GENEXY CO LTD v. HEREKE TEXTILES CO LTD

HCSA 58/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 58 OF 2014

(ON APPEAL FROM SMALL CLAIMS TRIBUNAL
CLAIM NO. 48644 OF 2013)

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JUDGMENT

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Introduction

1. This is an appeal by Genexy Co Ltd (“Genexy”) against the award of the Small Claims Tribunal dated 17 September 2014 (“Award”) whereby Ms Jacqueline KL Lee, Deputy Adjudicator (as she then was), dismissed the claim of Genexy against Hereke Textiles Co. Ltd (“Hereke”) and allowed the latter’s counterclaim. Genexy also appeals against the determination of the review of the deputy adjudicator dated 10 October 2014 whereby Genexy’s application to review the Award was refused. Leave of appeal was granted by this court on 15 December 2014.

2. This is a simple contractual dispute concerning sale of goods. In gist, Genexy seeks to rescind a sale agreement dated 6 July 2013 (“the Agreement”) by way of an order whereby Hereke agreed to supply to Genexy two lots of the same fabrics in two different colours (“the Fabrics”) at the total price of HK$37,400 (“the Price”). After receiving pre-shipment samples (“Pre-shipment Samples”) and being dissatisfied with its quality, Genexy informed Hereke that it would cancel the transaction on 7 August 2013. Genexy now wants to recover the deposit paid in the sum of HK$11,220.00 (30% of the Price) and a further sum of HK$9,478.50 being the compensation payable to its end-customer.

3. Hereke denies any defects in the quality of the Fabrics and complains about the wrongful rejection of the Fabrics which were ready to be shipped to the destined factory of Genexy pursuant to the Agreement. It counterclaims against Genexy for the balance of the Price, i.e., HK$28,356.00.

Preliminary matter

4. The deputy adjudicator altogether provided three documents to resolve the parties’ dispute. First, right after the conclusion of the trial on 17 September 2014, the deputy adjudicator gave her reasons for the Award orally. She on the same day handed down her written Decision (“the Decision”).

5. On 10 October 2014, right after the review hearing, the deputy adjudicator gave her reasons for her determination orally and later handed down a document entitled “Review Decision” (“Review Decision”).

6. On 3 November 2014, upon the filing of Form 9 by Genexy, the deputy adjudicator handed down a document entitled “Reasons for Decision” (“Reasons for Decision”).

7. Mr Lam, for Genexy, argues that the Reasons for Decision should be disregarded for two reasons. First, he refers this court to section 18(2) of the Small Claims Tribunal Ordinance, Cap. 338 which provides that the reasons for an award or order may be given orally or in writing as the tribunal thinks fit. On this basis, he submits that after the deputy adjudicator gave her reasons orally, her power to issue reasons was spent.

8. I cannot accept this submission. In my judgment, in view of the particular nature of proceedings in the Small Claims Tribunal, the provision gives an adjudicator discretion as to how his/her reasons for his/her award/order are to be given. I do not think the provision obliges an adjudicator to make a choice between oral reasons and written reasons. An adjudicator may give oral reasons only and in such a case, the transcript of the relevant proceedings would provide a written record of his/her reasons. However, I see nothing inappropriate for an adjudicator to prepare a separate document, other than or in addition to the transcript, to give an edited account of his/her reasons orally given.

9. I have studied the relevant part of the transcript of the trial hearing and the Decision. Their contents are more or less the same. Of course, I should refer to the Decision to examine the validity of the decision of the deputy adjudicator.

10. I have also studied the contents of the Reasons for Decision. It merely seeks to provide a summary of her decisions in both the trial hearing and the review hearing. The deputy adjudicator did not include any additional grounds and materials to support her decision. Nor did she attempt to make any correction. Though I appreciate very much the good intention and the conscientious effort of the deputy adjudicator, I accept the submission of Mr Lam and opine that this document may cause the parties confusion as to whether the grounds contained therein are in any way different from the reasons already given in the Decision.

11. Therefore, for the purpose of this appeal, I ignore the Reasons for Decision.

General principles

12. Mr Lam helpfully refers this court to the decision of Au J in Chow Mee Yee Mille v Hong Kong Mediation Service Ltd, unreported, HCSA 17/2011, 16.2.2012, which set out the limited circumstances under which the findings of fact by the Small Claims Tribunal should be disturbed. Unless (1) they are perverse or irrational, (2) there is no evidence to support the decision and/or (3) the decision was made by reference to irrelevant factors or without regard to relevant factors, this court should not interfere with any of the findings of fact by the deputy adjudicator.

