KINGDOM INTERNATIONAL CO. (a firm) v. ASHITA INDUSTRIES LTD.

HCA 5831/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5831 OF 1997

____________

____________

______________

J U D G M E N T

______________

1. This is an action for goods sold and delivered. The Plaintiff claims the sum of US$66,597.75 being the balance of the price of garments sold and delivered to the Defendant, at the Defendant's request, during the period from 29th June 1996 to the 19th November 1996. The goods were listed in Invoice No 96-062 dated 12th November 1996 and Invoice No 96-066 dated 19.11.1996. The Plaintiff also claims interest and costs.

2. The Defendant denies it is indebted to the Plaintiff in any way at all. The Defendant counter claims that boys' garments under Purchase Order 500218 dated 29.6.1996 and women's nightgowns under Purchase Order 500231 dated 16th September 1996, did not conform to sample or were defective and that it is entitled to set off losses suffered against the Plaintiff's claim

3. The Defendant says that the Plaintiff was aware at all times that Defendant was selling on to buyers in Egypt and that Defendant is now being sued for losses arising from defects in the garments.

4. By the date of trial, both Plaintiff and Defendant had ceased to be represented by lawyers. The Plaintiff's case was conducted by Miss King, one of the partners of Kingdom International and the Defendant's by Madam Hsu Hsieu Ying, the authorised person from Ashita Industries Ltd., which had obtained consent to be so represented. Each party called two witnesses; the authorised representative in each case and an employee.

5. The Plaintiff company had been operating for 9 years as a garment manufacturer and began doing business with Defendant around 1994. Normally the Plaintiff supplied production samples to the Defendant, or, in some cases, the Defendant would provide samples. After liaison between the parties they would reach agreement about the order and Defendant prepared a contract. The Plaintiff, following contract specifications, would prepare a shipping sample for Defendant. If that was confirmed as suitable, the Plaintiff would commence mass production.

6. Several days before delivery was due, the Plaintiff would inform the Defendant to arrange shipment and examination of the goods. When the goods arrived, Miss Hsu would examine and approve them for shipment. The next day the Plaintiff would send an invoice to be paid by Defendant 30 days from the invoice date. That was agreed by the parties to be the way in which their business was transacted.

7. The goods in the disputed Invoices were part of a Purchase Order C-500218 which covered 42 000 dozen items to be shipped in 7 containers between 15.9.96 and 18.11.96. The Plaintiff received payment for the first 5 deliveries but none for the last 2. The Plaintiff pressed for payment but without result.

8. Finally in January 1997 the Defendant disputed payment of the outstanding invoices by sending to the Plaintiff 2 Survey Reports purporting to show that various garments were made from fabric that was too light in weight to conform with the sample garments. These reports did not relate wholly to items covered by the disputed invoices, but were alleged to relate to goods sent in earlier shipments and reportedly rejected by the Egyptian buyers.

9. The Plaintiff did not dispute the accuracy of the reports but pointed out, correctly, that there had been no fabric weights specified in any of the relevant contracts and that the Defendant had inspected the goods without complaint before shipment.

10. According to the Plaintiff, where the weight of material was important it would be specified in the Purchase Order. The material used was a mixture of polyester and cotton, but the proportion of one to the other varied according to the items made. The invoices in dispute did not specify the weight of the fabric, the only reference to the material was "T/C" which, it was agreed, was the industry shorthand for polyester/cotton fabric. The weight of material was not specified in the Purchase Orders relating to the goods allegedly rejected; again only the T/C reference was used. The material was required to conform with the agreed samples.

11. Although some of the goods appear to have been returned to Hong Kong, there were no documents clarifying why the goods had been returned, or who had returned them. No contract documents relating to the sale of the garments to the Egyptian buyers were produced.

12. There was no dispute that the inspection procedures for the last two shipments had been followed as they had always been, with Miss Hsu inspecting and approving the goods for onward delivery. Miss Hsu employed no sophisticated tests in inspecting the goods. She checked what she referred to as the "hand-feel" of the fabric and her inspection consisted of taking cartons at random from the number to be shipped and inspecting garments within those cartons for defects. She did not choose to inspect the cloth prior to production, or to inspect the goods during the production process, but inspected finished products only. She said that "hand-feel" was sufficient for her to assess the material used. She said she was aware that cloth might become soft after dyeing and, as she had known the Plaintiff for some time, if she encountered any quality problem she would first see if her customer would accept the goods as they were and, if not, would see if the Plaintiff and the Defendant could resolve any problem together.

13. It appears that at some unspecified date Defendant's Egyptian buyers refused to accept part of a shipment and returned goods. The gravamen of this complaint, or complaints, was never substantiated. The fax of complaint was vague in describing the alleged defects and the alleged garments. No documents identified with precision what garments were faulty. There were no survey reports, no documents detailing alleged losses and no documents substantiating the contract between Defendant and its Egyptian buyers. Although Miss Hsu referred to the returned garments as being part of the shipment covered by the disputed invoices this was not substantiated satisfactorily either. It was possible, given the length of time that lapsed before the goods returned to Hong Kong, that some, or all, of the goods had come from orders made in previous years, particularly as some styles were repeated from year to year.

14. Miss Hsu gave evidence that as her client "sued" her she felt the Plaintiff should "share the burden"; however the fact was that Defendant had wholly accepted the goods prior to delivery after an inspection which followed the usual practice. Miss Hsu had some twenty years experience in the garment trade and obviously felt herself capable of doing these inspections. She, if she had wished, could have stipulated in the contract for inspection at any stage prior to, or during, production at the Mainland factory; nor was she prevented from employing a Quality Controller to check the goods on completion of production. Defendant is now complaining about the quality of goods which Miss Hsu had accepted on her buyers' behalf as being up to sample.

