HIP SHUN POLYBAGS MANUFACTORY LTD v. KWONG FAT OFF-SET PRINTING CO LTD

HCA1887/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1887 OF 2005

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J U D G M E N T

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1. The plaintiff manufactured and supplied “OPP” bags (oriented polypropolene) to the defendant.  The defendant was a manufacturer of greeting cards.  OPP is similar to cellophane and each greeting card was to be inserted into an OPP bag to protect it, keep it clean and make it look more elegant.

2. The defendant had a customer in England, “Kingsley”.  This litigation concerns six consignments of cards which were sent to England.  All the cards had been put into the plaintiff’s OPP bags.  The problem which emerged and which is at the heart of this litigation is that when the bags arrived in England they had become badly “wrinkled”.  Examples were produced in court.  The appearance of the bags is not disputed.  They were described as “looking like orange peel”.  The “wrinkling” or “buckling” of the OPP bag certainly made them look cheap.  It is true that, despite its wrinkled appearance, it still continued to protect the card inside and keep it clean but, because of its appearance, Kingsley, not surprisingly, rejected the first consignment.  I accept that they were not acceptable.  The plaintiff’s first contention was that the purpose for which they were intended was only to protect and keep clean, therefore, the wrinkling was irrelevant.  Having seen the exhibits and having heard the evidence, I find that the card and bag as received by Kingsley was not of merchantable quality.  It had been rendered an ugly and cheap looking product, unfit to be put of the shelves for sale.  Kingsley had reasonably expected a clean, smooth and elegant wrapping for the cards it had contracted to buy from the defendant.

3. This, however, was not the plaintiff’s main argument.  The main issue in the case was — should the plaintiff be held liable for the wrinkling.  Each party called three witnesses as to fact and one expert witness.

The facts

4. The facts and sequence of events, as I find them to be having heard the witnesses, are as follows.

(1)     The OPP bags were made in China and supplied to the defendant’s factory, also in China, where the cards were inserted.

(2)     The “wrinkling” problem first emerged in about June 2004.  Prior to that time the plaintiff and defendant had been doing business since about November 2003.  There had been 58 previous purchase orders which had been satisfactorily completed.

(3)     For the purchase orders which were destined for Kingsley in England the thickness of the bag was to be 30 macrons (0.03 mm).  This was a specific term of Kingsley’s contract with the defendant.  With previous UK suppliers Kingsley had used 19 macrons, but for these cards they specified 30.

(4)     None of the defendant’s previous 58 purchase orders with the plaintiff had been for 30 macrons.  They had all been for a slightly thicker measurement of 40 or 50 macrons.

(5)     The “wrinkling” problem was new.  Kingsley had not experienced it before with its other UK suppliers and the plaintiff and defendant had not experienced it before in any of their 58 previous purchase orders.

(6)     The problem first emerged after a representative from Kingsley had taken a box of wrapped cards back to England.  On arrival in England it was noticed that the bags had become wrinkled.  This was only a matter of a few days after they had left the defendant’s factory when they had been in a good and acceptable condition.  Another small batch was sent by courier.  They too were wrinkled on arrival.  They had not been wrinkled on departure.

(7)     “The 27 June meeting”

As a result of Kingsley’s complaints Mr Gary Li of the plaintiff visited the defendant’s factory in China.  In evidence the versions of that meeting differed.  Where there is conflict I prefer the defendant’s version.  Mr Li said that the bags he saw in the factory were already wrinkled and the defendant, in July 2004, sent them to Kingsley in any event.  They were therefore, so it was submitted, accepted by the defendant.  I accept however Mr Lawrence Wong’s version, for the defendant, that the OPP bags in the first consignment sent to Kingsley by sea were in good condition when they left the factory.  If Mr Li did see any wrinkled bags in the factory on 27 June they may have been some of the bags that had been rejected by Kingsley in June and sent back to the defendant’s factory.  I accept Mr Wong’s evidence that he would not have dispatched any bags to England if they were already wrinkled.

(8)     It is agreed that at the 27 June meeting Mr Li opined that a cause of the wrinkling could be a chemical reaction between the OPP material and the ink used in the manufacture of the cards.  This was no more than a theory.  It was suggested that if a sheet of OPP or cellophane was inserted into every bag it might solve the problem.

(9)     In the event, the defendant did not have the time or the cellophane sheets to take up this suggestion before the first consignment was dispatched to England in early July.

(10)    Mr Li had persuaded Mr Wong to send the first consignment as it was.  Mr Li denied that he “guaranteed” the cards would arrive in England unwrinkled.  I accept that he did not use the word “guarantee” but I am sure he persuaded Mr Wong to dispatch them in the hope that they would arrive in good condition and that he gave assurances to that effect as part of his persuasion.

