WHOLE LIGHT INDUSTRIES LTD v. TURBO-KNIT FACTORY LTD

DCCJ 3593 / 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3593 OF 2006

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JUDGMENT

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1.  In between April and June 2006, the Plaintiff (“Whole Light”) had supplied the Defendant (“Turbo-Knit”) with a total of some 105,110 lbs of dyed yarns.  Turbo-Knit has settled part of the purchase price of these goods except two invoices[1].  Whole Light now claims against Turbo-Knit HK$180,757.00 as the outstanding purchase price under these two invoices.

2.  Turbo-Knit accepts that the two invoices are prima facie due but says it has a counterclaim against Whole Light to set-off a substantial part of them.

3.  The basis of Turbo-Knit’s counterclaim rests upon its pleaded case that:

(1)     Whole Light was late in delivering of some of the dyed yarns beyond the agreed dates of 30 April 2006 (for 80,000 lbs) and 10 May 2006 (for the remainder of goods).  As a result of the delay, Turbo-Knit has suffered loss in the form of paying additional surcharge to its subcontractor and paying manufacturing fees to alternative factories to speed up the production.  The total loss is HK$118,317.04.

(2)     Whole Light had overstated the quantity of dyed yarns actually delivered to Turbo-Knit by 505 lbs.  Given that it has already paid for these goods, Turbo-Knit is entitled to a repayment of HK$5,807.50.

(3)     Some of the dyed yarns delivered were defective in that they were stained or too damp.  Turbo-Knit is thus entitled to counterclaim for the refund of purchase price paid and wasted cost in processing some of these defective yarns into knitted panels.

4.  Alternatively, Turbo-Knits says Whole Light entered into a settlement agreement with it on about 15 July 2006, whereby Whole Light agreed to settle Turbo-Knit’s claim for late delivery, defective yarns and short delivery with a payment of HK$62,348.45.  As such, this sum should be deducted from the two invoices.

5.  Whole Light denies all the basis of Turbo-Knit’s counterclaim and the settlement agreement.  It says there was no delay or short delivery, nor was there any defective yarns.  Further and in any event, it says even if there was any of the alleged default on its part as alleged, its liability is avoided under various provision of the sales contract signed between the parties.  It also says it has not entered into the settlement agreement. 

6.  In light of the above, the real issues for determinations at trial are:

(1)     Whether there were the agreed dates of delivery of 30 April and 10 May 2006, and if so, whether there were delays in these respective deliveries.  If so, what is the quantum of loss suffered by Turbo-Knit.

(2)     Whether the dyed yarns were defective as claimed, and if so, what is the quantum of loss suffered by Turbo-Knit.

(3)     Whether there is the overstated delivery, and if so, what is the quantum of loss suffered by Turbo-Knit.

(4)     If Whole Light was in breach of the sales contract for the above defaults, whether it can avoid liability by reason of the various provisions in the contract.

(5)     Whether the parties have entered into the settlement agreement.

Were there late deliveries

Undisputed background

7.  It is common ground that the subject matter transaction was the first time the parties dealt with each other.  In relation to the day to day negotiations and dealings, they were done through one Mr Wong Siu Mo of Whole Light and Mr Ng Chi Fu, the yarns supervisor of Turbo-Knit.  

8.  Mr Wong was at the material times the sales manager and representative of Whole Light’s associated company known as Polytech Trading Ltd, but there is no dispute that he was authorized to represent Whole Light to carry out negotiations with Mr Ng.  It is however Mr Wong’s case that for important matters, he had to seek approval from Mr Suen Kar Chun, who is the boss of Whole Light and its associated companies.

9.  It is not disputed that Mr Wong and Mr Ng started to discuss and negotiate for the supply of dyed yarns by Whole Light to Turbo-Knit in around March 2006.   It was known to the parties that the dyed yarns would be used by Turbo-Knit to make into knitted apparels for sub-sale overseas.

10.  The parties (through their respective bosses) signed a written sales contract (prepared by Whole Light), which carries a date 27 March 2006.  It is hotly disputed at trial when Turbo-Knit actually signed back this document.  Whole Light says it was around early April 2006, while Turbo-Knit says it is around 13 April.

11.  I do not think it is important to this case as to when the sales contract was actually signed, as both parties agreed this was signed and the signing date only provides a background to the dispute.  What are important are the relevant stated terms (including the hand amended ones) of the contract.  They are as follows:

(1)     Quantity of dyed yarns to be ordered was 150,000 lbs at HK$11.50 per pound.

(2)     Partial delivery allowed after 1 April 2006.  At least 80,000 lbs of dyed yarns to be delivered before 30 April 2006.

(3)     Cargo receipts has to be issued by Turbo-Knit after delivery of 15,000 lbs of dyed yarns.

12.  There are also various conditions printed over the back of the sales contract.  I will set them out more specifically when I deal with the question of Whole Light’s reliance on them to avoid liability.   

Was there an agreed delivery date of 30 April and was there late delivery

13.  It is clear from the above express term of the sales contract that Whole Light agreed to deliver at least 80,000 lbs of dyed yarns to Turbo-Knit by 30 April 2006. 

14.  It is undisputed evidence that by 30 April 2006, only a total of 67,780.5 lbs of dyed yarns were delivered to Turbo-Knit.  It was on 6 May 2006 that the delivery went past 80,000 lbs.  Whole Light was therefore late in delivering 80,000 lbs of dyed yarns to Turbo Knit. 

15.  Mr Arthur Wong for Whole Light however submits that such delay is not in breach of the sales contract since time is not of essence, as it is not so expressly stated.  Moreover, Whole Light should in any event be excused from this delay because it was in fact caused by Turbo-Knit’s default in not issuing the cargo receipts to Whole Light in accordance with the sales contract or by Turbo-Knit’s own conduct in repeatedly changing the priority of the orders to be met by Whole Light under different purchase orders.

