LEE SHUN COMPUTER EMBROIDERY FTY (a firm) v. GREAT UNION GARMENT LTD

HCA 2346/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2346 OF 2005

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J U D G M E N T

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1.  The plaintiff is claiming the sum of $1,821,627.90 being balance of money due on invoices rendered for work done.  The defendant is counterclaiming by way of set-off airfreight charges incurred of $1,820,766.05 by reason of late delivery by the plaintiff, and damages for defective goods in the sums of $39,857.42 and $67,647.32.

2.  The trial was conducted partly in English, and partly in Chinese (in the taking of evidence).  The documents were in Chinese without English translation.

Background

3.  The plaintiff is a computer embroidery factory in Shenzhen.  The defendant is a garment trader in Hong Kong.  Between October 2004 and June 2005, the defendant placed various purchase orders with the plaintiff for computer embroidery work and/or heat pressed adorning stones and/or accessories on the garments.  The defendant would deliver all the raw materials to the plaintiff for processing, and the plaintiff would deliver the processed goods to other sub-contractors of the defendant for further processing. The finished goods were for the defendant’s purchasers Pathways Import Inc. in Los Angeles, USA.

4.  The parties are on common ground that:

(1)     Subject to determination of the proper unit price and/or quantities of certain disputed items, the defendant is liable to the plaintiff for work done;

(2)     The defendant is entitled to 2% discount on the invoiced price as properly determined;

(3)     The defendant has already made payment of $2,985,416.17.

5.  The defendant alleged that the plaintiff was late in delivery.  The Amended Defence pleaded that there were the implied terms of the contract that:

(1)     All shipments must be made on time;

(2)     The plaintiff would be liable for any additional delivery costs incurred by the defendant as a result of any late shipments made by the plaintiff.

The defendant is counterclaiming the balance of airfreight incurred less the costs of shipment by sea incurred in the ordinary course.

6.  The Amended Reply pleaded that even if the plaintiff were late in shipment, the defendant had by its conduct waived the condition of time.  It also denied that the defendant was liable for the airfreight allegedly incurred at all.

7.  As to defective goods, the claim of $39,857.42 is admitted by the plaintiff, but the claim of $67,647.32 is disputed.

Issues

8.  The issues are:

(1)     What was the unit price of the disputed items;

(2)     What was the quantity to be charged of the disputed items;

(3)     Whether there was the implied term that time was of the essence;

(4)     Whether the plaintiff was late in shipment;

(5)     Whether the defendant had waived the condition of time;

(6)     Whether there was the implied term on the part of the plaintiff to pay for the airfreight;

(7)     Whether the defendant had incurred and/or liable for any airfreight;

(8)     Whether there were defective goods in the sum of $67,647.32.

9.  In the opening, Mr. Chung for the plaintiff raised the point of waiver on the invoiced amounts on the ground that the plaintiff’s invoices stated that “Should there be problems with the goods, please say so within 3 days.  Otherwise it is invalid.”  This point is not pleaded and is abandoned by Mr. Chung.

Unit price

10.  The plaintiff’s claim was based on the invoices it rendered from October 2004 to June 2005.  The defendant pointed out that in respect of 8 items, the invoiced unit price differed from the unit price as per the defendant’s purchased orders.  It was put by counsel for the plaintiff to Miss Kwan Kam-yee (DW1), Administrative Manager of the defendant that the variation of the unit prices had been agreed orally.  Miss Kwan said that although she did not negotiate the prices, there was no document showing the varied prices.  Mr. Pang Shiu-keung (PW1), partner of the plaintiff, never mentioned any oral variation of the unit price.  There is no evidence supporting any such variation. I reject the plaintiff’s claim of variation and the unit prices should be determined according to the defendant’s purchase orders.