(11)    The cards arrived in late July, badly wrinkled, and were rejected by Kingsley.  Kingsley accepted the cards but rejected the OPP bags.  They had them all repacked into OPP bags supplied by a UK supplier.

(12)    As for the remaining five consignments the defendant did have the time and resources to take up the suggestion of a cellophane insert.  This was done at the defendant’s expense.  Time became critical for two small orders which, as a result, were sent by air — also at the defendant’s expense.

(13)    Consignments 2-6 inclusive all had wrinkling problems on arrival in UK.  However, the wrinkling was not nearly as bad and so Kingsley decided, reluctantly, to accept them.  They were all passed on to Kingsley’s customers and duly went into the market place.

(14)    I am satisfied that, at least by the time of the 27 June meeting, if not before, the plaintiff knew that the OPP bags were destined for England.  The plaintiff knew that the wrinkling problem had been raised by the UK customer.  Mr Li further conceded, at trial, that the wrinkling, as exhibited on the cards produced, was unacceptable.

(15)    It was further a fact that the OPP bags actually supplied by the plaintiff were marginally thinner than the 30 macrons specified in the Kingsley’s contract.  They were 28 macrons.  I do not think it relevant to the “wrinkling” problem.  Strictly speaking the plaintiff did not supply the specification as requested.  However, I do not believe they would have been rejected on this ground alone and neither do I think that the difference of 2 macrons is causative to the wrinkling problem.

(16)    “The 27 October 2004 meeting”

Again, the evidence about this meeting differs.  Again, I prefer the defendant’s version.  Mr Li of the plaintiff said it was not “a meeting” in the sense of a pre-arranged meeting.  He said he simply went, unannounced, to the defendant’s Hong Kong offices to demand payment.  It was nothing to do with the wrinkling problem for which he had always denied liability.  Mr Li said that as a result of the meeting Mr Wong promised to pay all the outstanding invoices (namely for all the Kingsley’s orders and others which were outstanding).  Mr Wong on the other hand said the meeting was convened to discuss the wrinkling problem.  I accept Mr Wong’s version because :

(i)       The defendant made and kept a written minute of the meeting which is consistent with their version of it.  It is unlikely that there would be a minute of an “unannounced” meeting.

(ii)      The plaintiff brought a Mr Yim to the meeting.  Mr Yim was the plaintiff’s quality controller from its factory in China.  If the sole purpose of going unannounced to the defendant’s Hong Kong office was to collect money there would be no need for Mr Yim to come from China to attend.  Mr Li’s explanation that Mr Yim happened to be in Hong Kong at the time and provided the transport did not ring true.

(iii)     It is highly improbable that Mr Wong suddenly agreed to pay, in full, all the Kingsley orders.  By this time Kingsley had mounted a substantial claim against the defendant for the costs and damages flowing from the rejected first consignment.  I am satisfied that Mr Wong agreed to pay all outstanding invoices, except the Kingsley orders.  As the written minutes suggest expert advice was going to be sought about the wrinkling problem.

(17)    None of the six consignments have been paid for.  The total claim of the plaintiff is $251,002.54.  In my judgment, as consignments 2-6 were, in fact, accepted, entered the UK market and, presumably, were sold to the public, there must be judgment for the plaintiff in their claim for those consignments.  The value of consignments 2-6 inclusive is $195,641.61.  The balance of $55,360.93 is the cost of the first consignment which was rejected.

Counterclaim

5. The major part of the trial was concerned with the defendant’s counterclaim.  The counterclaim stemmed from Kingsley’s rejection of the first consignment.  The damages claimed were as follows :

(a)	the cost of buying and inserting cellophane sheets in consignments 2-6	$457,280.72
(b)	the cost of air freighting two small orders which had been delayed because of the insertion of the cellophane sheets	$210,764.45
(c)	reimbursement to Kingsley for the costs of re-packing consignment number 1 after it had been rejected in the UK	$723,504.07

6. The plaintiff was not in a position to contest the quantum of the above figures.  It was therefore a question of liability only.  The question is — has the defendant proved that the wrinkling was due to defective goods having been supplied by the plaintiff.  In order to prove their counterclaim the defendant contended that the plaintiff was in breach of the implied term of “merchantable quality” as provided by section 16(2) of the Sale of Goods Ordinance (and also “fitness for the purpose for which they were intended” provided by section 16(3)).

7. As to the cause of the wrinkles two experts had written reports and were called to give evidence.  Before considering the experts’ evidence a number of matters should be weighed in the balance :

(i) The bags were wrinkle free before they left for England.

