TUNG GA LINEN & COTTON (HK) LTD v. WINNITEX INVESTMENT CO LTD

DCCJ 7049/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7049 OF 2003

____________

____________

___________________

JUDGMENT

___________________

1.  In this action, the Plaintiff claims for the balance of purchase prices of linen yarns sold and delivered under 4 Purchase Orders issued by the Defendant, namely Purchase Orders numbered YSA 3085; YSA 3105; YSA 3162 & YSA 3219 respectively.

2.  The Defendant admits that the linen fabrics sold and delivered under Purchase Orders YSA 3105 & YSA 3219 were without any problem; but alleges that there had been late delivery and/or defective quality of the linen yarns in respect of the other 2 purchase orders namely Purchase Orders numbered YSA 3085 & YSA 3162.  The Defendant therefore counterclaims for damages.

3.  In relation to the Agreement the Defendant's pleaded case is that:-

(1)	(a)	It was, inter alia, an express term of each of the Agreements that:-
		the supply of the Natural Linen and Semi-bleached Linen shall be completed and delivered to the Defendant on or before the dates specified in each of the Purchase Orders; and that compliance with the delivery dates was essential, to enable the Defendant to deliver the manufactured fabrics or garments to its customers on time.
	(b)	In respect of PO 3162 the Defendant pleaded that the Defendant by Ms. Mabel Yeung informed Mr. Jonathan Wong of the Plaintiff prior to the placing of the order that delivery of the Natural Linen ordered therein should be made no later than 30 October 2002 and should be supplied on time and the yarn should be good quality.
(2)	It was, inter alia, an implied term of each of the Agreements that:-
	(a)	the Natural Linen and/or Semi-bleached Linen shall be of merchantable quality and standard and/or of quality and standard that fabrics made from the same would pass the testing under the “American 4-Point System”;
	(b)	the Natural Linen and Semi-bleached Linen shall be of such quality as previously agreed by the parties in their prior trade dealings or alternatively such quality as accepted generally in the trade;
	(c)	the Natural Linen and Semi-bleached Linen shall be reasonably fit for the purpose of making quality fabrics/garments for supply to the Defendant's customers.
(3)	The Plaintiff knew or ought to have known that the Defendant required the Natural Linen and Semi-bleached Linen in each of the Agreements for using the same to manufacture various fabrics/garments for supplying to its customers and that the delivery date specified in each of the Purchase Orders was essential to enable the Defendant to ship the fabrics/garments to its customer(s) to fulfill its contractual obligations to its customer(s) in time.

4.  The Defendant pleaded that the Plaintiff breached the aforesaid terms of the Agreements:-

(a) In relation to PO 3162 the Plaintiff failed to deliver to the Defendant the Natural Linen on or before the agreed date of 30 October 2002.  The Plaintiff only completed delivery of the Natural Linen under PO 3162 to the Defendant on 23 November 2002.

(b) In PO 3162, some Natural Linen supplied under this PO by the Plaintiff with which 13,231 yards of fabrics were made, were not of merchantable quality or standard or reasonably fit for the required purpose and they suffered from defects including serious coarse picks, serious coarse yarn, knots and slubs.

(c) In relation to PO 3085, the Semi-bleached Linen supplied by the Plaintiff was not of merchantable quality or standard or reasonably fit for the required purpose and they suffered from defects including serious coarse picks.

5.  The Defendant counterclaims damages from the Plaintiff as follows:-

(a) Arising from late delivery, air freight charges for delivery of the fabrics and garments made from the Natural Linen in PO 3162 to its customers in the sum of HK$40,625.40 as particularized in para. 3 (5) (b) of the Re-amended Defence and Counterclaim.

(b) As a result of the poor quality, standard or the failure of the yarn in PO 3162 to be reasonably fit for the required purpose the Defendant pleads that it was entitled to reject acceptance of the Natural Linen supplied by the Plaintiff with which 13,231 yards of fabrics were made.  The Defendant pleads that it did reject acceptance by communications made over the telephone between one Mr. Jonathan Wong of the Plaintiff and Ms. Mabel Yeung of the Defendant on or about 4 December 2002.  The Defendant pleads that the Plaintiff is not entitled to the price of 6,628 kg of Natural Linen supplied under Order 3162 with which 13,231 yards of fabrics were made.

(c) Wasted costs in processing the 13,231 yards of fabrics made from the said defective Natural Linen and loss in relation to claims by its customer as well as loss of profit as particularized in para 3 (7)(c) of the Re-amended Defence and Counterclaim.

6.  The Defendant pleads that it has paid the Plaintiff the sum of HK$244,530.00 in respect of PO 3162.  It is entitled to a refund of the sum counterclaimed by it in respect of PO 3162.  By reason of such, all sums due under Order 3162 had been fully paid and there is no sum due to the Plaintiff from the Defendant under Invoice TGHK 22399 as alleged or at all.  Further, by reason of the matters aforesaid, the Defendant is entitled to deduct the loss and damages and/or the loss of profit from the sums originally due to the Plaintiff in the invoices referred to in para. 2 of the Statement of Claim.  The Defendant pleads that were the Plaintiff entitled to the sum of HK$552,630.00 claimed in the Statement of Claim or any part thereof, which the Defendant denies, the Defendant is entitled to set off against that sum the sum awarded to the Defendant by way of counterclaim as shall be sufficient to extinguish it.  The total amount of the Defendant's counterclaim amounts to HK$432,535.90 as particularized in para. 8 of the Re-amended Counterclaim.

7.  In its Amended Reply the Plaintiff agreed to the following as implied terms of the Agreement:-

(a) The Natural Linen and/or Semi-bleached Linen shall be of merchantable quality and standard;

(b) the Natural Linen and Semi-bleached Linen shall be of such quality as accepted generally in the trade;

(c) the Natural Linen and Semi-bleached Linen shall be reasonably fit for the purpose of making fabrics/garments.