Grounds of appeal

13. On liability, Mr Lam advances two main grounds why the deputy adjudicator should have made the Award in favour of Genexy. First, he submits that the Fabrics were not reasonably fit for the purpose of being used for the production of clothing and Genexy was thereby in breach of the implied condition of fitness for purpose under section 16(3) of the Sales of Goods Ordinance, Cap.26 (“the SOGO”). Secondly, he submits that the Fabrics were not of merchantable quality and thereby in breach of the implied condition of quality under section 16(2) of SOGO.

14. In a nutshell, Mr Lam complains about the quality of the Fabrics. He mainly relies on a test report of the Pre-shipment Samples prepared by SGS (“the SGS Report”). In the SGS Report, it was concluded that in respect of their tensile strength, slippage at 6mm of the Pre-shipment Samples were 1.7kg and 1.6 kg only whilst the general requirement is 8 kg minimum (“First Complaint”). The test adopted was BS 3320-1998 for the purpose of the British standard. It is not apparent in the SGS Report as to what the general requirement means.

15. Further, Mr Lam relies on the allegation of Genexy that the Fabrics tore easily at the seams when sewn together (“Second Complaint”). He highlights the lack of contrary evidence adduced by Hereke.

16. Bearing the foregoing principles in mind, I turn to see whether the relevant findings of the deputy adjudicator in relation to the quality of the Fabrics are flawed.

17. In the Decision, on the issue of the quality, the deputy adjudicator made the following findings:

 (1)   Mr Shek of Genexy admitted that when he placed the order with Hereke, he did not expressly indicate what specific garment would be made from the Fabrics and he did not explain that the Fabrics had to comply with the British standard of tensile strength or any standard at all;

 (2)   Mr Shek accepted that in July he already approved the sample and asked for bulk production. He only found that the Fabrics tore easily at the seams when sewn together in a garment;

 (3)   In the order placed by Genexy, there was no mention about any requirement of tensile strength;

 (4)   From the documents provided by Genexy, it can be seen that different garments have different requirements of tensile strength and different countries have different requirements too;

 (5)   Genexy had sufficient time to test the quality of the samples and any specific requirements should be indicated before any instructions for bulk production;

18. On the foregoing facts found by the deputy adjudicator, she concluded that absent any express requirements of tensile strength and due to different standards applicable to different garments to be made, it is unreasonable for Genexy to complain that the tensile strength of the Fabrics is below standard.

19. In the Review Decision, in regard to the First Complaint relying on the industrial standards, the deputy adjudicator stated more or less the same reasons. She also stated the admission of Mr Shek that Hereke had no idea as to how Genexy would use the Fabrics.

20. To deal with the Second Complaint, the deputy adjudicator referred to the evidence of Hereke that the tearing of the Fabrics appearing at the armpit area could be avoided by a different sewing method. Genexy’s answer was that the sewing method could not be altered. The deputy adjudicator went on to point out that she examined the garment sample at the trial and she discerned no tearing in other areas of the garment sample.

21. To complete the picture, it is not in dispute that on 24 June 2013, Genexy purchased from Hereke 3 yards of the Fabrics as sample (“the Sample”) before placing the order on 6 July 2013. Mr Shek found no quality problem with the Sample.

Discussion

22. I have reviewed all the evidence before the deputy adjudicator. It appears to me that her foregoing findings of fact are unassailable. With such findings, the claims of Genexy based on sections 16(2) and (3) of the SOGO cannot possibly be made out.

23. First, to sustain the plea made under section 16(3), Mr Lam accepts that the buyer, i.e. Genexy, should have expressly or by implication, made known to the seller, i.e. Hereke the particular purpose for which the Fabrics were bought and that the Fabrics were not reasonably fit for that purpose.

24. The evidence of Mr Shek taken at its highest is that he told Hereke that the business of Genexy was in the manufacture of clothing (服裝) and garments. I cannot accept that this would give rise to an implied term as to the tensile strength of the Fabrics.

25. The deputy adjudicator did deal with such evidence of Genexy and rightly concluded in the Decision that Genexy did not indicate to Hereke what the specific garments that the Fabrics would be made to manufacture would be. 

26. Mr Lam urges me to look at the Reasons for Decision and submits that there the deputy adjudicator went even further to conclude that Hereke did not know that the Fabrics would be used to manufacture garments at all. However, for the reasons given above, I refuse to take into consideration of the Reasons for Decision. Suffice it for me to say that, on a proper reading of the Reasons for Decision, I am not convinced that it was her conclusion there.

