WAI SHING BROTHERS GARMENT AND ANOTHER v. LINNA TEXTILES MANUFACTURING LTD.

DCCJ 6837/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.6837 OF 2001

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JUDGMENT

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Background:

[1] The Plaintiff was a garment manufacturer and the Defendant was one of its customers. Between December 1998 and January 1999, the parties entered into 4 purchase contracts (the "Contracts"), whereby the Plaintiff agreed to supply and the Defendant agreed to purchase cotton garments. The Parties agreed that these garments were purchased by the Defendant for resale to its customer, American Basics Co. LLC (hereinafter "ABC").

[2] Shipments of the garments under the Contracts were delayed and part of the garments had to be shipped by air instead of by sea. When all garments under the Contracts had been shipped, the Plaintiff sent 6 invoices, in the total sum of US$149,637.00, to the Defendant. On 7/7/1999, the Plaintiff received a cheque from the Defendant in the sum of US$76,075.39. The Plaintiff alleged that despite repeated demands the Defendant had refused to pay the balance of the contract price. The Plaintiff claimed against the Defendant for the sum of US$65,667.38, being balance of the contract sum US$73,561.61 less US$7,894.23 being airfreight charges actually paid by the Defendant.

[3] The Defendant alleged that all of the Plaintiff's shipments under the Contracts were delayed. As a result of the delays, some of the garments had to be delivered by air instead of by sea. The Defendant had incurred extra costs due to airfreight charges. Additionally, ABC also claimed compensation against the Defendant as a result of the delayed shipment. The Defendant stated: First, on 6/7/1999 the party had reached a settlement agreement where the Plaintiff agreed to accept the sum of US$76,075.39 as full and final settlement of the contract sums. Second, and alternatively, the Defendant had suffered damages due to the Plaintiff's breach of contract and counterclaimed in the total sum of US$81,043.46.

[4] Prior to trial, Mr. Kam, solicitor for the Defendant, applied to amend the counterclaim and to adduce a separate Defendant's bundle of documents for the trial. After a short adjournment for Ms. Doris To, counsel for the Plaintiff, to review the Defendant's bundle and the amendments, the parties agreed to restrict the Defendant's additional documents to 7 and the amendments to the counterclaim was agreed by consent. I gave the appropriate orders and after the amendment the Defendant's counterclaim now amounted to US$85,993.46. Particulars are as follows:

	Contract	Deduct	Additional	Added	CFS &
	No.	by ABC	Air freight	Quota	Document
		(US$)	(US$)	(US$)	(US$)
(1)	431	7,312.50	7,894.23
(2)	432	14,375.00	15,788.46	11,250.00
(3)	456	7,034.25	7,862.65	24.00
(4)	436	1,837.50
(5)	479	4,425.00			708.02
(6)	add:	Loss of profit			7,481.85

The Plaintiff's case:

[5] The Plaintiff alleged that on or about the end of 1998, Ms. Lam of the Defendant approached Ms. Yiu of the Plaintiff about the manufacturing of garments. The garments were to be shipped by sea to ABC in New York, between January and February 1999. Ms. Yiu informed Ms. Lam that the shipping schedule were too tight and it was unlikely that the Plaintiff would be able to meet the shipment dates. However, Ms. Lam represented to Ms. Yiu that the shipment dates were flexible and if the Plaintiff were late, she would be able to make alternative arrangements with ABC.

[6] The terms of the Contracts were as follows:

	Contract	Contract	Quantity	Amount	Shipment
	date	No.	(doz.)	(US$)	date
(1)	23/12/98	436	350	5,250	10/02/99
(2)	30/12/98	431/432	7,500	86,750	30/01/99
(3)	30/12/98	456	2,500	28,250	10/02/99
(4)	08/01/99	479	2,500	29,500	10/03/99

[7] By middle of January 1999, Ms. Yiu realized that the Plaintiff would not be able to meet the shipment dates for contract No. 431/432 and 456. Ms. Yiu immediately informed Ms. Lam. Ms. Lam stated that she would arrange to have these garments delivered to New York by air so that they would arrive in New York on time. Ms. Lam also asked that the garments under contract No.431/432 be delivered in batches as and when they were ready.