16.  I do not accept Mr Wong’s submissions for the following reasons.

17.  First, on a proper construction of the term against the background leading to the sales contract, I conclude that the time stipulated for the delivery of at least 80,000 lbs of dyed yarn must be intended by the parties to be of essence:

(1)     It is common ground that before the sales contract was signed, the parties had been negotiating for the time of delivery of the goods.  This shows that the time of delivery was of importance and they were concerned about it.

(2)     It is undisputed evidence that it was Turbo-Knit through Mr Ng who insisted on inserting to the draft sales contract the term setting out that at least 80,000 lbs of yarns should be delivered before 30 April 2006.  Mr Wong agreed to insert this after obtaining approval from Mr Suen.  These again show that the time of delivery was regarded to be of importance to the parties.

(3)     It makes commercial sense that time of delivery is of essence in a contract for the sale of raw materials which would be used to manufacture products to meet sub-sale shipments.

18.  Secondly, although it is accepted that by 30 April 2006 Turbo-Knit had not issued any cargo receipts (where it ought to have done so after 15,000 lbs of dyed yarns having been delivered), this does not excuse Whole Light from performing the contract under common law unless it had accepted Turbo-Knit’s breach and terminated the contract.  

19.  Mr Wong for Whole Light prays in aid of Condition 10 of the sales contract to say that there was no breach by Whole Light as it had not been paid by Turbo-Knit.  Condition 10 provides as follows:

“In the event of there being more than one contract for the purchase and sale of goods existing between [Turbo-Knit] and [Whole Light] and in the event of [Turbo-Knit’s] failing to carry out any of the terms of any contract, or in the event of [Turbo-Knit’s] being indebted to [Whole Light] upon any account whatsoever between [Whole Light] and [Turbo-Knit], [Whole Light] shall be entitled to refuse to carry out any of the terms of this contract until [Turbo-Knit] have complied with the terms of such other contract or to cancel this contract by a written notice to [Turbo-Knit].”

20.  In my judgment, Clause 10 does not assist Whole Light, since by its express wording, it only applies in a situation where there are more than one sales “contract”.  It is however Whole Light’s own case that there was only one agreement in this case, which is the sales contract, whereas the various purchase orders placed by Turbo-Knit were only instructions made pursuant to this contract to complete the total order of 150,000lbs stipulated therein.  Similarly, although Turbo-Knit contends at trial that there are other terms of the agreement between the parties contained in the various purchase orders[2], it is not its case is that there were more than one agreement between the parties.  As such, Condition 10 does not apply to the present transaction.

21.  Finally, I do not accept that there is sufficient evidence before me to show that Turbo-Knit had been unreasonably and repeatedly changing the priority of the orders and colour of the dyed yarns to be delivered, as a result of which, Whole Light’s production process was delayed:  

(1)  Whole Light has only been able to produce to the Court copies of a few emails exchanges between it and Turbo-Knit made on 26 May 2006, whereby Turbo-Knit had within half an hour made changing requests as to which colour and of what poundage of dyed yarns Whole Light should deliver first.

(2)  Given that they are dated 29 May 2006, they do not relate to the deliveries of 80,000 lbs of dyed yarns before 30 April 2006 (or 10 May for later purpose), they are thus irrelevant to this issue.

(3)  Other than these few emails, there is simply no evidence other than Mr Wong’s own assertion to suggest that there had been such previous unreasonable changing requests.  I however do not accept Mr Wong’s evidence:  (a) it is his own evidence that in relation to requests made on priority of the orders to be delivered, he would usually communicate with one Madam Ling of Turbo-Knit by way of emails, but (b) there are simply no emails produced by Whole Light to show that there were such previous requests made before 30 April 2006.

22.  For the above reasons, I find that Whole Light was in breach of the sales contract in failing to complete the delivery of 80,000 lbs of dyed yarns by 30 April 2006.

Was there an agreed date of delivery on 10 May 2006, and was there late delivery

23.  Mr Ng gives evidence at trial for Turbo-Knit, and says that after reluctantly agreeing to the 30 April 2006 delivery date for at least 80,000 lbs of dyed yarns, Mr Wong first promised to deliver the remainder of the 105,110 lbs of dyed yarns by 5 May 2006. 

24.  It is Mr Ng’s evidence that Turbo-Knit would certainly require an agreed delivery date from Whole Light as it needed it to complete its own sub-sale contract to process the yarns into finished apparels.  It is also Turbo-Knit’s case that it only agreed to sign the sales contract when Mr Wong agreed that the parties would later work out the delivery date for the remainder of the dyed yarns. 

25.  The date of 5 May was not met, and according to Mr Ng, upon repeated demands and negotiations, Mr Wong further agreed to have delivery made by 10 May 2006.  This is again not met. 

26.  Mr Wong’s evidence however is that, although the dates of 5 May and 10 May were mentioned by Mr Ng and discussed, and that Mr Ng had requested delivery to be made by 10 May, he had never agreed to a definite date for delivery, be it 5 May or 10 May.  He on the other hand accepts that he had indicated to Mr Ng that Whole Light would try to make delivery as soon as possible.

27.  I reject Mr Wong’s evidence and accept Mr Ng’s evidence insofar as they are in conflict for the following reasons.

28.  First, I find Mr Wong not a reliable witness: 

(1)     He is frequently evasive in answering questions and he also changes his evidence when he is pressed under cross-examination. For example, although he has given firm evidence as set out in paragraph 26 above, when he is asked again later on whether Mr Ng had told him that Whole Light would have to compensate Turbo-Knit’s peak season surcharge to be paid to its subcontractors if there was delay in delivery when the dates of 5 and 10 May were discussed, he changes his evidence and says he has got little impression whether there were the dates of 5 or 10 May, as many dates had been mentioned. 

