XCHRX WONG SHING CHEONG v. VISAGE (HONG KONG) LTD.

HCA13472/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13472 OF 1998

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J U D G M E N T

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1. This is an appeal against a decision by Master Jones who on 15th April 1999 on an application by the Plaintiff for final judgment to be entered pursuant to Order 14 Cap.4 made an order for interlocutory judgment against the Defendant with damages to be assessed.

2. The claim is for damages for non-payment of garments manufactured by the Plaintiff for the Defendant. The agreement, signed on 26th January 1998 was for two orders for ladies clothing. Each order contained two batches of goods. The first batch was inspected, accepted, shipped and ultimately paid for. However, the second batch never left the factory and has not been paid for.

3. The reason the second batch never left the factory, according to the Defence and Counterclaim, was that the goods in the first batch were defective or of unmerchantable quality and that the Defendant was therefore entitled to treat the contracts as having been repudiated and refuse to accept the second batch.

4. The Plaintiff says that the learned Master was right to enter interlocutory judgment because of the sequence of events. They say that an examination of the chronology of events reveals that the Defendant's rejection of the first batch of goods on the ground of defects was after the batch had been inspected and approved by the Defendant Company. Their case really hinges on one set of documents.

5. On 19th May 1998 an independent firm called Etam Merchandizing Pte Ltd inspected the first batch prior to shipment from Cambodia. As this was a standard FOB contract for sale of goods emanating from Cambodia the property in the goods would pass to the buyer once the goods left Cambodia. As to the circumstances of the inspection there was some dispute as to the thoroughness of it but this is academic, the Plaintiff says, because the inspection resulted in the goods being "approved" and the Defendant Company subsequently signed a document which certified that the goods had been approved and were ready for shipment. The precise words of the certificate being :-

"This is to certify that the above goods have been approved by manager of Visage (Hong Kong) Limited and shipment of same may now be arranged."

It is signed by the Defendant Company's manager.

6. This was one of the necessary documents for the operation of the Letter of Credit. This first batch was then duly dispatched, delivered, distributed and ultimately paid for.

7. The Defendant says that, in fact, the goods in the first batch were defective. They further rely on the second and third paragraphs in the Inspection Certificate which read :-

"As we have been unable to carry out a full on-site inspection of the goods, any shortage or defect subsequently found will be the responsibility of the manufacturer.

The issue of this certificate does not prejudice our rights, or release the manufacturer from his obligations, in respect of any claim arising from a breach in the terms of the contract entered into with ourselves."

8. They then refer to some correspondence from retailers in the United Kingdom criticising the quality of the goods.

9. The first complaint comes from a firm called Visage (Imports) Ltd. It seems that this company was the United Kingdom purchaser. They are not the Defendant. The correspondence by fax from this and other sub-purchasers begins in June 1998. It is clear that such complaints as there are relate not to the quality of the goods in the first batch itself, but to the samples which had been distributed earlier. At the time the sub-purchaser and the sub-sub purchasers made their complaints the first batch had been inspected, approved and dispatched and was on the high seas heading for England. The Plaintiff argues, with some force, that any disputes between the United Kingdom arm of the Defendant Company and its customers is no concern of theirs, once the Defendant Company had authorized the Letter of Credit by approving the goods for dispatch. Both the letters themselves and common sense suggest that the goods themselves did not arrive in England until August or September.

10. It is the non-payment for the second batch which is the subject of the claim. Presumably, because of the difficulties encountered with the first batch the Defendant never gave the Plaintiff the necessary instructions about the different colours for the dyeing process. For the likely reason behind this the Plaintiff points to the final paragraph in the fax from the United Kingdom company to the Defendant Company on 15th June 1998 :-

"I have tried to sell all the Chung Cheung goods for Autumn but my buyers just don't want them, even if I change the colours. Please ask the factory to help us out by trying to sell these to someone else. That way we can all lose less money and try again to make it up for Spring 1999.

Best Regards,"

11. This was the start of the Defendant's attempt to cancel the second batch.

12. On 18th April 1998 the Defendant had written to the Plaintiff asking them to refrain from dyeing the garments because it wanted to amend the colours. However no further instructions were ever given. The Letter of Credit expired on 14th July and the Plaintiff was left with the completed, albeit undyed, goods. The Defendant attempted to negotiate a 50% discount but this was rejected and proceedings were commenced on 11th August. The commencement of proceedings amounted to the Plaintiff's acceptance of the Defendant repudiatory breach which was also communicated to them by letter from the Plaintiff's solicitors on 12th August. There was no response.

13. The Plaintiff plainly has a strong case. However, for the two following reasons I have come to the conclusion that the Defendant should not be shut out from arguing their case on liability at this stage.

14. Firstly, the Plaintiff's case in the Order 14 proceedings rests almost entirely on the effect of the Inspection Certificate. In my judgment the legal consequences of the whole of that document are at least arguable. The Plaintiff says that the second and third paragraphs, which favour the Defence case, can be safely ignored. The Defendant says they should be given the opportunity of arguing to the contrary. There are disputes of both fact and law which although are far from evenly balanced are nevertheless triable issues.

15. Secondly, the Defendant have pleaded a counterclaim. It is true that the mere fact that a counterclaim is made does not necessarily entitle the Defence to leave to defend. However, where a bona fide counterclaim arising out of the same subject matter and connected with the Defence is set up, leave to defend will normally follow. The Plaintiff says that the Counterclaim is not bona fide. In my judgment, on an appraisal of the affirmations, it is difficult to conclude with confidence that the Counterclaim is plainly not bona fide.

16. Overall, it is a case in which the words of Godfrey JA on Strong Base Services Ltd. v. Geroma Electronic Ltd. & anor. [1996] 2 HKC 94 are appropriate :-

" For myself, I have no doubt that this is a genuine commercial dispute. Although there are a number of odd and, indeed, suspicious features, about the first defendant's case, the allegation made by the plaintiff that it is obviously a cock and bull story, and practically moonshine (an allegation which the plaintiff has to make in order to succeed in this appeal) seems to me to be an allegation which is simply not made out on the material before us. There is material which justifies some suspicion as to the first defendant's case, but nowhere near sufficient for us to hold that the first defendant is to be sent away from the seat of judgment without being given the opportunity to defend itself at a trial."

17. I have further come to the conclusion (after considerable deliberation, which explains why this decision is being handed down about a week later than I originally indicated to the parties) that this is an appropriate case in which to make the leave to defend conditional. There is no clearly defined test to be applied when deciding if leave should be conditional. The quotations from earlier authorities which best fit this court's approach to the question are "where the court is prepared very nearly to give judgment for Plaintiff" and "the case is almost one in which summary judgment should be entered". However, it is not impossible that the merits of the case, as ultimately decided by the trial judge, could result in an outcome more favourable to the Defendant than could be achieved by the learned Master's order entering interlocutory judgment with damages to be assessed.

18. I therefore allow the appeal to the extent that leave to defend is granted conditionally on the full sum claimed being paid into court within 21 days. These are not circumstances in which costs should follow the event. The order nisi I make for costs of this appeal is that they be in the cause.