8.  However the Plaintiff denies that these were implied terms of the Agreement:-

(a) that fabrics made from the same would pass the testing under the “American 4-Point System”;

(b) the Natural Linen and Semi-bleached Linen shall be of such quality as previously agreed by the parties in their prior trade dealings; or

(c) the Natural Linen and Semi-bleached Linen shall be reasonably fit for the purpose of making quality fabrics/garments for supply to the Defendant's customers.

9.  In relation to the delivery dates stated in the purchase orders, it is the Plaintiff's case that they were unilaterally imposed by the Defendant and the Plaintiff had never agreed to the same.  Further the Plaintiff avers that the delivery dates were not deadlines before which the Natural Linen and/or Semi-bleached Linen under the purchase orders had to be delivered by the Plaintiff to the Defendant, as time was not made of the essence thereunder.

10.  The Plaintiff therefore denies the Re-amended Counterclaim.

The Issues

The 1st Issue

12.  The evidence relied on by the Defendant related to the previous course of dealing are:-

(1) Mr. Jonathan Wong the Executive Director of the Plaintiff stated in paragraph 4 of his witness statement which was adduced into evidence, that it was the usual practice that upon the order of linen yarn being placed by the Defendant, the Plaintiff would deliver 2 cones of yarn each weighing 2 kg for the Defendant.  The yarn could be knit into 5 yarns of greige fabric.  If the greige fabric is not suitable for the Defendant's use, the Defendant would notify the Plaintiff.  The Plaintiff would deliver another lot of yarn sample for testing by the Defendant.

It is clear from this evidence that there is no mention that the fabric would specifically be tested as to quality by the American 4-Point System.

Mr. Jonathan Wong stated in evidence that the Defendant would knit the sample yarn into fabric before they could see the quality of the yarn.  He said that was the Defendant's internal checking method.  But there is no evidence that he knew that the Defendant used the American 4-Point System for checking.  This evidence cannot support that there was a previous course of dealing where yarn sample supplied by the Plaintiff would be knit into fabric and the Plaintiff assented to the fabric to be tested by the American 4-Point System and that he accepted that the yarn supplied by him had to meet the test that when knit into fabric, the fabric would be meet the requirements of the American 4-Point System for quality fabrics.

(2) The Defendant refers to two prior transactions where the Plaintiff sold fabric to the Defendant.  These orders are on 19 October 2001 at page 143-6 of the Trial bundle (“BD-T”) and dated 16 December 2002 at page 143-10 of BD-T.  These fabrics were tested by the Defendant and the fabrics returned to the Plaintiff.  It was not disputed by Mr. Jonathan Wong that he had seen the test reports at pages 143-7 to 143-9 of BD-T which were sent to him by the Defendant.  However Mr. Jonathan Wong stated that he did not know that the test reports were based on the American 4-Point System.

As these two purchase orders related to the sale of fabrics by the Plaintiff to the Defendant they do not relate to a previous course of dealings of the sale of yarn by the Plaintiff to the Defendant.  These situation could not support the Defendants contention that a term could be implied that linen fabric woven from linen yarn sold by the Plaintiff to the Defendant would have to meet the standard imposed by the American 4-Point System.

Further there is no evidence that the Plaintiff was aware that the test report sheets sent to the Plaintiff at pages 143-7 to 143-9 of BD-T were that based on the American 4-Point System.  Mr. Jonathan Wong stated that he was not aware of that.

13.  Mr. Jonathan Wong denied that it was commonly the case that the test or standard used for fabrics sold to customers by him was the American 4-Point System.  He stated that in Europe another standard was used.  He stated that the standard used for testing the quality of yarn was not the American 4-Point System which was one of the standards used for testing the quality of fabrics, not yarns.  He does not agree that the standard commonly used in Hong Kong for testing yarn or fabric is the American 4-Point System.

14.  There is no evidence of a previous course of dealing between the Plaintiff and the Defendant where linen yarn was sold to the Defendant by the Plaintiff and the Defendant returned the yarn on the basis clearly communicated to the Plaintiff that fabric knit from the yarn did not meet the American 4-Point System and the Plaintiff accepted that the standard to be used was to be the American 4-Point System.  In fact Mr. Jonathan Wong stated that the Plaintiff was quite willing to take back yarn sold by it to the Defendant if the yarn was not processed but in its original state as delivered to the Defendant, merely on the basis that the yarn was not suitable for use by the Defendant. 

15.  I have no reason to disbelieve the evidence of Mr. Jonathan Wong and I find him to be a credible witness.  I accept his evidence referred to aforesaid.

16.  From the aforesaid it is clear that there was no knowledge on the part of the Plaintiff that linen yarns sold to the Defendant, knit into fabric by the Defendant would invariably be tested as to its quality according to the standard of the American 4-Point System.  There is no reference to this in any communication or document in the previous course of dealings between the Plaintiff and the Defendant.

17.  The Plaintiff's Counsel referred to the House of Lords' decision of McCutcheon v. David Macbrayne Ltd. [1964] 1 WLR where Lord Devlin stated at pp 134-135 that:-

“In my opinion, the bare fact that there have been previous dealings between the parties does not assist the respondents at all.  The fact that a man has made a contract in the same form 99 times (let alone three or four times which are here alleged) will not of itself affect the hundredth contract, in which the form is not used.  Previous dealings are relevant only if they prove knowledge of the terms, actual and not constructive, and assent to them.  If a term is not expressed in a contract, there is only one other way in which it can come into it and that is by implication.  No implication can be made against a party of a term which was unknown to him.  If previous dealings show that a man knew of and agreed to a term on ninety-nine occasions, there is a basis for saying that it can be imported into the hundredth contract without an express statement.  It may or may not be sufficient to justify the importation – that depends on the circumstances; but at least by proving knowledge the essential beginning is made.  Without knowledge there is nothing.”