(2)     Further, he is prepared to give evidence which is untrue as it is contradicted and proved wrong by Mr Suen’s evidence:  He gives evidence under cross- examination that the reason why Whole Light did not withhold deliveries despite the non-issue of cargo receipt by Turbo-Knit is because of the fact that Whole Light needed its own production facility to take up another major order received.  However, this is flatly contradicted and denied by Mr Suen (Whole Light’s boss and only other witness), who says that there was no such other major order. 

29.  Secondly, I regard Mr Ng’s evidence inherently more credible and that the entire evidence looked together is supportive of his case:

(1)     For the same reason as set out in paragraph 17(3) above, it is commercially more likely that an agreed date of delivery for the remainder of dyed yarns was reached between the parties.  This is particularly so given that the parties had already agreed on the first batch delivery date of 30 April 2006.

(2)     It is more likely than not that Mr Ng would have insisted on an agreed date for delivery of the remainder of the goods, given Mr Wong’s own evidence that several dates had in fact been mentioned by Nr Ng and discussed between them.  What would have been the purpose of raising these dates for discussion if Mr Ng did not intend to have an agreed date reached for delivery? 

(3)     Mr Wong’s evidence when looked at as a whole is consistent with the position that he had in fact agreed to make delivery by 10 May:  under cross-examination on whether he had agreed to a date of 10 May, Mr Wong’s response is that he did not “concretely agree”, and further says that, after consulting Mr Suen, Whole Light would try its best to meet the 10 May date.  When further pressed, he says he could not remember whether he had told Mr Ng that Whole Light would try its best to meet the date of 10 May. 

(4)     Mr Ng is a reliable witness as he gives evidence in a consistent and firm manner, unshaken under cross-examination.

30.  I therefore find that, on a balance of probabilities, Whole Light through Mr Wong had agreed to make delivery for the remainder of the dyed yarns by 10 May 2006.  This agreement forms part and parcel of the sales contract as I also accept Mr Ng’s evidence that when Turbo-Knit agreed to sign the sales contract, it was made under the understanding that the parties would further come into an agreed date for the delivery of the remainder of the ordered dyed yarns.  For similar reasons given above at paragraphs 17 and 20, this date of 10 May 2006 was an essential term of the agreement.

31.  It is common ground that by 10 May 2006, a total of 95,341 lbs of dyed yarns (inclusive of the 80,000 lbs) had been delivered by Whole Light to Turbo-Knit, which was short of the 105,110 lbs.  As such Whole Light was late and in breach of the agreed date of 10 May 2006.

Did Turbo-Knit suffer any loss by reason of the delay and what is the quantum

32.  The burden is on Turbo-Knit to show that it has suffered loss and damage by reason of Whole Light’s delay in delivering the dyed yarns.

33.  It is Turbo-Knit’s pleaded case that given that delivery had not been made in accordance with the agreed dates of 30 April and 10 May, it has suffered losses in (a) paying its subcontractor Pioneer Embroidery Factory peak season surcharge at HK$1.00 per piece of the semi-knitted cardigan to carry out embroidery work, and (b) paying subcontractor factory Zhong Shan Jinjiali Knitting Co Ltd and 華洪毛織廠(“Wah Hung”) manufacturing cost to carry out part of the manufacturing of the knit cardigans which could have been carried out by Turbo-Knit’s associated factory at a lower cost had there been no delay. 

34.  In monetary terms, Turbo-Knit’s case is that it has suffered a total loss of HK$118,317.04 by reason of the delay in the delivery of the dyed yarns:

(1)     It has paid Pioneer a total of HK$20,784.00 as embroidery peak season surcharge fees.

(2)     It has incurred additional cost respectively of HK$74,296.67 and HK$23,236.37 in engaging Jinjiali and Wah Hung to carry out the manufacturing process.  These sums were arrived at after deducting the would have been manufacturing cost charged by Turbo-Knit’s own factory had the works been carried out by it.

35.  At trial, much cross-examination time was spent on whether Mr Ng had in fact told Mr Wong, and Mr Wong had agreed, that Whole Light had to compensate Turbo-Knit its loss such as peak season surcharge fees if there were delayed deliveries.  However, given it is not Turbo-Knit’s pleaded case that it is entitled to compensation by such an agreement, I do not find this part of the evidence relevant, and thus it is not necessary for me to deal with it in this judgment.

36.  The real question is has Turbo-Knit proved each of these losses?  That is what I am going to deal with next.

Pioneer’s surcharge

37.  Mr Ng and one Ms Lee Ka Man of Pioneer give evidence at trial to confirm this losse.   Ms Lee is the sole proprietor of Pioneer and she has been running it for more than 20 years in carrying out textile embroidery and beading works. 

38.  It is Ms Lee’s evidence that in the knitting cardigan or sweater industry, the period from January to mid May is the low season while mid May to September is the high season. This is so since most of the purchase orders are usually made by the overseas buyers in the US and Europe during these periods, so that the apparels can be completed and delivered for sale in the winter, especially for the festivals of Thanksgiving Day and Christmas.  As such, for the subject matter goods, Pioneer would charge Turbo-Knit low season fee for carrying out embroidery works on its semi-knitted goods if they were delivered before 15 May 2006.  However, it would add HK$1.00 per piece peak season surcharge if the goods were only given to it after 15 May 2006, as it would by then fall within the peak season.

39.  Ms Lee and Mr Ng confirm in evidence that Pioneer did levy the surcharge and Turbo-Knit had paid the same.  This is supported by Pioneer’s invoice dated 20 July 2006.   On the other hand, there is no positive evidence adduced by Whole Light to challenge Ms Lee and Mr Ng’s evidence.

40.  I accept Ms Lee and Mr Ng’s evidence.  As witnesses, they give evidence in a firm and consistent manner and are not shaken under cross-examination.  Moreover, their evidence is supported by contemporaneous document (the invoice) and makes commercial sense (in particular when there is nothing to validly challenge the evidence on the period of peak season).   

