant alleges that the original samples of watch case provided by the plaintiff were not proper in that firstly, the watch case was only 17mm wide, whereas the watchbands required was to be 18mm, and secondly, the space between the two arms of the watch case sample was more than 7mm (i.e. with a plus tolerance) whereas the width of the first middle link of the watchband was only 7mm with a minus tolerance i.e. smaller. The edges of the watch case were also alleged to be rough. Three samples alleged to have been provided by the plaintiff were produced in Court. The plaintiff denied they were theirs. All these, according to the defendant, gave rise to problems. A more reasonable or acceptable watch case sample was only provided to the defendant sometime after the middle of March. Even then, the watch case sample was not satisfactory. That is why the defendant said it had to specially make a mould for the making of the middle links of the watchbands. Having considered the evidence, I have some doubts whether the defendant's allegations are true. First of all, the plaintiff in its contract specified that the size of the gent's watchbands was to be 18mm. The plaintiff, and also Mr Takani, must be well aware of this. They were buying 18mm watchbands. It is, therefore, unlikely that the watch case samples provided by Mr Takani would be of a size smaller than the watchbands. Secondly, it is not disputed that the defendant's samples of watchbands were sent to the plaintiff. According to the defendant, the width of the middle link was of a standard size of 7mm. This must also be known to the plaintiff and Mr Takani. Thirdly, the contract only required (under Remark 2) that the watchbands must fit the watch case samples. If the middle link of the defendant's watchbands was only 7mm with a minus tolerance, and if it were the case that Mr Takani's watch case samples had a space between the arms of more than 7mm, one would not expect any problem at all in fitting the watchbands into the watch cases. As to the rough edges of the watch case samples, one must not forget that they were only samples. This should not pose any problem to the defendant.

34. I have also heard the evidence of Mr Yeung regarding the making of a new mould or adjusting an existing mould for the cutting of middle links for use in the watchbands. He had given some slightly different versions on this, and I find his evidence to be less than satisfactory.

35. The plaintiff alleges that the defendant had delayed in making deliveries. As I said earlier, the plaintiff provided in the Chinese Specification that delivery must not be late and opened a letter of credit shortly after the contract with an expiry date to be on 15th June (when the last instalment was to be delivered by May 1988). Mr Takani also required the watchbands for use in his watches in order to beat the summer sales season. I do not believe that the plaintiff would wish to delay the deliveries. That is also the reason for Danny Lai to make enquiries from time to time of the defendant as to the progress.

36. It is important to note that although both the gent's as well as lady's watchbands were required under the contract, the defendant could only deliver 400 pieces of gent's watchbands on or about 10th June and another 1,000 of pieces gent's watchbands (which had not been sandblasted yet) were available towards the end of June. So far, no lady's watchbands had been produced^. Mr Yeung explained to me that this was due to the request of the plaintiff to withhold the manufacturing of the lady's watchbands. He suggested that this might be due to the decrease in popularity of this type of watches, particularly the lady's watches.

37. I am not sure I would accept this. Since it would take about 75 - 90 days to manufacture the watchbands, I would think that the request to withhold delivery, if there was any, must have been made round about March or April. Mr Takani had placed an order with the plaintiff in early January. By this time; his customers who were the manufacturer of watches must have started to produce these watches - gent's as well as lady's. I do not believe that within a matter of a few months, even before this kind of watches were put into the market, there would be such a sudden drop in popularity. Even if that was the situation in Japan, one would expect it would apply to both gent's as well as lady's watches. It would be more reasonable if the request had been for the production of a small quantity of gent's and a small quantity of lady's watchbands instead of withholding production of the lady's watchbands altogether. I am unable to accept that it was the plaintiff's idea that production of the lady's watchbands should be withheld.

38. According to the contract which was made on or about 8th January, by the end of March, i.e. for about 80 days, the defendant was supposed to deliver 1,200 pieces of gent's and 1,150 pieces of lady's watchbands (a total of 2,350 pieces). Even assuming that the plaintiff could only give the proper watch-case samples to the defendant on or about 18th March, by 10th June, there were about 84 days. Yet, the defendant could only produce 400 pieces of gent's watchbands but no lady's watchbands. This represented about one-third of the number of gent's watchbands which the defendant had agreed, under the contract, to produce within a period of about 80 days and less than one-fifth of the total number of gent's and lady's watchbands it had agreed to produce for the same period of time. So even if one accepts that the defendant received the proper watch case samples on 18th March, it is still clear that the defendant was not able to keep up with the schedule.

