XCHRX KAM SIU KNITTING & GARMENT FTY. LTD. v. CAREY & CO. LTD.

HCA 18711/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 18711 OF 1999

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J U D G M E N T

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1. This is an appeal against the decision of Master C B Chan given on 14 June this year when she gave the defendant unconditional leave to defend. The parties have agreed that judgment should in any event have been given for the sum conceded by the defendant, namely 80% of the claim for $42,160 under paragraph 1 of the statement of claim by way of sample charges, with leave to defend as to the balance. I accordingly give judgment for the plaintiff for the sum of $33,728.

2. As to the rest of the claim, the plaintiff contends that judgment should also be given for the claim under paragraphs 2 and 3 of the statement of claim, namely the sum the plaintiff claims is owed for the price of goods manufactured for the defendant under five contracts entered into between 13 May 1999 and 12 June 1999. These contracts were for the manufacture of ladies trousers knitted from a mixture of stretch nylon and lycra and the terms were contained in written "purchase contracts" numbered 99C/B1217, 99C/B1220, 99C/B1221, 99C/B1222 and 99C/B1223. The relevant terms in each case were similar, namely FOB Hong Kong, payment to be by cheque 10 days against clean bill of lading, with delivery on/before 1 July 1999 in respect of the first contract, and 30 July in respect of the others, by sea to Sweden from Hong Kong. Also included in the contract under "Remarks" was the following:

Pre-production samples must be submitted before production.

Shipment samples must be submitted before delivery.

and I accept the contention of Mr Chung for the defendant that submission under this provision must imply submission for approval before proceeding further. It was, therefore, a two stage process: inspection and then production, then further inspection prior to shipping.

3. The plaintiff's case is that under each contract the samples were approved and accepted by the defendant, the goods manufactured ready for shipping then inspected and accepted again. However, the instructions for shipping were never received from the defendant and the plaintiff says that they are accordingly in breach of the contract and liable to pay the contract price for the goods.

4. What is clear is that this is a contract between the plaintiff and the defendant, and no other, and it is the approval of the defendant which is required under it. If that approval is given, then any later rejection by the final buyer does not affect the defendant's liability to pay under the contract, although there is provision on the inspection report, referred to below, for the plaintiff to be held responsible for defects not apparent on inspection being discovered by the buyer. It may be that the plaintiff was aware that the defendant did refer samples to its buyer before approving them, but it was only the defendant's approval that was required under the contracts.

5. To see what has happened here, it is necessary to look at the course of events surrounding these contracts, and for the purpose of these proceedings it is convenient to deal with the contracts in two parts, first 99C/B1217, and then the rest together.

99C/B1217

6. This contract was dated 13 May 1999, and pre-production samples were submitted to, and approved by, the defendant in mid-May. On 7 July 1999, no point apparently being taken by either party on the late delivery, the plaintiff sent a shipment sample to the defendant, which they sent on to their customer in Sweden, and on 13 July an inspection of the goods was made by a Mr Lee Hang Yeung of the defendant company at the plaintiff's premises and he completed an inspection report on which he listed two major defects, namely wrong size and defective cloth, and one minor, dirt. Further, under "Remarks", there was a note that the colour was slightly thicker than the others, a portion of the goods had a "front/backrise being 1.5 cm too long (as shown in diagram)" and a "bubble at the crotch". In spite of this, Mr Lee clearly marked a tick in the box headed "Accept", and it is on this that the plaintiff relies.

7. Meanwhile, the defendant received a fax message from their customer the same day referring to the defect in measurement and the bubble and asking them to check and revert to them. As a result, the defendant says they requested Mr Lee to make another inspection which he did the next day when on the inspection report he repeated largely the same remarks and noted the goods were not suitable for shipment. He also noted that they had to be approved by the client, which, as I have already observed, was not part of the contract. This report was not, as the first, countersigned by a representative of the plaintiff, who denies it took place, but there is certainly some evidence it did, and for the purposes of this appeal I shall assume so.

8. What happened next, according to the defendant, is that the plaintiff was informed of the defects and delivered a series of "rectified" samples for approval by the defendant, which were sent to the customer to examine. After each one was seen by them they sent faxes to the defendant saying that the defects were unacceptable, and this was communicated to the plaintiff, until 20 August 1999, when the customer cancelled the order with the defendant. If this evidence is right, then the plaintiff was aware throughout of the attitude of the defendant's customer, and the inability of the defendant to approve the goods. Whether the plaintiff was aware of it is clearly a dispute on the facts which it is not for me to resolve at this stage.