The evidence aforesaid shows that the Defendant has not proved that the Plaintiff was ware of the alleged term that yarn purchased by the Defendant would be woven into fabric which has to meet the standard of the American 4-Point System.  The Defendant therefore cannot establish that the Agreements in the purchase orders contained this implied term.

18.  I find that there was not an implied term either from the previous course of dealings between the Plaintiff and the Defendant that the fabrics which would be manufactured by the Defendant using the Plaintiff's linen yarns in PO 3085 and PO 3162 should comply with the American 4-Point System.

The 2nd Issue

19.  This issue does not arise as I have found against the Defendant's contention in Issue 1.

The 3rd Issue

20.  In the issue I have to find whether the times for making deliveries under PO 3085 and PO 3162 were made of the essence by the Defendant?  If so, whether the Plaintiff had delayed and was late in making the deliveries of the linen yarns to the Defendant under PO 3085 and PO 3162.

21.  The Defendant on 21 March 2006 about one week before the trial amended the Defence and Counterclaim to include an assertion that Ms. Mabel Yeung of the Defendant had a telephone conversation with Mr. Jonathan Wong of the Plaintiff in or around October 2002 that the natural linen yarn had to be supplied on time and should be of good quality.  This was supported by her evidence contained in her Supplemental Witness Statement dated 20 March 2006 wherein she stated that the Defendant was in a tight schedule to provide linen fabric or natural flax fabric to a client.  She stated as follows:-

“I immediately explored with Mr. Jonathan Wong of the Plaintiff to confirm if the Plaintiff was able to provide the linen to Winnitex for making the required fabrics before the deadline aforesaid.  During the negotiation on this Order with Mr. Wong, I emphasized that the subject linen had to be of good quality because Winnitex have no time to waste.  According to previous dealings between Winnitex and the Plaintiff, the goods supplied by the Plaintiff had to pass the testing of American 4-Point System.  For the reason as stated in the Witness Statement of Miss Choy, I informed Mr. Jonathan Wong that time for supply of the linen was of vital importance and of essence.  In view of the past cordial relationship between the Plaintiff and the Defendant, Mr. Jonathan Wong warranted to me in unequivocal term that the Natural Linen in respect of Purchase Order 3162 would be delivered to the Plaintiff on or before 30 October 2002.  In reliance upon the warranty given by Mr. Jonathan Wong, I on behalf of the Defendant placed the Purchase Order YSA 3162 dated 19 October 2002 with the Plaintiff.”

22.  Ms. Choy Yuen Pik the Sales Manager of the Defendant gave evidence.  She stated that she did not have direct dealing with Mr. Jonathan Wong of the Plaintiff in relation to the purchase orders.  She worked closely with Ms. Mabel Yeung.  She said before placing the purchase order for linen yarn on the Plaintiff, the Defendant had purchased from other suppliers linen fabric for their customer.  However, their customer rejected the quality of the fabric.  They then decided to purchase yarn from the Plaintiff to manufacture fabric for their customer.  She had asked their customer to defer delivery under 30 November 2002.  She therefore told Ms. Mabel Yeung that no delay could be accepted and the quality of the yarn had to be good.

23.  Mr. Jonathan Wong gave evidence that when Ms. Mabel Yeung telephoned him to place the PO 3162, he told her he did not have the 9's (15NM/1) 100% Natural Linen in stock and had to manufacture it.  Ms. Mabel Yeung told him that the Defendant urgently needed the yarn.  He told her to go to other suppliers because he did not have the stock.  She insisted on placing the PO 3162. 

24.  It is not in dispute that the first PO 3162 was dated 19 October 2002, see page 58 of BD-T, for 8190 kgs (273 cartons).  Delivery dates were stated therein to be “25-10-2002 of 137 cartons; 30-10-2002 of 136 cartons”.

25.  On 5 November 2002 a first revised order of PO 3162 was sent to the Plaintiff for a further order of 150 kgs.  Delivery date details in this order was unchanged, see page 59 of BD-T.  Again a second revised order which was dated 5 November 2002 was placed on the Plaintiff for a further 650 kgs of yarn, see page 60 of BD-T.  The delivery date details were the same as in the original purchase order namely on 25 October 2002 and 30 October 2002.  This second revised order contained a fax machine imprint of the outgoing date of 19 November 2002.  Mr. Jonathan Wong stated that it was in fact faxed to the Plaintiff on 19 November 2002, 19 days after the second delivery date of 30 October 2002.  Mr. Jonathan Wong stated in evidence that before he received the first PO 3162, he told the Defendant's staff that the Plaintiff would be late in making delivery.  When he received the first revised order he again told Ms. Mabel Yeung that delivery would be late.  He stated that with an increased order more time would be required in manufacturing the yarn.

26.  Ms. Mabel Yeung denied that Mr. Jonathan Wong told her that he did not have stock for the 9's (15NM/1) yarn and needed to manufacture the yarn and that he told her to order from another supplier.

27.  It would seem from the evidence of Ms. Choy Yuen Pik that the Defendant urgently needed the yarn because it had an order from a customer that had a deadline which was made more urgent because fabric formerly ordered by it from another supplier had been rejected by its customer on quality.  It may well have been the case that in desperation Ms. Mabel Yeung placed the PO 3162 on the Plaintiff hoping that the Plaintiff would be able to comply with the order within a reasonable time even though it may not be able to make delivery on stipulated dates. 

28.  One thing is clear, by the late revisions of orders, the second revision order faxed to the Plaintiff on 19 November 2002, the message is given that the dates of delivery of 25 and 30 October 2002 is not of the essence as even on 19 November 2002 the Defendant was still enlarging the quantity of the order.  In the evidence of Mr. Jonathan Wong and Ms. Mabel Yeung it is not in dispute that it takes 4 days for goods to be delivered by truck by the Plaintiff's factory to the Defendant's factory in Zhejiang.  The Defendant well knew that even were the goods to leave the Plaintiff's factory on 19 November 2002, it could not reach the Defendant's factory until 23 November 2002.  In fact the second and final delivery reached the Defendant's factory on 23 November 2002.