41.  Mr Arthur Wong for Whole Light seeks to make a case that Pioneer’s invoice is made up for the purpose of the present case.  His attack rests mainly on the fact that there has been an amendment on the invoice in crossing out the words “補差價” and replacing them with “由於毛衫出遲的關係，成本上升，所以每件衫要加$1.00件。”.  Ms Lee gives an explanation that the amendment was made at the request of Turbo-Knit to make the meaning “補差價” clearer.  I accept her evidence and reject Mr Wong’s submission.  If the invoice were made up as alleged to perfect Turbo-Knit’s case, it could have been done much more easily and perhaps better by making up an entirely new invoice with the new words, instead of putting the amendments there. 

42.  For these reasons, I find that Turbo-Knit has proved that it has suffered a loss of HK$20,784.00 as surcharge payment made to Pioneer by reason of Whole Light’s delay in delivering the dyed yarns.

Additional manufacturing cost

43.  Mr Ng says in his witness statement that, given the late delivery, Turbo-Knit’s own factory was unable to carry out the manufacturing process using some of the dyed yarns because its production line was by then fully engaged for the production of other orders that it had to meet.  Turbo-Knit had no alternative but to subcontract the works to Jinjaili and Hung Wah.

44.  Mr Ng at paragraph 33 of his witness statement says the production costs of Turbo-Knit’s own factory to carry out the same works as done by Jinjiali and Hung Wah would have been respectively HK$108 per dozen and HK$35 per dozen.  Thus, after setting off these would have been costs respectively against the actual sums paid to Jinjiali and Hung Wah (being respectively HK$261,235.67 for 20,771 pieces of knit cardigan and HK$61,355.95 for 13,073 pieces of knit cardigan), the additional manufacturing costs incurred by Turbo-Knit by engaging Jinjiali and Hung Wah are respectively HK$74,296.67 and HK$23,236.37.

45.  There is again no positive evidence to challenge Mr Ng’s evidence that Turbo-Knit had to subcontract the works to Jinjiali and Hung Wah because of the late deliveries.  Mr Ng’s evidence is consistent with the peak season scenario.  The payments made to Jinjiali and Hung Wah are supported by the respective invoices issued by these factories.  I therefore accept Mr Ng’s evidence and find that Turbo-Knit had to subcontract part of its manufacturing works to these two factories because of Whole Light’s late deliveries.

46.  However, under cross-examination, Mr Ng confirms that he has no personal knowledge of the figure of the would have been production costs of Turbo-Knit’s factory as set out in his witness statement.  He says that these figures were provided to him by Turbo-Knit’s accounting staff, he cannot say whether it is correct or not, although they look reasonable to him.  Turbo-Knit has also not provided any documentary proof, such as accounting records, to show how this production cost is calculated. 

47.  In light of the above, I regard the evidence in support of the quantum of loss under this head unreliable, and I therefore do not accept it as sufficient proof of the quantum of loss suffered by Turbo-Knit.  However, given my above finding on causation, in my judgment Turbo-Knit is prima facie entitled to nominal damages in the sum of HK$1,000.00.

Could Whole Light rely on the conditions of the sales contract to avoid liability

48.  By its pleading, Whole Light seeks to rely on Conditions 10 and 11 of the sales contract to avoid any liability for the late deliveries.

49.  As I have ruled above, given that Condition 10 only applies to a situation where there are two or more contracts, which is not the case here, it is simply not applicable.  Further, as submitted by Mr Lau for Turbo-Light, which I accept, Condition 10 is also not applicable because it relates to Whole Light’s entitlement to “withhold” delivery, where in the present case, there was never such withholding of delivery. It is common ground that Whole Light continued to make deliveries batch by batch all along.   Condition 10 therefore does not assist Whole Light.

50.  Condition 11 provides as follows:

“Notwithstanding any stipulation in contracts or orders regarding delivery of goods or documents to [Turbo-Knit] on credit against acceptance of draft or bill, (or cheque), [Turbo-Knit] agree that no delay, failure or refusal on [Whole Light’s] part to deliver goods or documents unless fully paid shall be considered a breach of the contract, and [Turbo-Knit] shall continue to be fully bound by all other terms, implied or expressed, of the contract as if no stipulation for credit has been made.”

51.  I do not accept the construction submitted by Mr Lau for Turbo-Knit that this only applies to a situation where it is a cash payment transaction.  The opening words of the condition “on credit against acceptance of draft or bill, (or cheque)…” must mean that the condition is applicable to the situation where the transaction is, as in the present case, based on documentary credit.  The reference to the words “paid for in cash” in my view only refers to the time when Whole Light in fact receives payment (and thus cash) under the documentary credit.

52.  However, in my view the proper and reasonable construction of Condition 11, in particular in applying the contra proferentem rule given that the clause is a standard condition drafted by Whole Light, is that it is only applicable to the situation where the non payment by the customer is not caused by Whole Light’s very default or breach of the contract it seeks to be exempted by this condition.  If construed otherwise, this condition would become oppressive and wholly unreasonable.  For example, if Whole Light fails to deliver the goods under a contract which is to be paid for by way of a letter of credit, of course it would not be able to obtain payment, but it cannot be right that it would then not be regarded in breach of the contract unless and until it is in fact paid (for delivering nothing). 

53.  With the above construction of Condition 11, it again does not apply in the present case.  The withholding of payment of the two outstanding invoices by Turbo-Knit is a result of the parties’ dispute on the proper amount of deductions that should be given to Turbo-Knit in light of Whole Light’s various breaches of the sales contract.  As such, it is not open to Whole Light to rely on Condition 10 now and say that there are no such subject matter breaches given that it has not be fully paid by Turbo-Knit.