[8] Irrespective of the best efforts of the Plaintiff, deliveries under the Contracts were delayed. All garments, except those under contract No. 436 and 479, were delivered by air. Between January 1999 and March 1999, the Plaintiff sent 6 invoices to the Defendant for the contract price.

[9] At first, Ms. Lam did not raise any questions on compensation for the airfreight charges. It was not until the Plaintiff had sent two outstanding account statements to the Defendant in April 1999, that Ms. Lam raised issues on the late delivery and asked for compensation. Irrespective of the numerous conversations between the parties, the Plaintiff had never agreed to any terms of settlement with the Defendant.

[10] On 26/5/1999, the Defendant sent the Plaintiff a fax message proposing deductions for the airfreight charges and deduction of the contract prices ranging from 15% to 35%, amounting to US$83,107.41. The Plaintiff rejected the Defendant's proposal and after several telephone conversations the Defendant proposed deducting 5%-10% from the contract prices. The Plaintiff again rejected this offer.

[11] On 9/6/1999, Ms. Yiu wrote ABC to enquire if it had made any claims against the Defendant due to the delayed shipment. ABC did not reply to the Plaintiff's enquiry.

[12] On 6/7/ 1999, Ms. Yiu again discussed the outstanding payment with Ms. Lam and it was agreed that Ms. Yiu may collect a cheque at the Defendant's office the next day. When Ms. Yiu arrived at the Defendant's office, a staff handed her a cheque in the sum of US$76,075.39 and asked her to sign a receipt acknowledging that the said payment as full and final settlement of the contract sums. Ms. Yiu refused to sign and was allowed to depart with the cheque. Irrespective of numerous demands, the Defendant had refused to pay the balance of the contract price.

The Defendant's case:

[13] The Defendant alleged that it was acting as agent for ABC at the time of the Contracts. The agency agreement between ABC and the Defendant allowed the Defendant to earning a 5% commission on the contract price.

[14] Prior to the Contracts, Ms. Lam of the Defendant had repeatedly warned the Plaintiff that time of delivery of the garments were of the essence. Ms. Lam also stated to Ms. Yiu that the Plaintiff would be liable to the Defendant for all loss and damages as a result of any delays.

[15] As soon as the Defendant suspected that the Plaintiff was unable to comply with the stipulated shipment days, the Defendant had sent faxes to the Plaintiff stating that the Plaintiff would be held liable for all loss and damages as a result of the Plaintiff's delay. Irrespective of the warnings, the Plaintiff was unable to comply with the contract shipment dates. After discussions, Ms. Lam agreed not to cancel the Contracts provided that the garments were to be delivered to ABC on time. If necessary, the garments would be delivered by air and the Plaintiff would be liable for all airfreight charges, additional quota charges together with other loss and damages.

[16] After the Defendant received the Plaintiff's first list of accounts, Ms. Lam told Ms. Yiu that the loss and damages would be deducted from the contract price. The Defendant was awaiting ABC's decision before it could calculate the sums due to the Plaintiff. After numerous negotiations, in a letter dated 23/6/1999, ABC stated that the Defendant must compensate for the late shipment by reduction in future orders totaling US$68,00.00.

[17] On 23/6/1999 Ms. Yiu agreed to accept US$76,075.39 as a full and final settlement for the contract sums. On 7/7/1999, Ms. Yiu picked up the settlement cheque from the Defendant's accountant Ms. Hui; however, Ms. Yiu had refused to sign an acknowledge prepared by Ms. Hui.

The Issues:

[18] Ms. To suggested that there were 3 issues in this matter: (1) Whether there was a settlement agreement between the parties? If the answer is 'Yes', then the Defendant must succeed in its defence. If the answer is 'No', then I must continue with the other issues. (2) Whether the Plaintiff was in breach of the terms of the contract? (3) Whether the Defendant had suffered any loss and damages due to the Plaintiff's breach?

