AJAX INTERNATIONAL CO LTD v. ODYSSEY ITALY LTD

(Transferred from District Court Civil Jurisdiction Action No. 5280 of 1990 pursuant to the Order of Listing Master Suttill in Chambers herein dated the 1st day of October, 1991)

1991, No. A5359

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff sues for the balance of the price of goods sold and delivered to the defendant. Delivery was in Italy. The plaintiff claims that an associated company of the defendant carried out quality examinations on the date of each shipment, that the goods were found in good order and condition, and that certificates to that effect were issued to the plaintiff. Payment for the first and second shipments was tendered, but the defendant failed to pay for the third shipment. The plaintiff therefore claims $140,029.02.

2. The defendant says that the plaintiff knew that the goods were destined for resale in Italy, that it relied upon the plaintiff's skill and judgment, and that it was an implied condition of all contracts that the goods would be of merchantable quality. The defendant says that samples were provided and that it was an implied condition that the goods would correspond with the samples in quality and be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the said samples.

3. The defendant avers that in breach of contract, the plaintiff delivered goods which were not of merchantable quality, not reasonably or at all fit for their purpose, did not correspond with the samples in quality, and contained defects rendering them unmerchantable.

4. The only defect relied upon by the defendant was that "unsuitable fabrics were used and inadequate seam allowances were made in the manufacture of the knapsacks rendering the welts of the knapsacks insecure and cannot stand minimum strength or stress".

5. The defendant says that this defect was latent and concealed and could not have been revealed by the examinations "as to the quantity and packing of the said goods" which "were carried out by Odyssey International Limited for the Defendant before shipment of the same", but which were "not meant to be quality examinations".

6. The defendant counterclaims for $561,220.00, being the cost incurred by it in compensating its Italian customer for the cost of necessary repairs in Italy.

7. The plaintiff, in its reply, claims that it was informed that the goods were for export, and told nothing else. The plaintiff alleges that the goods were manufactured according to the product specifications given to it in the defendant's production authorizations. The defendant did not, therefore, rely upon its skill or judgment in supplying goods fit for a particular purpose.

8. The plaintiff says that it sent the defendant pre-production samples. There were no complaints. The plaintiff says that the defendant was experienced in purchasing such goods, inspected them before acceptance, and before delivery for shipment, and should have discovered such defect as is alleged. The defendant should therefore have mitigated its alleged loss.

9. The evidence in the trial was relatively brief. Mr. Mario Pozzi, a sales representative, gave evidence for the defendant. He said that the goods were to be sold in Italy by the defendant to its Italian customer, Ellesse. The defendant had sold to Ellesse all the goods which it purchased from the plaintiff.

10. The first complaint received by the defendant was on 9 June 1990 (TB 93), but he did not have a clear idea of the problem until he went to Italy around 19 June.

11. On 12 June, there was an allegation from Italy that 30% of the goods were defective (TB 94), and on 4 July, that more than 60% were defective (TB 99).

12. Mr. Pozzi said that he was present in Italy when an inspection was made. "We opened the boxes and took out the rucksacks from the polybags and we checked and the drawcord sleeves were defective in that just pulling them caused them to come away. Ichecked more than 100 pieces from various boxes and more or less all had the same defect. At the time the rucksacks were empty.

13. When asked why the plaintiff was informed on 4 July that more than 60% were defective, Mr. Pozzi said: "Because it was my hope that it was not the entire quantity, but later I was informed that it was and we sent another man to check."

14. Thus it came about that on 6 August, the plaintiff was informed that after re-inspection, the quality was found to be "totally unacceptable". "The major problem is the welt at sack opening cannot stand for minimum stress which cause seam slippages". The plaintiff was further informed about the cost of repair in Italy.

15. Mr. Pozzi said that the defendant paid Ellesse 80 million lire, and he produced invoices to prove that this was the cost of repair in Italy.

16. Mr. Pozzi was asked about various documents sent by Ellesse to the defendant, relating to the inspection of rucksacks from the third shipment. The percentage of unacceptable goods, in various lots, ranged from about 35% to 85%. Putting it another way, the percentage of goods held to be acceptable ranged from 15% to 65%.