29.  I have to find whether time for delivery stipulated in the first PO 3162 was of the essence under the aforesaid circumstances.  In relation to the two versions of evidence related what the parties stated in relation to time for delivery, I prefer the evidence of Mr. Jonathan Wong to that of Ms. Mabel Yeung.  Mr. Jonathan Wong was a good witness and impressed me as a truthful and reasonable person.  Whereas, Ms. Mabel Yeung's evidence in her Supplemental Witness Statement was only filed less than one week before trial.  It struck me that it is not believable that she could remember details of a telephone conversation 3½ years ago of which there is no previous written record.  According to Mr. Jonathan Wong at the time of the placing of PO 3162 by Ms. Mabel Yeung he told her that he had to manufacture the yarn and may not be able to deliver on the stipulated time.  Mr. Jonathan Wong stated that he understood that time of delivery was not of the essence.  I accept his evidence.  The course of events show that the Defendant could not have imposed strict time of delivery on the Plaintiff or else it would not have sent revised orders as late as 19 November 2002.  This conduct is inconsistent to its stated position of enforcing strict time of delivery even if initially time was of the essence.  However, as I believe and accept the evidence of Mr. Jonathan Wong, Ms. Mabel Yeung was aware at the time of placing the order in PO 3162 that the Plaintiff was not able to comply with the stated times of delivery and despite that still placed the order.  She must have been willing to accept the Plaintiff's stated position at the time she placed the order that the Plaintiff may not be able to deliver on the stated times.

30.  I refer to the landmark English Court of Appeal's decision of Charles Rickards Ltd. v. Oppenhaim [1950] 1 KB 616 referred to by the Plaintiff's Counsel.  In this case the contract was for the sale of a Rolls Royce Silver Wraith chassis; Lord Denning said at pp. 621-627:

“It is clear on the finding of the trial judge that there was an initial stipulation making time of the essence of the contract between the plaintiffs and the defendant: the body of the car was to be completed “within six, or, at the most, seven months.”  Mr. Sachs did not seek to disturb that finding; indeed, he could not successfully have done so.  But what he did say was that that stipulated time was waived.  His argument was that, the stipulated time having been waived, the time became at large, and that thereupon the only obligation of the plaintiffs was to deliver within a reasonable time.

…… I agree that that initial time was waived by reason of the requests that the defendant made after March, 1948, for delivery;

…… the defendant, as he did, led the plaintiffs to believe that he would not insist on the stipulation as to time, and that, if they carried out the work, he would accept it, and they did it, he could not afterwards set up the stipulation as to the time against them.  Whether it be called waiver or forbearance on his part, or an agreed variation or substituted performance, does not matter.  It is a kind of estoppel.  By his conduct he evinced an intention to affect their legal relations.  He made, in effect, a promise not to insist on his strict legal rights.  That promise was intended to be acted on, and was in fact acted on.  He cannot afterwards go back on it.”

31.  It seems to me that by sending the second revised purchase order which to all intents and purposes was faxed to the Plaintiff on 19 November 2002, as the imprint from the Defendant's fax machine on the photocopy purchase order at page 60 of BD-T showed, the Defendant had led the Plaintiff to believe that it would not insist on the stipulation as to time, and that if they carried out the work, the Defendant would accept it.  As the Plaintiff did so, the Defendant could not afterwards set up the stipulation as to time against them.

32.  The 4th revised PO 3085 (Rev. 4) was dated 9 December 2002.  This was dated after the last delivery date written therein.  The reasonable inference could be drawn from this is that the Defendant was not insisting that the Plaintiff should make deliveries on or before the last written date for delivery but would allow the Plaintiff to make deliveries even after the expiry of that last written delivery date on 29 November 2002.

33.  I therefore find that time was not made of the essence in the purchase orders entered into by the Plaintiff and the Defendant.  Even if it was made of the essence, in the placing of the orders, which I do not find to be the case, by the respective revision of the purchase orders in both PO 3085 and PO 3165 the Defendant had given a clear message that such stipulation as to time would be waived. 

The 5th Issue

34.  There is no evidence adduced by the Defendant or the Plaintiff that there is a quality previously agreed between them in their prior trade dealings as being the accepted quality of yarn to be sold by the Plaintiff to the Defendant apart from the allegation of the Defendant denied by the Plaintiff and decided in the 1st Issue, that the fabric knit from the yarn shall comply with the American 4-Point System.  I already made a finding that there was no implied term in relation to this in the 1st Issue.

35.  As regards whether there is a quality of yarn accepted generally in the trade, the Plaintiff admitted in its Amended Reply that the Natural Linen and Semi-bleached Linen shall be of such quality as accepted generally in the trade.  As regards what that quality is, the Defendant's witnesses are not experts on yarn and could not give evidence on this.  They are textile inspectors and their expertise is on fabrics.  Under cross-examination they agreed that they did not know how to test linen yarns and they were not conversant with the standards for testing the quality of linen yarns.  The Defendant's 2 experts (who claimed to have many years of inspecting and examining linen fabrics) did not say that such a trade usage existed.  Mr. Wilson Wong the Plaintiff's expert stated that in oral evidence that there is an accepted standard for yarn.  It is based on a technical specification.  He also referred to the technical specification under the FZ/T32001-1998 Section 4.1.  He sets out a table related to the technical specification in Table 1 of his expert report at pages 257 to 275 (b). 

36.  In relation to the legal test for trade usage, again the Plaintiff's Counsel referred to Essabhoy Ebrahim (HK) Ltd. v. Tai Fong Dyeing and Weaving Factory Ltd. [1978] HKLR 567, where there was a contract for the supply of indigo dye and Mr. Justice Zimmern formulated the test for trade usage at p. 572.