Defective yarns

54.  Turbo-Knit’s pleaded case of defect is that (a) 2,632.00 lbs of the dyed yarns were coarse and stained, (b) 472.50 lbs were stained and (c) 192.80 lbs were seriously watery or damped.  

55.  It is common ground that Turbo-Knit had already settled the purchase price of these dyed yarns, which were covered by Whole Light’s invoice.  Turbo-Knit now claims for the return of the purchase price for these dyed yarns and HK$4,236.00 as the wasted cost for its processing of 472.50lbs of the stained dyed yarns into knitted panel.

56.  It is also undisputed that Turbo-Knit had returned 2,632 lbs of the dyed yarns to Whole Light, and Whole Light had replaced the same with 2,557.50 lbs new dyed yarns.  Whole Light however says it replaced the dyed yarn out of goodwill only but not accepting that they were defective.  Further, Whole Light refused to replace the 427.50lbs of dyed yarn on the basis that they had been made into knitted panel.

57.  Mr Arthur Wong for Whole Lights confirms to this Court that Whole Light is prepared to deduct HK$856.75 from its claimed sum to give credit for the shortfall of 74.5lbs (2,632lbs - 2557.5lbs) between the accepted returned yarns and the replaced yarns.

58.  Mr Ng’s evidence is that Turbo-Knit had informed Whole Light about the defects found in these dyed yarns.  Mr Wong had inspected the same and agreed to replace them.  Further, they had further agreed that Turbo-Knit was entitled to deduct the purchase price already paid for these defective goods from the subsequent invoices while Whole Light would separately issue a new invoice for the price of the replaced yarns.  This invoice is numbered 0600EX and dated 31 June 2006, and was faxed to Turbo-Knit.

59.  Mr Wong says in evidence that although he had gone to inspect the alleged defective yarns, but he did not agree that they were defective.   However, given that the quantity complained of was not large, and after obtaining approval by Mr Suen, he agreed to replace them (except the 427.50 lbs which had already been made into knitted panel) out of goodwill only.  He denies that there was an agreement that Turbo-Knit was entitled to deduct the entire paid purchase price for these yarns from subsequent invoices, while Whole Light would issue a new invoice for the price of the 2557.50 lbs of replaced yarns.

60.  Mr Suen also gives evidence that the invoice 0600EX was never sent and it was created for the purpose of internal record between Whole Light and its associate company, Polytech, which provided the replaced yarns to Whole Light.

61.  Given Whole Light’s acceptance that it would give credit to Turbo-Knit for the shortfall of 74.5lbs of yarns, I do not find it necessary to decide on the alleged agreement that there should first be a refund of the price paid for the return yarns through deduction from subsequent deliveries, while Turbo-Knit had to separately pay for the replaced yarns of 2,557.50 lbs under a new invoice to be issued.  This is so because even if there was the agreement, the net effect would have the same, that is, Whole Light would have to refund HK$856.75 to Turbo-Knit (2,632lbs x $11.50 – 2,557.50 x HK$11.50).

62.  In relation to the question as to whether the 2,632 lbs and 427.50lbs of yarns were defective because of staining, after assessing the evidence as a whole, I prefer Mr Ng’s evidence to that of Mr Wong because:

(1)     The contemporaneous evidence of an email dated 5 May 2006 supports Mr Ng’s evidence.  This was sent by Turbo-Knit’s staff to Mr Wong informing him that certain of the dyed yarns delivered were found to have widespread staining of mould.  It then asked Mr Wong to send someone to the factory to verify and discuss the way to deal with it.

(2)     The fact that Whole Light replaced the yarns is more consistent with the fact that they were stained.

(3)     Also for the reasons mentioned above in paragraph 28, I find Mr Wong not a reliable witness.

63.  On the other hand, I accept Mr Arthur Wong’s submission that Turbo-Knit has failed to prove the quantum of the alleged wasted cost of HK$4236.20 in making the 427.50 lbs of stained yarns into knitted panel.  It has not produced any evidence other than a bare assertion to support this costs.  However, when asked, Mr Ng again says he has no personal knowledge as to how this sum is arrived at.  As such, there is simply no reliable evidence to support the same.

64.  In relation to the 192.80 lbs of yarns said to be defective being watery or dampened, Mr Ng’s evidence is as follows:

(1)     By an email dated 4 May 2006 sent by Turbo-Knit to Mr Wong, Whole Light was informed that because of the excessive dampness (measured against the European Community standards) found in some of the dyed yarns, there should be a deduction of 482lbs from the delivered quantity.

(2)     After inspection by Mr Wong at the factory, it was agreed between the parties that Turbo-Knit was entitled to deduct 40% of the 482 lbs (that is 192.80lbs) from the delivered yarns for the actual quantify of goods having been delivered to Turbo-Knit.

65.  Mr Wong and Mr Suen deny that the yarns were defective for being too moist.  They say there had never been any agreement between Turbo-Knit and Whole Light that the yarns had to be in compliance with the so-called European Community, something which they say they do not know what it means.  Further, Mr Wong says he had gone to look at the yarns, but he did not agree they were defective as alleged and did not make any agreement for deduction.

66.  I prefer Mr Ng’s evidence to that of Mr Wong and Mr Suen:

(1)     It is marked on Turbo-Knit’s email with a handwritten scribble saying the 482lbs be counted with 40% “40%計”.  Mr Ng says this was written down when it was negotiated and agreed with Mr Wong at the factory.  This part of the evidence has not be validly challenged or rebutted.  I accept it.

(2)     Further, in reply to Turbo-Knit’s above email dated 4 May 2006, Mr Wong by his fax dated 5 May 2006 stated that both parties had not previously agreed that the dyed yarns should comply with the European Community’s standard.  As such, before the inspection of the goods by its staff, Whole Light “for the time being” would not accept the deduction of the water weight. 