17. Mr. Pozzi frankly admitted that the defect could have easily been discovered if the goods had been examined.

18. He was asked about the "Merchandise Inspection Report" prepared by an associated company of the defendant on 4 May in relation to 4,000 rucksacks. He admitted that there was no reference in that report to the defect in question. He said that the inspection was done by "our production merchandiser". It appears that 80 rucksacks were inspected, and there is no reference to the drawcord problem. He said that it suggests that the drawcords were not pulled, and he conceded that they should have been.

19. The second witness called on behalf of the defendant was Kenneth Cheung Wai Ming, a merchandiser employed by the defendant. He was responsible for inspecting the goods sold to the defendant and ensuring that production was on schedule. He travelled to China twice, during the production process, to make sure that the goods conformed to sample. He inspected goods on 4, 17 and 21 of May. He said that after each inspection, a report was prepared by the Director of Quality Assurance. Such report was based on his inspection (TB 063). The said Director was his superior. He said that the inspection was carried out in the carpark of the plaintiff's premises, in open space, and on 4 May, lasted about 35-40 minutes. He admitted that the drawcord problem was not discovered. The drawcords were not pulled, because "it didn't occur to me to test it. We only check for the existence of the accessories. We rarely check whether its been put together properly, only sometimes." Then he said that he should have checked it, but the vehicle carrying the goods was late and he waited in the car park for almost an hour. Then he said that he did try the drawcord sleeves, but "I didn't pull hard". He said that the certificate of inspection was issued so that the plaintiff could get paid.

20. He was shown some rucksacks with torn material (D19), and he said that in his opinion "the stitches are alright, but the material is too thin. There should be a double layer". That is why the material was torn. "An experienced manufacturer should have reinforced the material at the stitching point. The tearing is caused by the weakness of the material."

21. I should make it clear that it was never satisfactorily established in evidence where these rucksacks came from, but it appears, from all the circumstances, that they were probably part of the consignment sent to Italy. He said that they were either brought back or sent back from Italy.

22. He was then shown another rucksack, which came from the possession of the plaintiff (P1). He said it appeared to be the same kind of product. It had only a single layer of material. It was firm and strong. He didn't give a coherent explanation.

23. Chan Man Chit was the defendant's claims manager in 1990. He was instructed by Mr. Pozzi to go to Italy, and he spent 3 or 4 days there inspecting the rucksacks which had been sent to Ellesse. He went to a warehouse and opened cartons, and inspected rucksacks at random. Upon pulling the drawcord, the sleeves "ripped off". He did it "over 200 times and on each occasion, merely pulling the cord to close the sleeve caused the sleeve to come away". While he was there, the sleeves were being repaired. He tested the repaired rucksacks and was "very satisfied". He brought 5 or 6 defective rucksacks back to Hong Kong, and he said that exhibit D19, comprising 3 rucksacks, were similar. In any event, the defects in D19 were similar to those he had seen in Italy. He thought that the plaintiff's rucksack (P1) was a very good one and had slightly different material.

24. He made it clear that he considered the problem to be the connection between the sleeve material and the rucksack, and not the material itself. He said that in each of the 200 rucksacks which he examined, the sleeve ripped away very easily when the cord was pulled.

25. The final witness for the defendant was Wong Yat Hong, a partner in a surveying firm. Although he only holds a secondary school qualification, he has been in the business of cargo inspection for 25 years.

26. He prepared a survey report, (TB 106) in relation to one rucksack supplied to him by the defendant. He couldn't say if it was one of the three in D19. Insofar as that rucksack was concerned, he concluded that "the sewing finishing were not good enough to support the pulling force by cord drawing"

27. For the plaintiff, Carrie Liu Wai Chu handled shipping and merchandising. She said that the goods produced were in accordance with the samples prepared pursuant to production authorization from the defendant (TB 042, 044, 052, 054).

28. She was present at the defendant's inspection on 4 May. Three people arrived on that occasion. "They opened 6-8 cartons and inspected for half an hour. They pulled the cord of the rucksack. I was present .... They pulled the cords on the sleeves, because this is a basic method of inspection. There were some thread ends and they used a lighter to burn them. The pulled all the parts, at the stress points. They drew the cord to see if it could be done smoothly. They also pulled back the sleeves and showed me the thread ends in the sleeve area."