15. Miss Hsu said that she had told the Plaintiff from the outset about the importance of the fabric weights required by her buyer, depending on the sample; that was denied by Miss King. She agreed that she had inspected and approved the samples provided by the Plaintiff, but she said that she could not, on discovering problems after production, have stopped delivery because she had a responsibility to her buyers to ensure they had goods to sell. For minor quality problems she could ask the Plaintiff to improve goods because of the mutual trust between Plaintiff and Defendant at the time. According to Miss Hsu the garments that were rejected by her buyers, eventually had been sold back to Egypt at a much lower price. When asked by the court whether there had been any agreed procedure in respect of faulty garments at the outset of the relationship between Plaintiff and Defendant, Miss Hsu said that it was mutually agreed that production would be under the Plaintiff's charge and the Defendant's task was to inspect the goods before they were loaded in Hong Kong. She agreed it was probably correct that she could have refused to accept unsatisfactory garments prior to shipment. Her clients totally relied on her as the goods were not accepted subject to any inspection on arrival in Egypt, either by the buyer's inspector, or by any inspector appointed by the government. The Egyptian buyers would begin to sell the goods on receiving the shipping sample. Only if the goods could not be sold would they advise Defendant that quality was unsatisfactory.

16. Miss Hsu made no immediate complaint about the goods to the Plaintiff, despite her alleged knowledge that the goods were being returned. Faxes from Miss Hsu to Miss King in late 1996 indicate that Miss Hsu accepted the quality problem as being between her and her buyers and she sought assistance of the Plaintiff in rectifying the matter on that basis. Her complaints arose only when she realised she had not received money from her buyers and had a cash-flow problem.

17. Having considered the evidence I was satisfied on the balance of probabilities that the Defendant had not paid for the goods in Invoice Nos 96-062 and 96-066 and that the Defendant was not justified in refusing to pay them because of alleged defects in goods shipped earlier.

18. No material weights had been specified for the goods covered by the disputed invoices or, indeed, for any of the goods alleged to be unsatisfactory. All the goods had been examined by Miss Hsu for the Defendant in the manner she ordinarily did. Although Miss Hsu had complained about the unsatisfactory "hand-feel" of goods contained in the very first container, it is significant that she had never stopped any delivery, or refused to accept delivery, despite her alleged dissatisfaction. I did not accept that she was telling the truth about so advising the Plaintiff.

19. The Defendant had been satisfied with the production samples and had ample opportunity to inspect the finished goods which were accepted for delivery without complaint or rejection. No complaint had been communicated to the Plaintiff until January 1997 when the Survey Reports were forwarded. Those results were not disputed, but they are not evidence which shows that those fabric weights failed to comply with contract specifications, or that they differed from the production sample.

20. If, as Miss Hsu claimed, her buyers were dissatisfied with the goods, the fault lies with Defendant as their supplier as who accepted those goods and shipped them. The Defendant could have stipulated the fabric weight in the Purchase Orders, just as it could have refused to accept the goods after inspection if the fabric did not, as claimed, match the sample fabric, or if garments were defective.

Conclusion

21. The Defendant counterclaimed in respect of losses suffered in respect of goods supplied under Purchase Orders 500218, 500235, 500231, 500250 and 500234.

22. P.O. 500235 and 500250 related to alleged claims by Defendant's clients for defective goods. P.O. 500218 related to loss of profits and losses on re-sale. P.O. 500231 was for losses on defective and short-supplied goods. P.O. 500234 related to losses from returned goods.

23. Apart from the allegations in the Defence and Counterclaim there was no evidence put forward by Defendant that substantiated the complaints made about the goods.

24. There was no evidence to support Defendant's claim that its Egyptian buyers were suing for any losses. It may be that the buyer or buyers, returned goods but the reason for their return is unclear. They may have been unsatisfactory to the buyer, but those complaints were not documented, they were not inspected on their return and as there is no evidence as to how they were treated, stored or handled in the 9-11 month period they were away from Hong Kong the Plaintiff cannot be held responsible for their condition. No documents relating to any legal action by the Egyptian buyer were produced by Defendant, although copy letters, purportedly from the Egyptian purchasers, were produced. However, Miss Hsu told the court that she had actually requested these letters from her buyers after the Plaintiff had begun proceedings. They are letters dated September 1997, listing briefly alleged defects and contain, in each case, vague threats to sue and request payment for alleged losses. No other documents support Defendants claim of being sued. Nor is it clear whether garments referred to are garments made by the Plaintiff.

25. No proper survey report relating to the alleged defects appears to have been obtained or produced. The only Survey Reports confirm material weights - that confirmation does not help the Defendant to establish that the goods did not conform to sample.

26. The only item produced to substantiate what was a very large counterclaim of some US$187,528.00 was a typewritten summary produced by Defendant during the trial, relating to the 5 Purchase Orders setting out alleged losses of profit, prices on re-sale and losses on unsold quantities. No supporting documents revealed how the losses had been estimated.

27. Accordingly I enter judgment for the Plaintiff and dismiss the Defendant's Counter claim.

28. Costs of this action be to the Plaintiff to be taxed if not agreed.

29. Interest to run on the sum of US$66,597.75 at Judgment rate from date of Writ to date of judgment and thereafter at Judgment rate until payment in full.