(3)     However, there is no further letter coming from Whole Light after the inspection (which did take place as accepted by Mr Wong) to say that it still did not accept the deduction. In the circumstances and in light of the evidence of Turbo-Knit’s email with the handwritten note as set out above, I find it inherently more likely than not that Mr Wong did confirm after the inspection that Turbo-Knit was entitled to deduct 40% of the 482lbs from the delivered quantity of the dyed yarns.  Had it been otherwise, Mr Wong should have written back to insist that there was nothing wrong with the yarns and there should be no deduction of weight.

67.  For the above reasons, I find that, on a balance of probabilities:

(1)     The returned dyed yarns of 2,632 lbs were defective as being stained with mould, which were replaced by 2,557.50 lbs of dyed yarns.  As such, Turbo-Knit is entitled to be repaid HK$856.75 for the shortfall of the returned yarns.

(2)     The 427.50 lbs of yarns were also defective being stained with mould.  However, Turbo-Knit has failed to prove the quantum of loss, and thus is prima facie entitled only to nominal damages of HK$100.00.

(3)     Whole Light through Mr Wong has agreed to the deduction of 192.80 lbs from the delivered quantity of yarns to account for the excessive watery contents of some of the yarns.  As such, Turbo-Knit is prima facie entitled to the refund of HK$2,217.20 (192.80 x HK$11.50) as overpaid price.

Could Whole Light rely on the terms of sales contract to avoid liability

68.  By way of its Re-Re-Amended Reply and Defence to Counterclaim, Whole Light seeks to rely on Conditions 4 and 5 of the sales contract to avoid any liability flowing from the defective yarns.  Conditions 4 and 5 provide as follows:

“4. No claim in respect of the goods under this contract shall be made against [Whole Light] unless it be made in writing within seven days after delivery; nor shall any claim be made by [Turbo-Knit] after the goods have been removed from the place of delivery or have been processed.”

“5. All shades of colour, descriptions, counts, twists, qualities, dimensions, weights and packings are only approximately exact and [Whole Light] shall be under no liability for compensation, allowance or otherwise, if the goods are not of the exact shades of colour, description, counts, twists, qualities, dimensions, weights and packings stipulated for.”

69.  I do no think Whole Light can rely on the first limb of Condition 4, since the above various emails sent out by Turbo-Knit show that claims for defective yarns had been made by Turbo-Knit within seven days after the respective delivery of the yarns.

70.  However, insofar as it says that no claim shall be made by Turbo-Knit if the yarns had been removed from the place of delivery (i.e., Turbo-Knit’s factory) or had been processed, I accept that it applies to the claim for the wasted costs of 427.50 lbs of dyed yarns, since they had been processed.  However, given my ruling above that Turbo-Knit has failed to prove the alleged quantum under this head, all it means is that Turbo-Knit is not entitled to the HK$100.00 nominal damages.

71.  Insofar as Condition 5 is concerned, in my view on a proper construction, it only applies to exclude liability where there is only an insignificant and minor deviation (and hence the use of the word “exact”) in quality or weight of the goods compared with the described ones.  This is however not the case in the present dispute.  As I have found above, the staining and the difference in weights due to excessive moisture cannot be described as insignificant or minor.  As such this condition also does not assist Whole Light to avoid its liability for the defective yarns.

Overstated delivery

72.  Turbo-Knit’s case is that Whole Light has overstated the delivery of a total of 505lbs of dyed yarns in its various delivery notes when measured against the actual delivered weight.  This is supported by the handwritten corrections made by Turbo-Knit’s staff in various delivery notes.  Turbo-Knit says these corrections had been agreed upon by Whole Light.

73.  Mr Wong in evidence accepts that from time to time, after the delivered dyed yarns were weighed by Turbo-Knit’s staff (sometime on the site if the goods were delivered to the factory in the Mainland, and sometimes later if the goods were delivered to Turbo-Knit’s Hong Kong office first), Turbo-Knit staff would mark the corrected weight on the delivery notes if they found that there was a difference between the stated weight and the weighed one.  The corrected delivered notes would then be provided or faxed to Whole Light.  If Whole Light disagreed, he or his colleague would go to the factory to verify the weight together with Turbo-Knit’s staff to come up with an agreed weight.

74.  When he is asked under cross-examination whether he accepts that Whole Light had agreed the 505lbs corrections, Mr Wong disagrees.  He says he has doubts about the corrections made on these delivery notes and they might not be correct.  After being given some time to look over all the delivery notes, he identifies specifically two delivery notes respectively dated 25 April and 26 April 2006 with numbers 0045199 and 0045561[3] which he says there was no agreement on the corrected weights marked on them.

75.  However, Mr Wong’s evidence is completely contradicted by the fact that, these corrected weights were in fact accepted by Whole Light with the amendments made to the invoices issued covering the yarns delivered under these two delivery notes.  These invoices had been settled after the accepted amendments. 

76.  In the circumstances, I reject Mr Wong’s evidence as unreliable and accept Turbo-Knit’s evidence.  I thus find that the actual delivered quantities of the dyed yarns were 505lbs less than what had been stated in the various delivery notes.  As such Turbo-Knit is prima facie entitled to the refund of HK$5,807.50.

Could Whole Light rely on the terms of the sales contract to avoid any liability

77.  By way of its Re-Re-Amended Reply and Defence to Counterclaim, Whole Light seeks to rely on Conditions 4 and 5 to avoid liability for the overstated delivery quantity.

78.  For the same reasons set out in paragraphs 69 and 71 above, I do not find these conditions applicable to the present case.  The time bar under Condition 4 does not apply as there are corrections made by Turbo-Knit’s staff on the delivery notes to mark its objection either promptly or shortly after the deliveries. Further, the discrepancy between the actual and stated delivered quantity of the yarns cannot be regarded as minor or insignificant, as such, Condition 5 also does not apply.   Whole Light cannot not rely on these conditions to avoid liability under this head.