29. There was no complaint about having insufficient time to inspect. On 16 May, she was again present at another inspection, and this time, two persons carried out the inspection in her office. There was no complaint about insufficient time to inspect. Likewise on 21 May, although there was only one person present and the inspection was less detailed than before, and only took 15 minutes. Whereas on the first inspection, 6-8 cartons were opened, on the last occasion only 3-4 cartons were opened.

30. She was asked about the samples. She said that she recalled a comment that the material for the sleeves was too thin, but that it was nevertheless accepted. She also recalled a complaint about the sleeves after delivery, but it was handled by her boss, Ricky Lee.

31. She was asked, in cross-examination, why she remembered the defendant's representatives pulling the cords and she said: "I saw them doing it. I don't remember the exact dates, but I stood there and watched for half and hour so I remember the procedures they used."

32. The final witness for the plaintiff was To Shung Yee, an expert, and a department manager of SGS Hong Kong Ltd. He compiled reports (P3, P4).

33. He said that he had examined P1 and D19. He said that they were basically no different. The torn and loose sleeves in D19 were caused by "a very great force". He thought that "if the rucksack was full of objects and you used the cord as a handle to lift it, the sleeve may tear". However, that was not the function of the cord. The function of the cord was to close the sleeve. Ordinary usage would not have created the tears seen in D19.

34. During cross-examination, he was asked to rip the seam of P1. This was done and it was discovered that the sleeve was not double folded. He thought that while stitching and material were important, "decent" material and "good" stitching would have been sufficient. He thought that the material of D19 and Pl felt the same. 1 thought that two layers of stitching might not have been 1 possible. He had not seen it used in bags before, although he had seen it in garments.

35. I turn to a brief analysis of the evidence. The most striking feature is the evidence from the defendant's claims manager, Chan Man Chit, that in a warehouse in Italy, he plucked some 200 rucksacks out of cartons, at random, only to discover that each and every one of them was defective, insofar as merely pulling the cord in the ordinary way caused the sleeve to rip away. Mr. Pozzi said more or less the same thing. He checked more than 100 rucksacks at random and more or less all had the same defect.

36. I find that evidence very difficult to accept for a number of reasons. First, and foremost, I cannot accept that the examination of the rucksacks in Hong Kong could have failed to reveal such a defect. Even assuming that the inspectors were lazy, inefficient and unintelligent, I consider it most unlikely that anyone could examine one of these rucksacks, even in the most cursory and casual way, and fail to pull the drawcord sleeve. When one looks at the Merchandise Inspection Reports which had to be filled in before the Certificates of Inspection were prepared, it can immediately be seen that they make provision for a reasonably detailed and thorough inspection. One of the first things I would expect any inspector to do is to firmly pull the drawcord sleeve to test whether it actually closes the sleeve. It appears to me to be the most natural and obvious thing to do in relation to the rucksack.

37. Second, if this was such a universal defect as to be present in every rucksack, I am at a loss to understand why not a single example was produced in evidence. In fact, three rucksacks were produced as D19. Even assuming, on the balance of probabilities, that they were three of the rucksacks sent back from Italy, they did not appear to me to be examples of the sort of defect described by Mr. Pozzi and Chan Man Chit. The sleeves of these rucksacks had indeed been torn, but there was no evidence as to how they had been torn, by whom, and in what circumstances. I have no hesitation in accepting the evidence of To Shung Yee, the expert, that the torn sleeves in the 3 rucksacks (D19) were caused by "a very great force" and not by ordinary usage. Where were the rucksacks where the sleeves ripped away merely by pulling the drawcord? And why did Kenneth Cheung say that the stitching was alright, but the tearing was caused by the weakness of the material?

38. If these rucksacks were all defective in the manner alleged, why did the defendant inform the plaintiff on 12 June (DB 094) that 30% of the goods were defective? If every sleeve was defective as alleged, I find it difficult to understand this estimate. After Mr. Pozzi's return from Italy, the defendant informed the plaintiff that the percentage of defective goods was "over 60% from the whole shipment". If Mr. Pozzi had found that "mare or less all had the same defect", why this estimate after his visit? Mr. Pozzi's explanation that despite the fact that all the rucksacks he saw were defective, he still hoped that some were not, was not particularly convincing. And where did the "over 60%" estimate come from?