“On this evidence the court is asked to say that by the custom and usage of trade in Hong Kong there is annexed to a contract in writing for the sale and purchase of BASF 60% grain a term that the packing would be in sealed drums.  Farewell LJ. In Devonald v. Rosser & Sons (1906) 2 KB at 743 said:

“A custom to be good must be reasonable, certain and notorious”

37.  There is no objective evidence whether the technical specifications referred to by Mr. Wilson Wong comply with the test for trade usage aforesaid.  What is certain is that there is no evidence that the yarn in PO 3085 and PO 3162 did not comply with the technical specifications in FZ/T32001-1998 Section 4-1.

38.  Both the Plaintiff's and the Defendant's experts are agreed that the accepted quality of yarn by trade usage is not that the yarn should be of such quality that when knit into fabric, the fabric should comply with the American 4-Point System.  All experts are agreed that the American 4-Point System is not the test for yarn but for fabric.

39.  I therefore find that the Defendant has failed to establish on a balance of probability that the Natural Linen and Semi-bleached Linen shall be of such quality as previously agreed by the parties in their prior trade dealings.  Although the Plaintiff's pleaded case is that the quality of the Natural Linen and Semi-bleached Linen shall be of such quality as accepted generally in the trade, there is no evidence to state what is the quality or test to assess the quality which is accepted generally in the trade.  Even if the test were that of the FZ/T32001-1998, there is no evidence that the yarns delivered in PO 3085 and PO 3162 are not of the quality of that standard. 

The 6th Issue

40.  There is no evidence adduced to support this issue.  Further, I had found the evidence of Ms. Mabel Yeung to be not so reliable as she seeks to assert contents of telephone conversations made 3½ years ago of which she had made no written record related to details of what she had said to Mr. Jonathan Wong.  This is referred to in the contents of her Supplemental Witness Statement which was filed only six days before trial and 3½ years after the event to support the contents of the Amended Defence and Counterclaim amended 3½ weeks before trial.

41.  I find against the Defendant on this issue.

The 7th Issue

42.  In considering this issue it is necessary to understand the meaning of “merchantable quality” and “fit for its purpose”.

43.  The Plaintiff's Counsel referred to the Hong Kong decision of Oracle Enterprises Ltd. v. The Gosho Co. Ltd. [1962] HKLR 702.  In this case the plaintiff buyer agreed to buy 150,000 yards of dyed rayon material known as “Fujiette” from the defendant seller; the plaintiff was dissatisfied with the quality of the goods and sued for damages; Mills-Owen J. dismissed the plaintiff's claim and held that the goods were of merchantable quality and fit for its purpose (namely, to make lingerie for USA ladies pyjamas).  Mr. Justice Mills-Owens continued to say at pp. 724-726 that:

“If it were to be held that there was a more limited implied condition, namely, of fitness for lingerie without reference to any particular market, my view is that the material is in fact reasonably fit for that purpose.  Lingerie may, obviously, be manufactured out of almost any material reasonably wearable as a matter of personal comfort, and if a buyer is concerned as to the aesthetic quality of the goods he requires it is for him to make the necessary stipulation.  Here, as it appears to me, it is the aesthetic quality of the material which is complained of; there is no question of the material as such being incapable of manufacture into lingerie or being un-wearable only with dire consequences.

On the issue of “merchantable quality” arising, as Mr. Zimmern concedes it does arise, under section 14 (2), the expression includes the “state or condition” of the goods [section 62 (1)].  Various judicial definitions of the expression have been quoted by counsel.  Mr. Zimmern would rely upon the statement of Lord Wright in Cammell Laird v. Managanese Bronze (supra) at p. 430:-

“What subsection (2) now means by ‘merchantable quality' is that the goods in the form in which they were tendered were of no use for any purpose for which such goods would normally be used and hence were not saleable under that description.”

He also referred to Weiler v. Schilizzi where Willes J. said:-

“The purchaser had a right to expect, not a perfect article, but an article which would be saleable in the market as (Calcutta linseed)”.

Halsbury (para. 78) adopts the statement of Farwell L.J. in British Tramways v. Fiat Motors Ltd., in the following terms:-

“Goods are of merchantable quality where they are of such quality and in such condition that a reasonable man, acting reasonably, would, after a full examination, accept the goods in the circumstances of the case in performance of his offer to buy them, whether he buys for his own use or to sell again.

Accepting, as I do, that the alleged defects are inherent in the material Fujiette, arising inevitably in the course and mode of manufacture of such material, the material in this case conformed to what a buyer would expect to obtain in the market on ordering Fujiette, and it is capable of use for the purpose for which Fujiette is ordinarily bought.  A reasonable man, acting reasonably, would accept the material as being of the usual quality and condition.  Hence it is of merchantable quality within the meaning of the Act.”

44.  From the Judgment the following definitions of “merchantable quality” could be found:-

“the goods in the form in which they were tendered is of use for the purpose for which such goods would normally be used and hence were saleable under that description.”

“an article which would be saleable in the market as (100% natural linen natural colour or 100% natural linen semi-bleached as described in the purchase orders)”

“goods of such quality and in such condition that a reasonable man, acting reasonably, would, after a full examination, accept the goods in the circumstances of the case in performance of his offer to buy them, whether he buys for his own or to sell again.”

45.  The evidence shows that in PO 3085 Plaintiff delivered 2 sample cones of 2 kg each to the Defendant for them to knit into sample fabric to test.  According to Mr. Jonathan Wong the Defendant urged them to deliver the order of yarn before they could test the sample.  After delivery of the first lot of 450 cartons the Defendant returned 445 boxes of the yarn and he sent replacement for the returned yarn.  Finally all the yarn was delivered.

46.  Mr. Jonathan Wong gave evidence that his yarn was of the highest quality.  The Plaintiff imported all the materials from France and Belgium.  They were the best material in the world.  The Plaintiff sold them to other clients.  The yarn in PO 3085 returned by the Defendant had all the packaging intact.  They put down the words “Return Goods” on the box.  The Plaintiff sold these same goods to other clients.  There were no complaints from the clients.  That is why when clients suggest the return of yarn the Plaintiff accepts it. 