Quantities to be charged

11.  The defendant alleged that the plaintiff had overstated the quantities for various items in the invoices.  The plaintiff’s invoiced quantities were based on the quantities actually delivered to the defendant’s sub-contractors as per the delivery orders, which had been acknowledged by the sub-contractors in 90% of the cases.  Miss Kwan said there was an oral agreement that the plaintiff would only charge for the quantities stated in the purchase orders regardless of the quantities delivered, and it would not charge for any surplus delivered, as the same could be taken into account for defective goods.  No such oral agreement was pleaded and it was never put to Mr. Pang in cross-examination.  I reject the defendant’s evidence and the chargeable quantities should be as per the delivery orders.

12.  On the basis of my findings on the unit price and the chargeable quantities, it is agreed by the parties that the plaintiff’s claim, i.e. the total invoiced price less (1) 2% discount; (2) the part payment by the defendant; and (3) damages admitted by the plaintiff in the sum of $39,857.42, should be $1,789,341.64.

Late delivery

13.  The Amended Defence pleaded that in each and every purchase order, the shipment date was specifically written therein.

14.  The purchase orders stated a “goods period”, which was usually a month or so after the date of the purchase order.  Some purchase orders stipulated that the processed goods should be delivered on the 3^rd day of the delivery of the raw materials, some purchase orders stipulated delivery on the 5^th day of the delivery of the raw materials, and othrs were silent on the point.

15.  Mr. Pang said that the purchase orders were only a rough anticipation of the orders to be placed in the ensuing “goods period”.  As there was no stipulation of the time of the delivery of the raw materials in the purchase orders, the plaintiff could not hold up production capacity indefinitely to wait for the raw materials.  The actual delivery date of the processed goods would be confirmed at the time when the raw materials were actually delivered by the defendant.  The raw materials under a purchase order were delivered by instalments.  Upon the actual delivery of the raw materials, the delivery date of the processed goods was confirmed with a Miss Leung of the defendant.  The delivery date would range from 6 to 7 days or even 10 to 14 days from the delivery of the raw materials. 

16.  Miss Kwan agreed that the defendant’s purchase order was only an advanced notice of orders that would be placed in the “goods period”.  She agreed that the actual delivery dates were negotiated by Ms Leung, who is still employed by the defendant.  But she said the defendant required the plaintiff to deliver the processed goods on the 3^rd or 5^th day after delivery of the relevant instalment of raw materials in any event.  For those purchase orders with no specification of the delivery date, the plaintiff should deliver the processed goods on the following day.  But in such cases, much depended on the actual circumstances and it was hoped that goods would be processed in time.  Miss Kwan said for the orders around the new year period, the schedule was pressing and “both parties did not hang on to it tightly”.

17.  Miss Kwan said in-chief that the defendant had warned the plaintiff orally and in writing about late delivery.  Mr. Pang said that there was never any complaint of late delivery at all.  The plaintiff stopped accepting orders from the defendant in June 2005 because of no further payment of the invoices.  On 13 September 2005, the plaintiff made demand of payment on the defendant.  On 16 September 2006, the defendant faxed to the plaintiff a Statement of Account of even date claiming deductions for airfreight.  It was the first mention of late delivery and airfreight by the defendant.

18.  Under cross-examination, Miss Kwan agreed that, the defendant had no record of any correspondence or written warning to the plaintiff on late delivery and/or airfreight earlier than this Statement of Account. 

19.  As to determination of the airfreight to be paid by the plaintiff, Miss Kwan said she did not negotiate any of the contracts, and she did not take part in shipping the finished goods by air to Pathways.  She complied a schedule “Annex I” analyzing the delay in delivery on the part of the plaintiff, by looking at the Pathways contracts, the defendant’s purchase orders, the supplier’s delivery orders of raw materials to the plaintiff, and the plaintiff’s records of intake and output of goods and delivery orders of processed goods to the defendant’s subcontractors.  She worked out the cases where the plaintiff had delivered the processed goods beyond the 3 or 5 days specified in the purchase orders.  She attributed to the plaintiff from 1/3 to full amount of the airfreight in some of those cases.   In other cases, the plaintiff had been late by Miss Kwan’s analysis, but she did not claim airfreight from the plaintiff.  As to the apportionment of the percentage of blame, Miss Kwan said it was a matter of estimation. 