39. For all these reasons, I cannot help but come to the conclusion that there was a clear breach on the part of the defendant in failing to deliver the requisite number of watchbands within the specified delivery dates. I do not accept that this delay was due to the failure on the part of the plaintiff to give the defendant the necessary proper watch-case samples or to the plaintiff's specific instruction to withhold production.

40. There was a lot of evidence from both sides as to whether the defendant could and should start the manufacturing process by cutting materials for the side links and the middle links while waiting for the appropriate samples. In view of the findings above, I do not think it is necessary to go into that. In any event, in view of the delivery schedules provided in the contract, I should think that it was only reasonable, if not desirable, for the defendant to start cutting the materials for those links as soon as the contract was entered into. After all the defendant had the measurements already, namely, 18mm for the gent's and 12mm for the lady's watchbands and a standard size for the middle links.

41. The next issue I have to deal with is whether the watchbands produced by the defendant were of a merchantable quality. According to the plaintiff's witnesses, they were asked by the defendant to inspect 500 pieces of gent's watchbands in about April. Danny Lai found them to be defective. Mr Takani also said that he came to Hong Kong to inspect them and found them to be defective. Both of them said that the defects were pointed out to Mr Yeung and explained to him in English and interpreted to him in Chinese. Mr Yeung denied that there was such an occasion. In view of what happened after that, I do not think it is vital to resolve the inconsistencies. However, I am inclined to accept the evidence adduced by the plaintiff, particularly Mr Takani who impressed me as a truthful witness.

42. The fact remains that on or about the 10th June, 400 pieces of gent's were delivered by the defendant to the plaintiff. Again, there was a dispute as to whether it was the 10th or the 11th June that the delivery was made. However, I do not think this matters very much except that it may go to the credibility of the witnesses. These 400 pieces of gent's watchbands had been rejected by the plaintiff but since the defendant's delivery man had refused to take them back, they were kept by the plaintiff. They are now produced as exhibits before me. The defects which had been described by the witnesses and which I have mentioned above had been demonstrated to me at the trial.

43. During the course of the trial, it appears that these defects were disputed, but towards the end of Mr Yeung's evidence, it became clear that Mr Yeung admitted that some of the defects were present. When I examine closely many of the watchbands produced before me, I do find that quite a number of them are not straight, some of them are not properly tapered, that is to say, not symmetrical, and in most of the watchbands which I examine, the spaces between the links are not even. Mr Yeung pointed out that the reason for the watchbands not being straight, i.e. a little crooked, was due to the presence of the adjustable links near the buckles. I notice that there are usually six adjustable links on each side of the buckle, and this only represents a small part, i.e. less than one-sixth of the whole length of the watchband. Yet, in some of the watchbands which I had examined, the crookedness is not onfined to the part with the adjustable links. As I understand it, the defendant's case is that notwithstanding these defects, the watchbands were still merchantable.

44. Counsel for the defendant submitted that whether the goods were merchantable or not depended on the circumstances of each case. Reliance was placed on the case of B.S. Brown & Son Ltd. v. Craiks Ltd. [1970] 1 WLR 752. With respect, I do not think that decision assists us. In that case, cloth which complied with the contractual description could be used for several industrial purposes but not for the use intended by the buyer although such purpose was not intimated to the manufacturers. The court held that the cloth was of merchantable quality within the meaning of the statute. If the cloth could be used for several purposes and no one particular purpose was specified, then clearly the cloth could still be regarded as merchantable. But that case is distinguishable from the present one. There can be only one purpose for which the watchbands are required. It is their quality which is to be considered. Whether the watchbands can be regarded.as merchantable must, in my view, depend on all the circumstances of the case. These would include, among other things, the conditions of the watchbands, whether there were any defects, what sort of defects they were and the price of the goods. The fact that the buyer and the sub-buyer found them to be unacceptable because of the presence of defects is certainly an important factor, although not the most important one, which the court would have to bear in mind.

45. The conditions of the watchbands in question can be seen from an examination of them. In fact, some of the defects are admitted.

46. Mr Yeung of.the defendant said that the gent's watchband costed $43 and the lady's watchband $40 only. He seemed to suggest that because of the prices not being very high, one would not expect the watchbands to be perfect or entirely free from minor defects. However, a look at the defendant's own brochure shows that the prices of the watchbands in question are not the lowest among the list. I would say that they were among the higher priced watchbands the defendant was manufacturing and selling. The question then is whether these watchbands, with the admitted defects, can still be regarded as merchantable.