(ii) None of the three parties involved had experienced such a wrinkling problem before.

(iii) The defendant had not purchased bags of 30 macrons thickness from the plaintiff before.

(iv) Including the two earlier sample boxes (sent in early June 2004) a total of eight batches were sent to UK on four different aeroplanes and four different ships.  All experienced wrinkling (however, those sent “with inserts” were not as bad as those without inserts).

(v) The first consignment once repacked in England did not re-wrinkle.

(vi)      No complaint was made that the inserted cellophane sheets in consignments 2-6 wrinkled to the same degree that the bags had wrinkled in consignment 1.

Expert evidence

8. The defendant engaged Dr Robert K.Y. Li as its expert witness.  The plaintiff’s expert was Professor Yeung Lam Lung.  Both were impressive and helpful witnesses.

9. Both conducted tests on three samples : PP-W were wrinkled bags from the plaintiff, PP-F were unwrinkled bags from the plaintiff and PP-7 was a control sample from a different supplier.

10. Of the various tests carried out the important one was the DSC study (differential scanning calorimetry).  Wrinkling occurs as a result of molecular rearrangement of the crystals in the material.  All six consignments were packed in the same way (which had hitherto not caused any problems) and had travelled by different transport for different periods of time.  Although neither expert could explain the wrinkling with 100% certainty, ultimately logic demanded that two causes should be considered.  Firstly, that the manufacturing process had been defective such that the finished produce contained too many imperfect crystals which would make it susceptible to wrinkling in the conditions which prevailed during transportation.  Secondly, that some unknown agent in the ink on the greeting cards caused a chemical reaction with the OPP to cause it to wrinkle.

11. Dr Li’s expert opinion was that the wrinkling was due to defective materials (inadequate heat treatment during manufacture) and not to an unknown agent in the ink.  Professor Yeung however, whilst agreeing with Dr Li’s tests, results and conclusions, said that an unknown agent in the ink could cause wrinkling in theory and that he could not absolutely rule it out as a possibility.

12. Dr Li explained :

“From the DSC analysis, it can be concluded that the main cause for the formation of the wrinkle patterns on the PP-W film is due to inadequate heat treatment to the OPP film in its manufacturing.  Under prolonged elevated temperature conditions, which were most likely to be encountered during transportation and shipment of the packaged greeting cards, the thermal energy will encourage those imperfect crystals (the presence of which is observed in the first heating cycle DSC curves shown in Figure 6a) to rearrange themselves in order to achieve the stable crystal form.  During this process, deformation and volume change in the micro-scale will take place.  These micro-scale deformations caused formation of the wrinkle patterns as observed on the PP-W films.

With suitable heat treatment imposed during the PP film manufacturing, the content of the imperfect crystals will be low (or mostly eliminated in the ideal case).  Hence film shrinkage and the related wrinkling of the PP films can be avoided.  In the manufacturing or oriented PP films, it is important to control the heat-treatment to avoid in-service shrinkage.”

13. He discounted the ink theory on the basis that :

“The wrinkled pattern on the PP-W bags was unlikely to be caused by the inks used for the greeting cards for two reasons:

1. PP is well known for its chemical resistance;

2. If the wrinkled pattern on the PP-W bags was caused by the inks, some markings should have left on the interior surface of the bags.  However, no markings were found on the bags.”

14. Moreover, if the ink was the cause of the wrinkling it is highly probable that it would have occurred before.

15. From the layman’s perspective Dr Li’s conclusion also commends itself to comment sense.  For the first time 30 macron bags were supplied to the defendant and sent on a long journey.  There was nothing new in the packing methods, nothing new in the ink on the cards.  The overwhelming probability is that the way they had been manufactured meant that they did not travel well.  Even the bags that went by air became wrinkled (the original samples the more so).  A failure to manufacture an OPP bag capable of surviving a journey to England by either sea or air is a failure for which, in all the circumstances of this case (particularly that the supplier knew the ultimate customer was in England), the plaintiff is liable.

Quantum

 17. There will be judgment on the counterclaim for (1) and (3) which is $457,280.72 + $723,504.07 which is $1,180,784.79.  The price due to the plaintiff for consignments 2-6 may be set off.  The final sum due to the defendant is $985,143.18.  There will be judgment to the defendant in this amount.

Costs

18. This action was commenced in the District Court.  It was transferred to the High Court by consent because the counterclaim exceeded $1 million.  I was informed that there was no other reason for its transfer.  I do not think it should have been transferred.  The provisions which permit it to remain in the District Court should have been applied.

19. I make a costs order nisi to the defendant on the District Court scale.  Should there be any further applications by the parties under the nisi order I encourage them to make them in writing.