47.  Ms. Mabel Yeung stated in evidence that after the yarn in PO 3085 was woven into fabric by the factory in Zhejiang she complained to the Plaintiff that the yarn had serious coarse picks.  The defective linen was further processed and more than 50,000 yards of fabric was made from it.  The wastage amounted to 2,491 yards of material.  She calculated at the cost of HK$22.76 per yard.  The wastage loss was a sum of HK$56,695.  She telephoned Mr. Jonathan Wong to ask him to bear half of it.  He agreed.  She then sent the Debit Note dated 18 June 2003 at page 220 of the Bundle of Documents (BD-2).  It would seem that this happened 7 months after delivery of the yarn.

48.  Mr. Jonathan Wong stated that after he received the Debit Note at page 220 of BD-2 he telephoned her.  He told her that he would not discuss with her whether the yarn is defective.  He told her that after delivery of 453 boxes to her she returned 445 boxes.  The rest she was sure she could use.  He said to her that he will not argue with her as regards whether the yarn was good or not but if you want to deduct anything you deduct it but you pay the balance.  He agreed to pay the $28,3476 but he demanded that the Defendant pay the other balances. 

49.  In relation to PO 3162, Mr. Jonathan Wong stated that the Plaintiff in response to a fax from the Defendant at page 157 of BD2 wherein the Defendant requested samples of 6's and 9's semi-bleach 100% linen yarn, sent a sample of 9's semi-bleach to the Defendant to see the evenness of 9's 100% linen yarn.  As the Plaintiff did not have stock of 9's 100% natural linen stock ordered in PO 3162 Mr. Jonathan Wong sent 9's semi-bleach 100% linen yarn to the Defendant simply to see the evenness of the yarn.  Subsequently he sent a shipment sample of 9's 100% natural linen for PO 3162 to the Defendant.

50.  Ms. Mabel Yeung on the other hand denied that samples were sent for PO 3162.

51.  Mr. Jonathan Wong stated in evidence that even though the Defendant subsequently sent a letter of complaint dated 18 June 2003 to him at page 221 of BD-2 claiming damages arising from alleged defective yarn and late delivery, at the end, he sort to resolve their dispute in order to obtain payment from the Defendant.  Mr. Jonathan Wong stated that Ms. Mabel Yeung told him that they made delivery of fabric made from the yarn in PO 3162 to their client and their client rejected the fabric because of poor quality.  Mr. Jonathan Wong denied that the yarn delivered was of poor quality.

52.  The Defendant in this trial adduces expert evidence from Mr. Wong Sing Ming a textile inspector of SGS Hong Kong Limited, whose report is at pages 343-350 of BD-2 and Mr. Hung Hing Pui another textile inspector of SGS Hong Kong Limited whose report is at pages 327-330 of BD-2.  They stated that the PO 3162 fabrics which were still in rolls, inspected by them did not comply with the American 4-Point System test.

53.  The Plaintiff adduced expert evidence of Mr. Wilson Wong, Manager of CMA Testing and Certification Laboratories whose report is dated 22 August 2005 and at pages 248-325 of BD-2 and Mr. Kenny Ho of CMA Testing and Certification Laboratories whose Supplemental Report is dated 30 September 2005 and at pages 354-361 of BD-2.  Mr. Kenny Ho gave evidence that the fabric tested by him allegedly manufactured from PO 3162 which fabric came from the Defendant complied with the American 4-Point System.

54.  All four experts agreed that the American 4-Point System is for testing fabric and is not suitable not for testing the quality of yarn.  Mr. Wilson Wong stated that when yarn is woven into fabric, it has to go through processes in the weaving and after the weaving.  The American 4-Point System is a method of visual inspection of defects in the fabric.  There are ten categories of defect descriptions that would be counted per 100 yards of fabric for American 4-Point System testing.  These are “coarse end”, “broken end”, “colour stain”, “coarse pick”, “broken pick”, “filling bar”, “hole”, “dirt/stain”, “slub”, and “foreign fiber”.  The maximum tolerance to qualify for “First Quality” under the American 4-Point System is 40 defect points per 100 yards.  Fabric is visually inspected to identify the defects per 100 yards.  However in respect of the 10 descriptions of defects, “broken end”, “colour stain”, “broken pick”, “filling bar”, “hole”, “dirt/stain”, “foreign fiber” relate to defects that arise from the weaving process and has nothing to do with the quality of the yarn.  Only “coarse end”, “coarse pick” and “slub” relate to the quality of the fiber.  Even though these relate to the quality of the fiber, there is a process in weaving that could reduce these defects.  Hence the report of visual inspection by Mr. Hung Hing Pui at page 328 of BD-2 where he has counted a total of 943 defects for 987 yards of fabric cannot truly reflect the quality of the yarn and what is acceptable for yarn.  After discounting points for defects arising from weaving the remaining defects are, 199 points of “coarse end”, and 147 points of “coarse pick” and 24 points of “slub” which totals 370 points for 987 yards.

55.  This shows that the American 4-Point System cannot accurately reflect the quality of the yarn.  All four experts agree that the American 4-Point System cannot reflect the quality of the yarn.