47. In April, the defects in the 500 pieces of watchbands were pointed out to the defendant. They were not accepted by the plaintiff and Mr Takani. Mr Yeung did not say whether he agreed to these defects but promised to remake them and to make deliveries in May. In my view, this indicates that the defendant raised no objection when the 500 pieces were found not to be acceptable and in fact were not accepted. The 400 pieces of watchbands delivered in June had the same or similar defects. There was hardly any improvement. These goods were rejected not only by the plaintiff but by the plaintiff's sub-buyer Mr Takani. The 1,000 pieces shown to the plaintiff and Mr Takani in June were more or less the same and were not accepted. In these circumstances, a very strong inference can be drawn from these facts that the 400 and 1,000 pieces of watchbands were not merchantable and I so find them. It was submitted that the plaintiff had accepted the 400 pieces. However, when one looks at the sentences written near the chop coupled with the oral rejection by Danny Lai, I do not think the so called acceptance can be regarded as unconditional or unequivocal.

48. The next issue is whether it was the plaintiff or the defendant which had repudiated the contract. Sindy Wu and Danny Lai told me that at the end of June when they went to the defendant's factory, they were told by Mr Yeung that those were the watchbands the defendant could manufacture and that the plaintiff could take it or leave it. Mr Yeung, however, said that it was the plaintiff which had refused to accept further deliveries of watchbands.

49. From the plaintiff's point of view, the 500 pieces produced in April were found to be defective. The 400 pieces of watchbands delivered in early June were not any better. The 1,000 pieces of watchbands inspected at the end of June were of the same quality. Delivery had been delayed. The plaintiff was certainly entitled to demand for delivery of better quality watchbands or at least give the defendant an ultimatum. Mr Yeung was therefore under tremendous pressure from the plaintiff for improvement on the quality of the goods and for further deliveries. There was still a lot which the defendant had to do to complete the contract. In these circumstances, it is therefore not surprising that Mr Yeung gave the reply as described by Sindy Wu and Danny Lai.

50. The plaintiff was anxious to get the goods for delivery to Mr Takani who required them urgently. It is unlikely that they took the trouble to see Mr Yeung simply to tell him that the plaintiff did not want to accept further deliveries. I think it is more reasonable to expect Sindy Wu and Danny Lai to go and see Mr Yeung and urge the defendant to improve the 400 pieces, finish the 1,000 pieces and speed up the manufacturing process for the rest of the watchbands. If the defendant could do this, there would be a chance that the contract could be completed within a reasonable time. I am more inclined to think that that was the purpose for Sindy Wu and Danny Lai to call upon Mr Yeung. I would accept their evidence on what happened at that meeting.

51. On the other hand, I have some doubts as to Mr Yeung's evidence regarding the events which took place from the middle of June until the last meeting with the representatives of the plaintiff. His version of the events, particularly the dates, was inconsistent with that given by his solicitors in a letter dated the 13th September 1988 which was less than three months from the events leading to the present dispute. That letter referred to certain events which took place in July whereas Mr Yeung told us in evidence that these events occurred in the latter part of June. I therefore find it difficult to accept Mr Yeung's evidence.

52. For the reasons which I have ventured to give above, I have come to the conclusion that the defendant was late in making deliveries to the plaintiff; the goods delivered were defective and were not merchantable; and further the defendant had indicated not to carry on with the contract any more. I find that the defendant had wrongfully breached and repudiated the contract and is therefore liable to pay damages to the plaintiff. For the same reasons, I am also satisfied that the plaintiff was not in breach and the defendant's counterclaim must therefore fail.