39. I am bound to say that I much preferred the evidence of Carrie Liu to that of Kenneth Cheung. The latter's evidence was unimpressive and contradictory. On the one hand he said that he should have checked the drawcords and the sleeves, while on the other he said that "we only check for the existence of accessories", and "we rarely check that its been put together properly, only sometimes." This evidence, as I have suggested, is by no means consistent with the Merchandise Inspection Report, which specifically makes provision for inspection as to "Workmanship (Manufacturing error)". Carrie Liu had no doubt that the cords were pulled. She said that "this is a basic method of inspection", and it seems to me that this is, at the least, more probable than not. It must also be remembered that Kenneth Cheung went to China, twice, during the production process, to make sure that the goods conformed to sample. The most casual of examinations would surelyd have uncovered the defect at this stage.

40. I am not satisfied, on the evidence, that the rucksacks were defective in am satisfied that they were it was considered that they the manner alleged, although I repaired as alleged. No doubt, needed strengthening. One possible explanation is that it was discovered that when a rucksack was full, and held by the drawcord, the sleeve tended to tear. That is the sort of way in which a careless young person might handle the rucksack. Be that as it may, the defendant has not satisfied me that unsuitable fabric was used, or that unsuitable seam allowances were made. I am not satisfied either, that the goods did not correspond to the samples, or that the defendant relied in any way upon the plaintiff's skill or judgment.

41. The counter-claim is therefore dismissed.

42. I would like to add this. Even assuming that the rucksacks were defective in the manner alleged by the defendant, I am satisfied that the defendant could have avoided the loss by taking reasonable steps. In my view, the defendant would be debarred from claiming the Italian cost of repair, because it should have discovered the defects before the goods were shipped. The plaintiff bears the onus of showing that the defendant ought reasonably to have taken certain steps to mitigate its loss. In my view, the plaintiff has discharged that onus. Having sent a man to China to observe the production process, and having inspected each shipment, the defendant cannot be heard to say that it could not reasonably have been expected to discover the alleged defect. In my view, the alleged defect was only latent and concealed in the sense that it could not be seen by the naked eye. But anyone who inspected that rucksack would, in my view, almost inevitably, have pulled the drawcord and closed the sleeve. It is very likely the first thing that any reasonable inspector would have done. According to Mr. Pozzi. and Chan Sit Man, this would have caused the sleeve to rip away in each and every rucksack. If their evidence is only half true, it would surely have been uncovered after three separate inspections, following observation of the production process in China.

43. In the event, it was not discovered, and in my opinion, if it existed, it should have been discovered. Since the defendant was inspecting the goods in order to issue a certificate which had to be produced to the bank to enable the plaintiff to be paid, it has to be assumed that the inspection had some meaning and significance.

44. In coming to this conclusion, I am aware that a buyer is not obliged as such to make a thorough examination goods which he has purchased, and is not prevented from claiming damages because of his failure to do so. He may rely on the contract, and where the defect is not patent or obvious, he may rely on he sellers contractual undertakings. (See paragraph 17.055 of the Fourth Edition of Benjamin's Sale of Goods.

45. But where the buyer has sent a representative, twice, to China, to observe the production process, and where it has inspected, on three separate occasions, and where the most cursory and casual inspection must inevitably have revealed the defect alleged, which though it cannot be seen, is not latent or concealed in any meaningful sense, then the buyer's failure to uncover the defect is, in my view, a failure to avoid the loss by taking reasonable steps. I say that whilst recognising that in those circumstances the plaintiff would have been the wrongdoer, in breach of its contractual obligation, and that the standard imposed upon the defendant would not be a high one. A purchaser would not be "under any obligation to do anything other than in the ordinary course of business, nor need he take risks with his money in attempting to mitigate nor take a step which might endanger his own commercial reputation; nor need he sacrifice any of his property or rights in order to mitigate the loss caused by the ... breach." (See Benjamin, supra, para. 16-044)

46. Had the counterclaim succeeded, the defendant would have been entitled to damages, not for the cost of repair in Italy, but arising from late delivery as a result of the goods having to be repaired in China or Hong Kong. No such damages were proven.

47. There will be judgment for the plaintiff for the amount claimed, namely $140,029.02.

48. I will hear counsel on costs and interest.