56.  The Plaintiff sold yarn to the Defendant who had time to inspect the yarn.  The Defendant thereafter wove the yarn into fabric.  The Defendant's customer rejected the fabric woven from the PO 3162.  It has been submitted by the Defendant's Counsel that there is evidence from the Defendant's expert report from their testing under the American 4-Point System that the yarn is of defective quality.  However, the Plaintiff's experts report came up with the result that the fabric tested by them complied with the American 4-Point System.  Mr. Kenny Ho, the Plaintiff's expert stated that when applying the American 4-Point System to test the fabric, one has to look at the fabric from the perspective of its natural characteristic.  He stated it is the natural characteristic of linen fabric to have uneven thickness of yarn.  The “coarse picks” that are to be regarded as defects are obvious and are those that are not in harmony with the rest of the fabric and one can easily see the linen yarn is much thicker than the rest of the yarn in the fabric.  From his visual inspection he came to the conclusion that subject to that consideration the fabric complied with the American 4-Point System.  Mr. Kenny Ho supported his comments from his internet research wherein he found an article on “Fabric”.  This is exhibited and marked Exh. P5.  The sources of the article were said to come from books entitled “Textiles” by Sara. J. Kanddph and Anna L. Langford etc. and “Fabric Science” by J.J. Pizzuto.  In relation to linen it states, “A distinctive character of lien is its natural luster and somewhat irregular yarn appearance, seen especially when the fiber is plainly woven”.

57.  Mr. Hung Hing Pui the Defendant's expert under cross-examination stated that he agreed that the natural characteristics of linen fabric would include neps and slubs and coarse yarn.  However under re-examination he qualified that to state that linen of higher grade would have these neps, slubs and coarse yarn reduced by process.  It is not clear as regards whether this is a process in the weaving or a process in manufacturing of the yarn.

58.  Mr. Wilson Wong stated at page 6, paragraph 2.1 of his Report, page 254 of BD-2 that,

“Just for reference only and cannot be directly reflected the actual quality of cone yarn status, the inspection reports was found that all inspected samples were concluded to be “First Quality” with remark of slight neps and slubs on fabric surface which due to the natural character of material “Linen”.  With reference to the inspection reference book (“Fabric, Inspection & Grading”, Page 11, by Daniel Powderely, Published by Bobbin International, 1987), it stated that “…… fabrics have natural irregularities which are common to a given fabric type.  These should never be considered as defects”.  In fact, this slight neps and slubs also can be removed by the finishing treatment after fabric manufacturing process.”

59.  Having considered the evidence aforesaid and the evidence that the Defendant's customer rejected fabric manufactured from the yarn, I have to find whether the Defendant established on a balance of probability that the yarns in PO 3085 and PO 3162 are not of merchantable quality, having regard to the definitions of “merchantable quality” aforesaid.  I find having regard to all the evidence that the Defendant has not established on a balance of probability that the yarns in PO 3085 and PO 3162 are not of “merchantable quality”.

60.  My analysis is as follows:-

(1) The fact that the Defendant's customer rejected the fabric manufactured from the yarn may have something to do with the customer's requirements related to the fabric.  However as we had seen, out of 10 categories of points of defects considered as defects under the American 4-Point System, 7 arise from the weaving process and 3 relate to the quality of the yarn.  The weaving process could heavily affect the quality of fabric.  Hence from the test report of Mr. Hung Hing Piu, out of 943 defects which he found in 987 yards of fabric, only 370 of these could have arisen from the quality of the yarn.  It can be seen that the fact that fabric may be of “unmerchantable quality” could have little co-relation as regards whether yarn could be of “unmerchantable quality”.

(2) The experts reports based on the testing of the fabrics under the American 4-Point System cannot show whether the yarns were of unmerchantable quality.

(3) The fact that the Plaintiff willingly accepted the return of part of the first delivery of yarn in PO 3085 cannot prove that the remaining batch retained by the Defendant was unmerchantable.  The Policy of the Plaintiff was to accept return of yarns which clients found unsuitable so long as they have not been processed.  Further Mr. Jonathan Wong stated in evidence that the returned yarn in PO 3085 was subsequently sold by him.  This shows it is saleable.

(4) The fact that he agreed to pay half of the cost of fabric wastage in the sum of $28,347 under the Debit Note at page 220 of BD-2 dated 18 June 2003 months after the event cannot establish that the yarn is unmerchantable as he agreed to pay subject to the Defendant paying the balance of the price due.  This is a commercial agreement.  Subsequent attempts at settlement cannot establish this that the yarn is of unmerchantable quality either. 

(5) In paragraphs 6, 7 and 8 of the witness statement of Ms. Mabel Yeung she refers to yarn delivered under PO 3085 on or about 6th November and again on 20 November 2002 which was found defective.  She sent a letter dated 21 November 2002 at page 181 of BD-2 to complain of the quality of the yarn.  However, Mr. Jonathan Wong stated in evidence that the Plaintiff accepted the return of 6,000 kgs of yarn and replaced these as evidenced in the Invoice dated 25 November 2002 at page 191 of BD-2 and again accepted the return of 5,000 kgs of yarn and replaced these as evidenced in the Invoice dated 26 November 2002 at page 194 of BD-2.  Hence these complaints of poor quality of yarn relate to yarn returned and subsequently replaced by other yarn which was accepted by the Defendant.

(6) I accept the evidence of Mr. Wilson Wong and Mr. Kenny Ho that “…… fabrics have natural irregularities which are common to a given fabric type.  These should never be considered as defects”.  Some of the minor neps, slubs and coarse yarn found by Mr. Hung Hing Piu in his test of the fabric may not be defects.

61.  According to Mr. Jonathan Wong, he had sought payment of sums due from the Defendant since 10 December 2002 (see page 202 of BD-2).  It would not be surprising that in order to obtain payment he would discuss terms with Ms. Mabel Yeung.  I therefore find that the Defendant has not established that the yarns in PO 3085 and PO 3162 were not of merchantable quality.

62.  Further the Plaintiff's Counsel referred to the 4,580 yards (or 34.6%) of the 13,231 yards of fabric alleged to have been woven from yarn supplied under PO 3162, that was subsequently sold by the Defendant to a company called Berlin Textiles Company Ltd. (“Berlin Textiles”) at HK$25.5 per yard.  This could be contrasted with the sales contracts with Carry Wealth Limited (“Carry Wealth”), the Defendant's customer which contained a unit price of US$4.46 (or HK$34.7 if US$1 = HK$7.8) per yard.  The said 4,580 fabrics were sold at a discounted price.