53. As far as quantum of damages is concerned, Sindy Wu told me that after the defendant had repudiated the contract, she tried to get other supplies to satisfy Mr Takani's order, but she was unable to do so. It was in about July that she told Mr Takani about this. According to Mr Takani, he had to look for other sources of supply in Japan. He tried but was not quite successful. Finally, he managed to buy from stock of a slightly different model and he said that he had to persuade his own customers to adjust the watches. He said he had to pay ¥1,800 for each of these watchbands in place of those which he originally intended to purchase from the plaintiff. According to the agreement he had entered into with the plaintiff, he was to pay ¥1,050 for each of the gent's watchbands and ¥1,000 for each of the lady's watchbands. He had therefore to pay extra for the goods. The calculation set out in the plaintiff's Further and Better Particulars was based on 3,200 pieces of gent's and 2,150 pieces of lady's watchbands. I do not think this is correct. Mr Takani placed an order with the plaintiff for only 3,162 pieces of gent's and 2,142 pieces of lady's, i.e. a total of 5,304 pieces (see p.1 of the plaintiff's supplemental bundle). Further Mr Takani's receipts referred to 5,304 pieces of watchbands. That must be the basis for calculation. So instead of ¥4.12m, the amount should be:

54. On top of that, Mr Takani had to pay compensation to his own customers for the delay. He said that his customers originally asked for a compensation of ¥2m, but after some negotiations, he agreed to pay and did pay ¥1.8m. Mr Takani in turn asked Sindy Wu for compensation. No legal action had been taken but Mr Takani did say to Sindy Wu that if no compensation was paid, then he might consider going to the court.

55. Because of the good business relationship between the plaintiff and Mr Takani (the total amount of business done between the two in 1987 and 1988 was in the region of HK$30m), they therefore started negotiation. A settlement was finally reached in about October 1988. The plaintiff' had agreed to pay Mr Takani the loss for the extra costs in the sum of ¥4.12m and a compensation of ¥1.653m, making a total of ¥5.773m. Having regard to the circumstances of this case, I accept that this was a reasonable settlement (subject to the adjustments set out above).

56. According to Sindy Wu, this sum was paid by her by two instalments: The first was made in cash while she was in Japan and a receipt was issued by Mr Takani dated the 5th October 1988 in the sum of ¥1.373m. This is p.15 of the plaintiff's bundle. The second instalment was paid while Mr Takani was in Hong Kong on or around the 24th November 1988. On this occasion, Sindy Wu went to the bank with Mr Takani and withdrew money from her own bank account to pay him because there was not enough cash in the company's account. This second payment was in the sum of ¥4.4m and was evidenced by firstly, a receipt given by Mr Takani dated the 24th November 1988; and secondly, a withdrawal slip of the same date from Sindy Wu's own bank account with the Kwong On Bank. (See p.16 of the plaintiff's bundle and p.3 of the supplemental bundle.)

57. Apart from the compensation and loss paid to Mr Takani, the plaintiff also claims for loss of profit. According to the contract between the plaintiff and the defendant, the price of each gent's watchband was $43 and that of a lady's watchband $40. The prices at which the plaintiff was to sell these watchbands to Mr Takani were ¥1,050 for a gent's watchband and ¥1,000 for a lady's watchband which was $63 and $60 respectively. In other words, the plaintiff was to make a profit of $20 for each watchband. The plaintiff claims for loss of profit for 5,350 pieces of watchbands. However, since the total quantity which the plaintiff had agreed to supply to Mr Takani was only 5,304, 1 think it can only recover the loss for 5,304 pieces. For a total of 5,304 pieces of watchbands, the plaintiff should have and could have made a profit of $106,080.

58. Although the defendant denied this, I accept that when Danny Lai approached Mr Yeung of the defendant, he had disclosed to him that the plaintiff required the watchbands for re-sale. Mr Yeung had said in evidence that Danny Lai had told him that after he (Danny Lai) had received the samples from his customer, the same would be forwarded to the defendant. These samples were indeed given by Danny Lai to the defendant. Mr Takani was also brought to see Mr Yeung. I am, therefore, satisfied from the evidence that the defendant was, at the time of the contract, aware that the watchbands were to be resold by the plaintiff to its customers. That being the case, I think the plaintiff is entitled to recover from the defendant its own loss of profit because of the loss of a deal by reason of the defendant's breach and repudiation of contract, as well as the reasonable compensation it had paid to Mr Takani. Both items are losses resulting directly from the defendant's breach and repudiation of contract and were reasonably foreseeable at the time of the contract. I would therefore allow these two items. The total amount of damages would then be as follows :-

1. Loss of profit : HK$106,080

2. Compensation paid to Mr Takani : ¥5,738,100 (as adjusted)

59. I would therefore give judgment for the plaintiff against the defendant in these two sums. There will be interest thereon at the rate of 10% per annum from the date of writ to the date of judgment and thereafter at the judgment rate until payment. The defendant's counterclaim , is dismissed. The plaintiff is also entitled to its costs of the action and the counterclaim to be taxed if not agreed.