27. In any event, it was not the basis on which the deputy adjudicator made the Award.

28. Mr Lam relies on a Chinese document setting out different standards of tensile strength for different garments in the US. Mr Shek in his evidence summarized such data in a table. Mr Lam submits that the SGS Report shows that the tensile strength of the Fabrics (16.66N and 15.68N) falls way below the minimum standard in the document (44N for girls’ clothing) and that Hereke fails to show that the Fabrics could satisfy any standard at all.

29. Mr Lam submits that the deputy adjudicator assumed that the Fabrics could have satisfied some standard of tensile strength and hence there was no issue about their quality. He further submits that on the evidence, the only conclusion open to the deputy adjudicator was that the Fabrics were below recognized industry standards.

30. I cannot agree. Whilst I accept that industrial standards are relevant to quality issues, I do not accept that the Chinese document exhaustively set out the tensile strength requirements for all kinds of garments. Indeed it was not so argued by Mr Lam. It should be borne in mind that the onus is not on Hereke to prove that the Fabrics met a particular standard of tensile strength. Instead, it is for Genexy to prove that there was an implied term concerning the tensile strength of the Fabrics and that they fell below the applicable standard.

31. In the first place, without having expressly or impliedly agreed with Hereke a particular standard that the Fabrics had to meet due to the known usage of the Fabrics, Genexy fails to convince me of a specific standard. In other words, I agree with the deputy adjudicator that there was no agreed standard between the parties at all.

32. Further, without a complete list of tensile strength requirements for all kinds of garments, I cannot conclude on a balance of probabilities that that the Fabrics must be below any standard.

33. Concerning the Second Complaint, the deputy adjudicator obviously has accepted the evidence of Hereke that the tearing problem was merely due to the sewing process and not attributable to the quality of the Fabrics. Her examination of the garment sample reinforced her conclusion that there was no tearing problem in other parts of the garment sample.

34. In any event, the deputy adjudicator must be right in her conclusion that Genexy had ample time and opportunities to test the quality of the Sample purchased on 24 June 2013 before placing the order for bulk production. It is clear that Genexy did not rely, and it would be unreasonable for Genexy to rely on Hereke’s skill or judgment concerning the quality of the Fabrics. Hence, it is another reason why there can be no implied term under section 16(3) of the SOGO.  

35. Mr Lam seeks to persuade me that the Sample was not the same as the subject matter of the order. They were only plain untreated cloths (胚辦/胚布) being only half dyed (半漂).

36. I do not accept this submission. It is true that the Sample was not dyed in the colours as subsequently instructed by Genexy. Genexy nevertheless acquired the Sample to assess the quality of the Fabrics and it is the evidence of Genexy that it was happy with the quality of the Sample. There is no suggestion that the quality of the Fabrics, in particular, their tensile strength would in any way be changed by the dyeing process. Nor is there any evidence that the tensile strength of the Sample indeed differed from that of the Shipping Samples. I conclude that the parties expect the quality of the Sample would be truly indicative of that of the Fabrics despite the subsequent dyeing process.

37. For the same reasons, the claim based on section 16(2) cannot succeed. Given her factual findings, it is open to the deputy adjudicator to conclude that Genexy should have discovered the alleged defects of the Shipping Samples when it acquired the Sample for assessment of its quality. Thus, there was no implied term as to the quality of the Fabrics. Even if there was, the deputy adjudicator is entitled to come to the conclusion that the Fabrics were of merchantable quality on the evidence.

38. In the premises, I see no grounds to interfere with the deputy adjudicator’s factual findings and her dismissal of the claim of Genexy must be upheld.

39. Then I turn to the issue of quantum. Mr Lam, not vigorously, argues that the damages should be limited to the estimated loss directly and naturally resulting from Genexy’s breach of the Agreement by rejecting the Fabrics and not the balance of the Price. Mr Lam stresses that Hereke did not adduce any evidence to show how it dealt with the Fabrics after the sale fell through.

40. Mr Yim, for the defendant, makes little submission on this issue.

41. In its counterclaim, Hereke demands that Genexy should pay the balance of the Price and take delivery of the Fabrics stored at its warehouse. The Fabrics were manufactured to the specific order of Genexy. Hereke is ready and willing to deliver the Fabrics to Genexy pursuant to the Agreement.

42. In the circumstances, the property in the Fabrics has passed to Genexy. Though no delivery has been made, Hereke is entitled to maintain an action for price. Its counterclaim for the balance of the Price should be allowed. The decision of the deputy adjudicator on quantum cannot be faulted in my judgment.

Conclusion

43. Despite the comprehensive submission of Mr Lam, I am not convinced that there is any valid ground to interfere with the decision of the deputy adjudicator. I therefore dismiss this appeal.

44. Costs should follow the event. I make an order nisi that Genexy should pay the costs of Hereke of the appeal.

45. I thank counsel for their assistance.