63.  He submits that these sales to Berlin Textiles militates against the Defendant's argument that the fabrics were not merchantable and were unfit to be made into garments.

64.  There is no evidence that the yarn is not fit for making into fabrics.  In fact fabrics were made from yarn sold in PO 3085 and PO 3162.

65.  The Plaintiff's Counsel also submits that as the Defendant had in PO 3085 and in all previous course of dealings knit sample yarn into fabric to test whether the yarn was acceptable, the Defendant could not have relied on the seller's skill or judgment.  S. 16 (3) of SOGO relied on by the Defendant state:-

“40. Section 16 (3) of the same Ordinance states,

“Where the seller sells goods in the course of a business and the buyer expressly or by implication, makes known to the seller any particular purposes for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's skill or judgment.”

66.  It is clear that where the circumstances show that the buyer does not rely on the seller's skill or judgment the implied condition of fitness for the purpose under s. 16 (3) of SOGO does not apply.

67.  The evidence does not show that the Plaintiff was specifically told that the yarn would be made into fabric which would be made into high quality garments.  Ms. Mabel Yeung in oral evidence stated in evidence that she told Mr. Jonathan Wong that the yarn would be made into fabric and sold to the Defendant's customers to be made into garments.  I have found the evidence of Ms. Mabel Yeung not wholly reliable and not acceptable.  Even had Ms. Mabel Yeung told the Plaintiff that the yarn would be made into fabric which would be made into garments, there is no evidence that the yarn is not fit for the purpose to be made into fabrics which could be made into garments.

68.  I am of the view that the Defendant has not established its case that the linen yarns which were delivered to it by the Plaintiff were not of merchantable quality or not fit for its purpose under s. 16 of SOGO.

The 8th Issue

69.  Section 37 (1) of the SOGO stipulates that:

“(1)	…… the buyer is deemed to have accepted the goods-
	when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.
(2)	Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them ……”

70.  In PO 3085 and PO 3162, the Defendant had woven the yarn into fabrics and thereafter the Defendant complained of defects in the yarn.  The Defendant was unable to return the yarn to the Plaintiff in the state in which the Plaintiff sold them to the Defendant.  It is clear that in relation to the yarn in PO 3085, the Defendant had woven sample yarn into fabric for testing before asking the Plaintiff to deliver the yarn.  In PO 3162, Ms. Mabel Yeung stated in evidence that it takes 7 days to weave fabric sample of natural flax of 50 yards.  She needed to weave at least 50 yards fabric because she needed to use the same yarn for the warp and weft of the fabric.  The first lot of delivery by the Plaintiff was 3 November 2002 and the second lot was on 23 November 2002.  There was sufficient time for the Defendant to weave a sample fabric for testing immediately upon receipt of the first lot of yarn.  The Defendant had failed to do that.  The Defendant had ample time and reasonable opportunity of examining the yarn.  This is not a case where defects would not be apparent on reasonable examination by weaving yarn into sample fabric for testing.

71.  Mr. Jonathan Wong says that it is the practice of the Plaintiff to accept the return of yarn delivered by the Plaintiff to the Defendant should the Defendant find the yarn unacceptable after weaving it into sample fabric for testing.  He stated in evidence that as the yarn had been woven into fabric he could not accept the rejection of the purchase orders.

72.  The Defendant clearly had done acts in relation to the yarn in which is inconsistent with the ownership of the seller by weaving the yarn into fabric.

73.  The Defendant's Counsel argued that S. 37 of SOGO may be negatived or varied by the course of dealing between the parties or by usage if the usage is such as to bind both parties to the contract.  There is no evidence of a course of dealing between the parties whereby the entire quantity of yarn sold by the Plaintiff to the Defendant was woven into fabric and thereafter rejected by the Defendant and the Plaintiff accepted the rejection.  The previous course of dealings shows that the Plaintiff would accept the return of yarn found by the Defendant to be not acceptable upon weaving a sample fabric and testing the sample fabric.  There is no evidence of usage that could be relied on by the Defendant for departing from the effect of s. 37 (1)(b) of SOGO.  The authority relied on by the Defendant's Counsel, Cluett H.K. Limited t/a Six Continents v. Hercules Knitters Limited (unreported) HCA No. 1669 of 1985 a Judgment of Deputy High Court Judge Cruden handed down on 21 November 1986, is an authority decided on its own facts.  The contract between the parties therein contain an express term as follows:-

“Clause 9 of the sales contract in question provided that:-

“…… acceptance of all or any part of the goods is not deemed to be a waiver of the buyer's right either to cancel or return all or any portion of the goods because of failure to conform to order, or by reason of defects latent or patent.” (see:§25 of the Judgment)”

There is no such express term in the agreements between the parties herein.

74.  On the other hand, Mr. Wilson Wong the Plaintiff's expert whose opinion I accept wrote in his expert report at paragraph 5 at page 255 of BD-2 state with citing reference book stated:-

“5.1 In commercial practice, fabric manufacturer have to make sure the quality of yarn before converting into the fabric.  Hence it is the responsibility of end-use party if they convert to another state without inspection or discussion with their supplier who cannot inspect the quality of original submitted product that they supplied.”

75.  Having considered the above, I find that pursuant to s. 37 (1)(b) of SOGO, the Defendant is deemed to have accepted the yarn delivered by the Plaintiff under PO 3162 and therefore could not reject the same. 

The 9th Issue

76.  I find that the Plaintiff is entitled to recover the amount claimed.

The 10th Issue

77.  The Defendant fails in its counterclaim.

78.  Judgment for the Plaintiff against the Defendant in the sum of HK$552,630.00 together with interest at judgment rate from date of Writ to date of Judgment and thereafter at judgment rate until payment.  The Defendant's counterclaim be dismissed.  I grant an order nisi for costs of the claim and counterclaim to be paid by the Defendant to the Plaintiff to be taxed if not agreed with Certificate for Counsel.