[19] Mr. Kam, solicitor for the Defendant on the other hand argued that there are only 2 issues in this matter, since the Plaintiff had admitted that it was in breach. Mr. Kam pointed to various paragraphs in Ms. Yiu's affirmation in opposition to the Plaintiff's Order 14 applications, witness statements and the Statement of Claim, where it was stated that the Plaintiff was willing to compensate the Defendant for actual loss and damages due to the Plaintiff's late shipment. Ms. To, on the other hand, argued that although the Plaintiff had admitted that there was delay in the shipments, but it did not automatically mean that the Plaintiff was in breach of the contracts.

[20] After careful reading of the relevant paragraphs, I agree with Ms. To that the Plaintiff's admission was restricted to being late and it was willing to pay compensation to the Defendant, but the Plaintiff had never admitted to being in breach of the terms of the contract. If I found that there was no settlement agreement, the Defendant must still prove that the Plaintiff was in breach of contract.

(1) Whether there was a settlement agreement between the parties :

[21] The settlement agreement was never reduced into writing. Accordingly, the existence of the settlement agreement must be proved by the testimonies of Ms. Yiu and Ms. Lam. The testimony of Ms. Hui was completely useless on this issue, as she admitted that she had no personal knowledge of the settlement agreement between the parties.

[22] In her testimony, Ms. Lam stated that on the evening of 6/7/1999, when Ms. Yiu agreed to the terms of settlement, the settlement sum had not yet been calculated. However, this contradicted with her witness statement. Paragraph (12) of Ms. Lam's witness statement stated:

"...Thereafter, on 6th July 1999, I agreed with Ms. Yiu over the telephone that the Plaintiff would accept a lump sum payment of US$76,075.39 from the Defendant in full and final settlement of the purchase price of the said goods...." (Emphasis added)

[23] Furthermore, Ms. Lam also testified that she had to ask Ms. Hui to make the calculation for the settlement sum. Ms. Hui however, testified that it was Ms. Lam who gave her the payment figures.

[24] Additionally, once Ms. Lam knew that Ms. Yiu had left with the US$76,075.39 cheque without signing the acknowledgement of settlement, she could have easily prevented Ms. Yiu from cashing the cheque by countermining the same. Ms. Lam's explanation was that she had called Ms. Yiu to protest, but had accepted Ms. Yiu's assurance that the Plaintiff would not commence any claim against the Defendant. I found this explanation difficult to accept. The whole idea of asking Ms. Yiu to sign an acknowledgement was the fact that there was very little trust left between the parties. Ms. Lam had testified that after Ms. Yiu wrote to ABC directly to enquire if it had made any claims on the Defendant due to the late shipments, whatever trust between the parties had been lost. Under the circumstance, it was difficult to accept that Ms. Lam would accept Ms. Yiu's assurance in place of a signed written acknowledgement.

[25] Finally, Ms. Yiu had insisted from the beginning of this dispute that the Defendant had not suffered loss and damages to the extent claimed by the Defendant. It was always the Plaintiff's position that the Defendant must provide the Plaintiff with documentary proof of any loss or damages. Under these circumstances, it was simply illogical for Ms. Yiu to have suddenly capitulated to the Defendant's position and accepted the sum of US$76,075.39 as settlement without any proof from the Defendant.

[26] Accordingly, I found that there was no settlement agreement reached by the parties.

(2) Whether the Plaintiff was in breach of the terms of the contract?

[27] The shipment dates were clearly stated on the face of the Contracts. It was undisputed that the Plaintiff had missed all of the shipment dates stipulated on the Contracts. The burden was clearly on the Plaintiff to prove that there was an agreement between the parties that had varied the shipment dates.

[28] The Plaintiff's sole evidence was Ms. Yiu's testimony that Ms. Lam had said to her the shipment dates were flexible. In paragraph (2) of her witness statement, Ms. Yiu stated:

"(In or about the end of 1998) Ms. Lam said that the scheduled shipment date were not entirely inflexible and that in case the Plaintiff had to be late she would liaise with the customer and make alternative arrangement...."

[29] In her examination-in-chief however, Ms Yiu admitted that she received the documents for the Contracts at the end of December and she did not sign and returned these documents until just before actual delivery of the garments. It was also agreed that by the middle of January 1999, the Plaintiff knew that it would not be able to meet the shipment dates. If Ms. Yiu's testimony was true and there was agreement that the shipment dates were flexible, it would have been natural for Ms. Yiu to either not sign the contract documents or made amendments to the shipment dates. After all Ms. Yiu was a seasoned garment manufacturer and well understood the possible consequence of missing a shipment date. However, Ms Yiu simply signed the contracts and returned them to the Defendant.