Was there the settlement agreement

79.  By a note dated 10 July 2006 and faxed to Mr Wong by Mr Ng, it was stated therein that there should be a total deduction of HK$62,348.45 by reason of the delay in delivery, short delivery as well as stained and excess moisture contents of the dyed yarns.  The deductions were broken down as follows:

(1)     Delayed delivery causing embroidery surcharge fee: HK$2,0784.00.

(2)     Dyed yarns having excess moisture contents: 198lbs x HK$11.5 = HK$2217.20.

(3)     Shortfall in the weight of delivered yarns:  317lbs x HK$11.5 = HK$3645.50.

(4)     Returned stained white colour yarns: 472.5 lbs x HK$11.5 = HK$5433.75.

(5)     Returned defective yarns:  2632 lbs x HK$11.5 = HK$30,268.00.

80.  Mr Ng says in evidence that he had asked Mr Wong to sign the note back to signify Whole Light’s agreement to these deductions.  The note was in fact signed by Mr Wong and returned to Mr Ng on about 15 July 2006.  

81.  By way of its Amended Defence and Counterclaim, Turbo-Knit pleaded this as a settlement agreement to compromise the various complaints made by Turbo-Knit.   At the end of the trial during closing submissions, Turbo-Knit further re-re-amended (with leave of the Court) the pleading to plead an alternative case that the agreement records the agreed deductions between the parties without prejudice to Turbo-Knit’s claim for further losses arising from the various complaints.

82.  Mr Wong says in evidence he signed back the note solely for the purpose of acknowledging receipt of it, as requested by Mr Ng.  He would not have agreed to the contents of the note since there were items that he had not even heard of and, at that time, Mr Suen had already told him that the matter had been passed on to Whole Light’s solicitors to handle. 

83.  Mr Suen gives evidence confirming the same and says he had never approved the deductions nor asked Mr Wong to sign it back even for acknowledgment purpose.  The fact is that Whole Light had in July already engaged solicitors to chase for the outstanding sum under the two invoices.  A chaser letter issued by it to Turbo-Knit dated 4 July 2006 supports this.  This letter stated that if Turbo-Knit failed to settle the outstanding sum within 3 days, Whole Light would commence legal proceedings without further notice.  Further, on the copy of this letter before the Court, it shows that the letter was faxed to Whole Light’s solicitors on 10 July 2006.

84.  I accept Mr Ng’s evidence that, in signing the note, Mr Wong confirmed the acceptance of the deductions set out in it instead of merely to acknowledge its receipt.  I come to this view because:

(1)     The signing of the note without any qualification is prima facie consistent with the acceptance by Mr Wong of the matters stated in it.

(2)     Further, when asked by me, Mr Wong accepts that, with his experience as a sales manager and staff, when he signs or is asked to sign something, it is usually to confirm the agreement or acceptance of the contents therein.   As such, it is incredible that he would only be signing the note without any qualification if he were only to acknowledge its receipt.  This is particularly so given their^[4]own evidence that Whole Light at that time had already engaged solicitors to advise on the matter.

85.  Mr Arthur Wong for Whole Light however submits the position that the signature was only intended to acknowledge receipt of the note as requested by Mr Ng is supported by Turbo-Knit’s reply letter dated 24 July 2006 to Whole Light’s solicitors, after the writ of the present action had been served on it.  This is so because in this reply letter, Turbo-Knit did not refer to this note or any settlement agreement at all.  It even further offered to settle the claim with a sum of HK$117,500.05.

86.  I do not agree with Mr Arthur Wong’s submission that this reply letter is inconsistent with the position that Mr Wong had accepted contents of note.  In the calculations of the offered sum of HK$117,550.05 attached to this reply letter, they show that Turbo-Knit had taken into account a deduction of the sum of HK$62,348.45, the very total figure set out in the note signed by Mr Wong.   It is thus consistent with Turbo-Knit’s case that Whole Light had by then already agreed to this sum of deduction.

87.  Although in the calculations, Turbo-Knit seeks to include a further deduction of HK$908.50, this in my view does not therefore show that it did not regard the HK$62.348.45 deduction set out in the note having been already accepted by Mr Wong.  The claim for a further reduction of HK$908.50 is consistent with Mr Ng’s explanation (which I accept) that, when Turbo-Knit later found out that there was a further sum it had incurred by reason of Whole Light’s default, it wanted to include the additional item in the formula.  Turbo-Knot might believe it was still entitled to add the item, but it does not follow that the deductions set out in the note had not been already accepted by Mr Wong by signing it.

88.  I also accept Mr Ng’s evidence that, after the receipt of the signed note on 15 July 2006, Turbo-Knit proceeded to prepare for the payment of Whole Light’s two invoices which would usually take ten days or so complete.  But before that was done, Turbo-Knot had already received the writ issued by Whole Light and thus it issued the reply letter dated 24 July 2006 seeking Whole Light’s confirmation to settle the dispute with the offered payment, which did not come into fruition.  As a result, no payment was made by Turbo-Knit in light of the litigation.

89.  The next question is whether Mr Wong had actual authority to sign the note for acceptance, and if not, whether he had the apparent authority to do so.

90.  In my judgment he had:

(1)     It is Mr Wong and Mr Suen’s own evidence that Mr Wong would not agree anything important on behalf of Whole Light unless he had the approval of Mr Suen. In the premises, given that Mr Wong in fact signed the note, in my view he would only do so with the actual approval of Mr Suen.  I therefore so find.

(2)     Further and in any event, in answer to my question, Mr Wong accepts that in his dealing with Mr Ng, it would have been fair for Mr Ng to assume that Mr Wong would have obtained all the necessary approval from his boss when he agreed.  Moreover, it is common ground that Mr Suen had met Mr Ng at least once together with Mr Wong, and then subsequently all the dealings were again conducted by Mr Wong alone with Mr Ng.  In light of this evidence, I find that Mr Wong had the apparent authority to sign and agree to the note on behalf of Whole Light as Mr Ng was justified and entitled to assume that Mr Wong had so obtained the approval from Mr Suen for Whole Light. Cf:  Bowstead & Reynolds on Agency (17th ed), para 8-023.