20.  It was pointed out to Miss Kwan that in Annex I, she compared the time lag between the delivery of raw materials to the plaintiff and delivery of the processed goods by the plaintiff globally without taking into account that the raw materials and correspondingly the processed goods were delivered in instalments.  She took the first delivery of the raw materials by the defendant for the relevant item, and the last delivery of the processed goods by the plaintiff. 

21.  To take the example of Item #2662 under the defendant’s purchase order dated 4 January 2004, it stated “the return of the first day’s goods on the third day”.  The plaintiff’s record of intake and output of goods showed 9 deliveries of raw materials from 9 to 27 January, and the deliveries of processed goods by the plaintiff were from 15 to 30 January 2005.  Miss Kwan agreed that she did not apply the “First-in First-out” principle. 

22.  It was also put to Miss Kwan that the delay was sometimes caused by the late delivery of raw materials by the defendant. 

23.  Miss Kwan said she understood that after the goods were processed by the plaintiff, the other sub-contractors would take 10 days for other work processes, and it would take 1 to 2 days for the goods to be transported from Shenzhen to Hong Kong, and it would take about 15 days to ship the goods from Hong Kong to Los Angeles by sea.  Hence, it would take about 28 to 30 days from the processed goods leaving the plaintiff’s factory to reach Pathways.

24.  To take an example of items #2604 to #2606 under the purchase order dated 25 November 2004, the “goods period” or the anticipated period of delivery of raw materials was until 31 December 2004, and the relevant delivery date to Pathways was from 30 January to 15 February 2005.  The actual delivery of raw materials were from 1 February to 25 February 2005, and the deliveries of the processed goods by the plaintiff were from 2 February to 28 February 2005.  Miss Kwan agreed that even if he goods were shipped to Pathways by air, the defendant was bound to be late in delivery to Pathways as delivery of raw materials went beyond that date.  She admitted it was the fault of the defendant in this case, hence, she only asked the plaintiff to bear 1/3 of the airfreight.  

25.  Apart from items #2604 to #2606, Miss Kwan agreed that there was other similar cases of late delivery of raw materials in Annex I.  She said the plaintiff delayed in the delivery of processed goods in earlier purchase orders, but the defendant had no alternative but continued to place the orders with the plaintiff.  More materials were delivered to the plaintiff late, and there was a domino effect in causing late deliveries in subsequent lots.  Hence, the plaintiff had to bear the airfreight with defendant jointly.

26.  But she also tried to explain that the defendant delivered the raw materials of the relevant item #2662 late because the plaintiff finished the first lot (presumably raw materials delivered on 9 and 11 January) only by 29 January, and the defendant worried about the progress and withheld delivering further materials pending discussions on shipment by air. 

27.  It was put to Miss Kwan that the defendant was using tactics to delay payment and she agreed.  Apart from the Statement of Account dated 16 September 2005 referred to above, Miss Kwan produced a different Statement of Account also dated 16 September 2005.  She agreed that the second Statement of Account must have been prepared after 16 October 2005 as it referred to deductions admitted by the plaintiff in writing on 16 October 2005.  Miss Kwan was cross-examined to a number of mistakes in the first statement.  She agreed that at that stage, she wanted to delay paying the plaintiff.  She agreed that in some cases, the defendant claimed airfreight from the plaintiff first but Pathways had later borne the airfreight later.  She agreed that the defendant’s attitude was to claim against the plaintiff first and to continue to negotiate with Pathways. 

28.  I find that the “goods period” in the defendant’s purchase order meant only the anticipated period of delivery of raw materials to be made by the defendant.  The evidence of both Mr. Pang and Miss Kwan were that the purchase orders were preliminary.  I find that there is no concluded contract at the time of placing the purchase order. 