[30] In paragraph (4) of the statement of claim, the Plaintiff admitted that in or about January 1999, Ms. Yiu had agreed with Ms. Lam that the garments under contract 431/432 and 456 would be shipped by air instead of by sea. As a seasoned garment manufacturer, Ms. Yiu must have known that shipping by air would have increased the costs of transporting the garments to New York exponentially. If the parties had agreed to a flexible shipment date, delivery of the garments to New York would not have been the Plaintiff's concern. There was no need to get Ms. Yiu's agreement prior to shipping the garments by air.

[31] The fact that the parties had to agree before shipping by air clearly points to the fact that there was no agreement on flexible shipment dates and when the Plaintiff could not meet the contractual shipment dates, the Plaintiff knew that it would be liable for the delays and the parties had to agree on how to mitigate the loss and damages.

[32] Accordingly, I found that there was no agreement on flexible delivery and by failing to comply with the shipment dates stated on the Contracts, the Plaintiff was in breach of the same.

(3) Whether the Defendant had suffered any loss and damages due to the Plaintiff's breach?

[33] It is trite that damages for breach of contract are to compensate the innocent party for loss he actually suffered. The burden to prove that it had suffered the damages claimed is on the Defendant. The learned author of Chitty on Contracts, 28th d. Vol.1, (at 27-001) stated:

"...Damages for a breach of contract committed by the defendant are a compensation to the claimant for the damage, loss or injury he has suffered through that breach. ... If the claimant cannot establish an actual loss, he is entitled only to nominal damages. ..."

[34] The Defendant's counterclaim for loss and damages can be separated into 4 heads: (i) The airfreight charges; (ii) The deductions by ABC; (iii) The extra quota and document charges; and (iv) The loss of profits.

(i) The airfreight charges:

[35] Whilst there was no dispute that due to the Plaintiff's breach, garments under contracts 431, 432 and 456 had to be shipped by air instead of by sea to New York. The plaintiff agreed that the Defendant had paid US$7,894.23 directly for part of the airfreight charges and have deducted that sum from its claim against the Defendant. The Plaintiff's allegation was ABC paid the balance of the airfreight charges.

[36] The Plaintiff's evidence was that airway bills dated 6/2/1999, 9/2/1999, 15/2/1999 and 11/3/1999 clearly stated that these were shipped "freight collect", which meant that ABC had paid the airfreight charges and not the Defendant.

[37] Ms. Lam on the other hand, testified that part of the arrangements between the Defendant and ABC, was that ABC would pay for the airfreight charges, but would deduct the same from its purchase price. Ms. Lam however, also testified that for this transaction, ABC had paid the Defendant by way of a Letter of Credit. It was because ABC and the Defendant wanted to avoid the expenses of arranging for a new Letter of Credits, that they decided to settle ABC's claims for delays by deductions from future orders. In other words, balance of the airfreight charges was included in ABC's deductions in future orders from the Defendant.

(ii) Deductions by ABC:

[38] The Plaintiff's allegation was that ABC and the Defendant had agreed that compensation for the delays were to be compensated by reductions of prices from future orders. As evidence of this arrangement, the Plaintiff produced an email message from Mr. Jeffrey Kaufman of ABC dated 23/6/1999. The email read in part:

"As agreed, we will reduce the prices for the following P.O.'s to compensate us for our loss.

P.O.	QTY.	Original Price	Reduced Price
703	2,500	$15.50	$11.50
704	2,500	$15.50	$11.50
701	4,000	$15.50	$11.50
829	2,500	$15.50	$11.50
830	2,500	$15.50	$11.50
702	1,000	$19.25	$15.25
699	1,000	$19.25	$15.25
700	1,000	$19.25	$15.25"

[39] Irrespective of the aforesaid, the commercial invoices produced by the Defendant showed completely different prices for the relevant purchase orders.