9. Mr Pirie for the plaintiff says that, even if this account of events is true, it is only evidence of the plaintiff trying to assist the defendant out of the dilemma in which they found themselves as a result of having found, and confirmed, the plaintiff's goods as acceptable, as shown, he says on the inspection report, where the box marked "accept" is clearly ticked. The defendant's case is that this is only a qualified acceptance, in the light of the defects recorded thereon, and is subject to the defects being remedied, as, they say, the plaintiff, by sending "rectified samples", has tried to do. However, they also maintain that the evidence shows that the plaintiff's efforts were in vain, and that they were entitled not to proceed with the contract, never having approved the goods for shipment. While it is true that there is no evidence of the plaintiff having been informed that the contract was cancelled, it is also arguable that it was apparent from the course of events that he would be unable to rectify the defects to enable the goods to be accepted. It must also be arguable that if, as the defendant maintains, the plaintiff continued to provide rectified samples, he too did not consider the acceptance unconditional.

10. Whether this is so or not is one of the principal matters in dispute and is a matter for trial. But, at this stage, I certainly cannot say that any of the matters in dispute are unarguable, or that the account of the defendant, supported as it appears to be by some documentary evidence, is so unbelievable that leave to defend should not be given.

99C/B1220, B1221, B1222, B1223

11. These contracts were all dated 12 June 1999 and were for similar garments but, as I understand it, in slightly different styles. The terms of the contracts were also similar, again with the two stage inspection provision: pre-production and pre-shipping. The pre-production samples were sent to the defendant on 20 May 1999, and they sent them to their customer for their comments. By fax dated 27 May, the customer noted that, in respect of all four styles, there was no stretch in the waist seams and these broke when worn, and asked for them to be improved. Mr Lee Hung of the defendant claims to have told the plaintiff by telephone of the defects on 3 June 1999. There appears to have been a further sample of the trousers under contract B1223 sent to the customer on 22 July 1999, and the same complaint was made. The defendant sent a fax to the plaintiff on 30 July informing them of the defects and advising the use of elastic nylon thread in the seams.

12. Although no pre-production approval had been given in respect of any of these contracts, the defendant was informed by plaintiff on 12 August that the goods under contracts B1220, B1221, and B1222 were manufactured and ready for inspection. In spite of this, and possibly waiving the requirement for pre-production inspection, instructions were given for Mr Lee to visit the factory, which he did the next day. The inspection reports for these, as for contract B1217, all noted at least one major defect, with a provision for re-inspection on 18 August of the goods under contract B1221, yet had a tick in the "Accept" box. The same happened with B1223, when the defendant was informed that the goods were ready, and Mr Lee inspected these on 18 August. This time there was no acceptance, with a number of defects noted, and the words "accept only upon further approval". Further samples were again sent to the customer over the next two or three weeks and there were repeated comments from them that, inter alia, the waist problem was not solved. The plaintiff admits receiving faxes from the defendant dated 21 and 24 August informing them of the continuing defects, and that the problems would have to be dealt with before shipment. There appears to have been an attempt to rectify the problem by the addition of a zipper, but this again was not satisfactory. Eventually, the customer cancelled the contracts with the defendant, and this cancellation was, according to the defendant, relayed to the plaintiff by telephone on 17 September 1999.

13. The principal question with regard to these contracts, as with B1217, is whether there had been unqualified and unconditional acceptance of the goods in accordance with the contract, to the extent that the plaintiff can claim that the terms have been complied with by them and they are entitled to payment. The only evidence upon which they can rely to this end is that of the inspection reports, and in those they rely entirely on the fact that there is a tick in the box marked "Accept" in all but the last contract, where there is no evidence of final acceptance at all. As to the reports, I repeat my remarks in respect of contract B1217 above. I find that with contracts B1221-1222, it is clearly arguable that the acceptance was qualified and subject to defects being remedied, and, again, the evidence of further samples being supplied, and changes in design suggested, by the plaintiff, seem to support that proposition. This, and the other matters in dispute, such as the alleged notification of cancellation of the contracts, must be a matter for trial, and I am unable to say that the plaintiff's case is so clear and obvious that judgment ought to be given now.

14. For these reasons I consider that, save for the matter of the sum conceded above, the Master's decision was entirely correct and that the appeal must accordingly be dismissed with an order nisi for costs to the defendant, and a certificate for counsel. The order in the court below and the order for costs there will stand.

15. This is a comparatively modest claim and I am concerned that considerable costs have already been incurred. It is clear that it should therefore proceed to trial without further delay, and I give the following directions to that end. Lists of documents are to be filed and served within 21 days, with inspection within 7 days thereafter. Witness statements are to be filed and served within 45 days, following which application may be made to the Listing Judge for leave to set down. There will be liberty to apply in respect of these or any further directions.