29.  Mr. Kwong submitted that even if the purchase orders were only preliminary, it would be reasonable to expect the delivery dates specified therein to have been adopted upon the confirmation of the orders upon the delivery of raw materials.  However, Mr. Pang’s evidence was that the deliveries were made within the dates confirmed with Ms. Leung, and the defendant had not called any direct evidence to rebut that.  I note that there is a singular lack of contemporaneous correspondence complaining late delivery or even on the discussion of shipping the goods to Pathways by air.  Ms. Kwan conceded that the schedule was tight during the new year period and both parties did not hang on to it tightly.  Although Mr. Pang might have been exaggerating when he said the agreed delivery date could be as long as 2 weeks, I accept his evidence that the deliveries were within the period agreed with Ms. Leung.  I do not find that the plaintiff had been late in delivery.

30.  Whether or not a term is implied usually depends upon the intention of the parties as collected from the wards of the agreement and the surrounding circumstances. A term will be implied if it is necessary, in the business sense, to give efficacy to the contract (see Chitty on Contracts, Vol. 1, 29^th Ed., 2004 para. 13-003 to 13-005).

31.  I find that the defendant never raised any reimbursement of airfreight on the part of the plaintiff until September 2005, three months after the transactions had ceased.  I do not find that the conduct of the parties supported the implied terms either as to time or reimbursement of the airfreight.  In any case, the defendant has waived the condition of time.

32.  As an aside, Miss Kwan said Mr. Pang agreed to pay the defendant $400,000 for the airfreight in a meeting after the Statement of Account dated 16 September 2005 was rendered.  This agreement of payment was neither pleaded nor mentioned in Miss Kwan’s witness statements.  I reject here evidence on this point.

Airfreight charges

33.  The Air Way Bills produced by the defendant showed that the shipper was one Top Pond Limited.  Miss Kwan said that Top Pond is a “sister” company of the defendant and can be equated with the defendant.  However, Top Pond and the defendant have different shareholders and directors.  Miss Kwan did not disclose what was the exact relationship of the two companies save that they shared the same office.  She said Top Pond was named as the shipper upon request of Pathways but no evidence or document was tendered to explain that. 

34.  Further, there is no document to show that the defendant has paid Top Pond.  Mr. Kwong for the defendant submitted that even if there were no evidence of payment by the defendant, the plaintiff had not really challenged that the goods were sent to Pathways.  In the business sense, it could easily be seen that Top Pond was used as a shipper as matter of convenience.   With respect, I cannot see Mr. Kwong’s point.  I am not satisfied that the defendant had incurred the airfreight alleged. 

35.  I do not find Annex I to be reliable, and I find that the apportionment of airfreight by Miss Kwan arbitrary and unsupported by evidence or reasoning.  The defendant also failed on this score.

Defective goods

36.  The plaintiff has admitted deduction for defective goods in the sum of $39,857.42.  As to $67,647.32, there is no correspondence, surveyor’s report or even photographs on the alleged defective goods.  All Miss Kwan relied on is a schedule he had prepared.  She agreed that she was responsible for the accounting side but not the production side.  I reject the claim on defective goods for $67,647.32.

Conclusion

37.  I find in favour of the plaintiff on its claim of  $1,789,341.64.  I am not satisfied that the plaintiff is liable to reimburse the defendant for airfreight or defective goods (except to the extent admitted and taken into account in the plaintiff’s net claim).  The defendant’s counterclaim of any surplus after setting-off of airfreight and defective goods is dismissed.

Interest

38.  Interest is award at the judgement rate from the date of the writ until judgment, and thereafter until payment.

Costs

39.  I made an order nisi that the defendant do pay costs to the plaintiff on both the claim and counterclaim, to be made absolute within 14 days, to be taxed if not agreed.