[40] Defendant's invoice dated 30/6/1999 showed that purchase orders 701 was billed at US$15.25 per dozen or only US$0.25 per dozen less that the original undiscounted price. Invoice dated 19/7/1999 showed that purchase orders 703 and 704 were billed at US$15.50, exactly the same as the original undiscounted price. Invoice dated 25/8/1999 showed that purchase order 702 was billed at US15.50, US$0.25 more than the discounted price stated in Mr. Kaufman's email.

[41] Ms. Lam explained that the Defendant and ABC had renegotiated the prices because the manufacturer could not complete some trimmings in accordance with ABC's requirements. Even if Ms. Lam's statement was true, which is not my finding, it is incumbent upon the Defendant to show evidence of the renegotiation and to prove that the original compensation to ABC had remained unchanged. The Defendant had failed to do so.

[42] As a result, I am left with evidence that showed the actual prices billed under these purchase orders substantially different from the content of Mr. Kaufman's email. As the email can no longer be relied on as proof of the agreement for compensation between ABC and the Defendant, the defendant is left without any evidence to support its counterclaim for airfreight charges and compensations to ABC.

[43] Additionally, Ms. Lam testified that she had agreed to compensate ABC the sum of US$68,000.00; however, the total value of the discounts stated in Mr. Kaufman's email was only US$34,984.25 add to that the airfreight charges paid by ABC, the total is only US$58,635.36. There was a difference of US$9,364.64 unaccounted for.

[44] Ms. Lam attempted to explain the difference by stating that she had forgotten that the Plaintiff had paid part of the airfreight charges and therefore inadvertently included the sum of US$7,894.23 in her negotiations with ABC. However, even if US$7,894.23 is deduced from the balance, there is still a sum of US$1,470.41 left unaccounted for. While negotiating to pay compensation to others, one is naturally negotiating to reduce the payment sum. Ms. Lam on the other hand had negotiated to pay more than what ABC had demanded. The figures in Ms. Lam's allegation just did not add up.

(iii) The extra quota and document charges:

[45] The parties agreed that the original quota certificate only permited 3 separate shipments and as a result of the Plaintiff's delay, the garments had to be shipped by airfreight in 10 separate lots. The fact that extra quota license was required cannot be disputed. The Plaintiff's only contention was that the Bank Payment Voucher, produced by the Defendant as proof of payment for the extra quota certificate was dated 26/2/1998, while the garments for this transaction were delivered in early 1999.

[46] Ms Lam explained that her accountant had mistakenly written 1998 on the Bank Payment Voucher, when in fact the correct year should be 1999.

[47] In addition to the Bank Payment Voucher, the Defendant also exhibited a cheque dated 26/2/1999, for exactly the same amount as the Bank Payment Voucher. The Defendant also exhibited Defendant's bank statement, for the month of February 1999, showing deduction of the same amount on 26/2/1999. I am satisfied that the year 1998 stated on the Bank Payment Voucher was a mistake and the Defendant had indeed paid the sum of US$11,250.00 for the extra quota certificate.

[48] In respect to the other quota fees of US$24.00 and the document fees of US$708.02, the Defendant had provided no evidence to substantiate these parts of its counterclaim.

(iv) Loss of Profit:

[49] Ms. Lam testified that although the Defendant had never invoiced ABC for the Defendant's 5% commission on the Contracts; however if an invoice was issued, ABC would pay the same. In other words, Ms. Lam admitted that the reason of the Defendant's loss of its 5% commission was not due to the Plaintiff's breach, but due to Defendant's desire of gaining further orders from ABC.

[50] This part of the Defendant's loss was not connected to the Plaintiff's breach and the Defendant is not entitled to recover under this head of its counterclaim.

[51] Order:

(1) Judgment is for the Plaintiff on its claim in the sum of US$65,667.38.

(2) Judgment is for the Defendant on its counterclaim in the sum of US$11,250.00.

(3) Judgment on the counterclaim is to be set-off against judgment on the claim, leaving a net judgment in favour of the Plaintiff in the sum of US$54,417.38, together with interest at the judgment rate, commencing from the date of judgment until payment.

(4) Costs of this action is to the Plaintiff, with certificate for counsel.