91.  The final question is thus whether the signed note amounts to a settlement agreement to compromise all of Turbo-Knit’s claims, or only an agreement between the parties on the deductions based on the information available at that time.

92.  A settlement agreement has to be clear and definite to show that the parties have come to an agreement supported by consideration to compromise their disputes in the terms as agreed.  See generally:  Foskett, The Law and Practice of Compromise (6^th ed), paras 3-01 – 3-22.

93.  After looking at the evidence as a whole, I find that the note signed by Mr Wong amounts to a settlement agreement between the parties at that time to settle the dispute between Whole Light’s demand for payment for the two invoice and Turbo-Knit’s claims for deductions under various complaints.  My reasons are as follows:

(1)     It is clear that before the signing of the note, the parties were engaged in a dispute as to what the exact amount should be paid by Turbo-Knit for the yarns received: Whole Light was chasing Turbo-Knit for payment of the two outstanding invoices, while Turbo-Knit was negotiating with Turbo-Knit for confirmation on various deductions it sought to make against the payments. 

(2)     In my view, other than to facilitate the finalization of the payment of the two invoices by taking into account all potential deductions to be agreed, there could be no good reasons why the note was sent to Mr Wong and for Mr Wong to have agreed to it soon after the receipt of Whole Light’s chaser letter dated 4 July 2006.

(3)     In light of the above evidence, the objective and obvious intention of the parties in preparing and signing the note is to record the agreement between them that Turbo-Knit would proceed to settle the dispute in relation to the payment of the two invoices with the agreed deduction, and that neither Whole Light nor Turbo-Knit should claim anything further respectively under the two invoices and for alleged losses suffered by reason of Whole Light’s various alleged breaches.  This is supported by Mr Ng’s own evidence (which I have accepted) that after the receipt of the signed note, he instructed the accounts department of Turbo-Knit to prepare the payment of the two invoices with the deductions.

(4)     The mere fact that perhaps both parties wanted to renege on this (Whole Light in suing for the entire sum under the two invoices and Turbo-Knit seeking to include a further item of deduction) does not change the fact there had been already a settlement agreement reached: cf The Law and Practice of Compromise, supra, para 3-22 at page 25.

94.  For the above reasons, I find on a balance of probabilities the following:

(1)     Mr Wong signed the note dated 10 July 2006 on 15 July 2006 to signify Whole Light’s agreement to Turbo-Knit’s various suggested deductions set out in it.    Mr Wong signed it with the actual or apparent authority of Whole Light through Mr Suen.

(2)     This agreement is a settlement agreement between the parties settling their disputes on the payment of Whole Light’s two outstanding invoices and Turbo-Knit’s claim for losses suffered as a result of Whole Light’s alleged breaches of the sales contract.

95.  If I were wrong in my above finding for the settlement agreement, I would have found that the note having signed and agreed by Mr Wong for Whole Light represents a record between the parties of the agreed deductions that Turbo-Knit was entitled to make against the outstanding purchase price due to Whole Light.

Conclusion

96.  In summary, I find that:

(1)     Whole Light was in breach of the sales contract in (a) making late delivery beyond 30 April and 10 May 2006, (b) delivering certain quantity of defective dyed yarns which were stained with mould or having excessive moisture, and (c) overstating in some of the delivery notes the quantity of dyed yarns delivered to Turbo-Knit.

(2)     Whole Light is entitled to rely on Condition 4 to exclude its liability for its breach of the sales contract in delivering 427.50 lbs of defective yarns, which had been processed into knitted panel by Turbo-Knit. 

(3)     Given (2) above, Turbo-Knit has proved the following quantum of damages suffered as a result of Whole Light’s breaches:

	(a)	HK$20,784.00 and HK$1,000.00 for the late deliveries.
	(b)	HK$856.75 and HK$2,127.60 for the defective yarns.
	(c)	HK$5,807.50 for overstated delivery.

(4)     Whole Light and Turbo-Knit entered into a settlement agreement on about 15 July 2006, whereby Whole Light agreed to Turbo-Knit’s deduction of HK$62,348.45 from the two invoices to settle the potential claim to be made by Turbo-Knit for Whole Light’s above breaches of the sales contract.

97.  In the circumstances, taking into account of Turbo-Knit’s proved counterclaimed sum of HK$62,348.45, I grant judgment in favour of Whole Light in the sum of HK$117,551.80 (being HK$180,757.00 – HK$62,348.45 - HK$856.75).  Turbo-Knit shall also pay Whole Light interest on this sum at the rate of 1% above the prime rate as from time to time quoted by the Hong Kong and Shanghai Bank Ltd from the date of the writ to the date of judgment, and thereafter at judgment rate until full payment.

Costs

98.  Although Whole Light obtains substantial judgment against Turbo-Knit, it has lost most of the issues before the Court raised by the defence and counterclaim.  Given that most of the time of the trial and evidence has been spent on these issues won by Turbo-Knit, and given that Turbo-Knit’s counterclaim is the flip-side of its defence, having regard to all the circumstances, I think it is only just and fair to grant an Order nisi that 50% of Whole Light’s costs of the action be paid by Turbo-Knit to be taxed if not agreed, with certificate for counsel.  This order would be made absolute 14 days from the date of judgment unless any of the parties applies to vary it.  

[1] Numvered respectively 0500EX and 0500EX2.

[2] In relation to this, I do not think it is necessary for me to find for other terms of the sales contract for the reasons set out under each of the issues in the judgment.

[3] These two delivery notes in fact do not relate to the 505lbs corrections.

[4] Mr Wong and Mr Suen’s evidence.