ALAN CHAN CREATIONS LTD. v. SMITH & SMITH CO. LTD.

HCA6418/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION 6418 of 1995

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J U D G M E N T

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1. On 25th October 1994, the Plaintiff entered into a contract with the Defendant, whereby the Defendant agreed to produce and supply to the Plaintiff 10,080 mugs to which 17 designs created or supplied by the Plaintiff were to be applied.

2. The contract is evidenced by a purchase order dated 25th October 1994. The following terms are relevant:-

"SIZE :	As our approved samples
COLOUR :	Printed as Black & White or Gold (For 1-col only)
PRICE :	HK$15.00 @ TOTAL - HK$151,200.00 ......
DELIVERY TIME :	On or before December 10, 1994
DESTINATION :	To be advised
REMARKS :	Certificate of Origin (China Form A) would be submitted by S&S. S&S must be submitted final samples (17 items) for our approval before starting production process. S&S allow ACC's staff for quality checking at their Shenzhen's warehouse. And also allow us for storage partial of mugs for ONE year WITHOUT ANY CHARGE"

3. On 16th December 1994, the Plaintiff rejected a delivery of 1,080 mugs by the Defendant. Following a delivery of further samples on 20th December 1994, which the Plaintiff regarded as unsatisfactory, the contract was terminated by the Plaintiff on 9th March 1995.

4. There is no disagreement over how the contract came about. Mr. Alan Chan is a well known designer. He is also the Creative Director of the Plaintiff, Alan Chan Creations Limited. He met Mr. Gregory Smith of the Defendant at a Unicef function. Mr. Chan together with other designers had created designs for some table wares. Those table wares were produced by the Defendant and Mr. Chan was impressed by their quality.

5. Mr. Smith supplied some promotional materials to Mr. Chan following the meeting. They show e.g. that the Defendant's customers included, Coca-Cola, Philip Morris and others of international renown and that they could produce porcelain, stoneware, ceramic materials of any shape and design with decal painting or hand painting as desired.

6. There is a detailed description of the decalling process in Mr. Smith's supplemental witness statement. It is a complicated, delicate and time consuming process. It is the process by which the Plaintiff's designs are transferred to the mugs. In the words of Mr. Smith

"In the case of (the Plaintiff's) designs, the printing covers the entire outside of the mug from top to bottom and through the handle. This would therefore not allow any room for error"

7. The 17 designs are either black and white or gold (one colour) only.

8. Now, the order referred to "approved samples".

9. According to Mr. Chan, in May 1994, he showed Mr. Smith Ex.P1, a mug with shoes printed on it and told Mr. Smith that he was looking for the same quality. Mr. Smith said he could see what the Plaintiff was looking for. It is to be noted that Exh.P1 is thin body as well as thin edge.

10. According to Mr. Chan, prior to 7th September 1994, the Defendant had given the Plaintiff, Ex.P1A, a blank mug, for feel and quality of its glaze and although that was not 100% of what he wanted, it was almost so. Mr. Smith denied giving Mr. Chan Exh.P1A. However, as I understand Mr. Smith's evidence, he accepted that it was sensible for a blank mug to be produced for size before producing the decals to apply to the mugs. On balance, I am of the view that the Defendant would have supplied a plain mug to the Plaintiff even before printed mugs were ready and that Exh.P1A was supplied by the Defendant. I note that the body of the Exh.P1A is thicker than Exh.P1, however, the edge of Exh.P1A is slightly flared and slightly thinner than its body.

11. There is a Contact Report dated 26th August 1993 where the first paragraph states

"The surface of the mugs were not smooth enough and would be improved to a standard that to be accepted by both parties"

12. Paragraph 10 states:

"Upon order confirmation, goods would be delivered in 45 days"

13. Then came a Contact Report dated 7th September 1994. This is an important document. I set out below the detailed comments on samples supplied by the Defendant.

"Re: Comments on 1st proof of Mugs

General Comments:

1.	Surface :	Mr. Smith agreed to keep the surface of the mugs as smooth as Mrs. Chan's sample (i.e. Exh.P1)
2.	Handle :	Mr. Smith will try to prevent the hole at the handle and make the surface as smooth as possible
3.	Handle :	Position and curvature of handle should be standardized
4.	Handle :	Size of the white rings around the joints of handles to be standardized
5.	Height :	The height of mugs should be standardized (97.5 mm)

Comments on individual mug:

1.	MUG-CD001	Picture flip horizontally (Left to Right)
2.	MUG-CD002	Picture flip horizontally (Left to Right)
3.	MUG-CD003	Lighter colour, allow 5mm white gap while wrapping around
4.	MUG-CD004	Lighter colour, allow 5mm white gap while wrapping around
5.	MUG-TR001	Border line on top was not straight enough
6.	MUG-TR002	Change colour scheme
7.	MUG-MJ001	Gold surface to be improved, delete 2 pieces of mahjong avoid overlapping area
8.	MUG-MJ002	Gold surface to be improved, delete 1 piece and fill in with gold
9.	MUG-HK001	Allow 5mm white gap while wrapping around
10.	MUG-HK002	Allow 5mm white gap while wrapping around
11.	MUG-DH001	Gold surface to be improved, attention on the joining area
12.	MUG-NA001	Replace with a clearer picture
13.	MUG-ST001	Allow 5mm black gap
14.	MUG-CG001	Picture flip horizontally (Left to Right)
15.	MUG-CP001 -
16.	MUG-CC001 -
17.	MUG-HA001 - "

14. This Contact Report also contained the following bullet points

"Mrs. Chan (Mrs. Alan Chan) committed 10,000 pieces of mugs with the price @HK$15.00.

First shipment would be 7,500 pieces, balance would be kept in Smith & Smith's warehouse".

15. Mr. Alan Chan has produced 13 mugs which according to him were supplied by the Defendant to the Plaintiff in August and September 1994 (prior to 7th September). They have been produced as Exh.P2 to P14. I note that although the thickness of the body of these exhibits are not uniform, they follow Exh.P1A quite closely in that in most of them, one could detect a slightly flared edge.

16. Now, Mr. Smith does not accept that they were all supplied by the Defendant prior to 7th September 1994. He accepts that Exh.P3, 6, 7, 9 and 14 were supplied prior to 7th September. According to him they have thick edges. The rest P2, 4, 5, 8, 10, 11, 12 and 13, according to Mr. Smith could only have been supplied after 10th December but on or before 20th December 1994 because according to him they have thinner edges. I will return to this matter later because this requires a careful consideration of Mr. Smith's evidence.

17. The Contact Report of 7th September 1994 shows that the samples which had been supplied were the subject of detailed comments. According to Mr. Alan Chan, subject to those comments, he was satisfied with the quality of those samples. The Contact Report was supplied to Mr. Smith by the Plaintiff on 14th September 1994.

18. I should also mention that there is a dispute between the parties over whether between 7th September 1994 and 2nd December 1994, further samples were supplied. Mr. Smith said they were. Mr. Alan Chan said not. Nothing substantial turns on this, because according to Mr. Smith the new samples which were supplied in November 1994, were the same as Exh.P2 to P14, but with the defects described in the Contact Report of 7th September 1994 removed. In other words, the November samples should be better than the samples referred to in the Contact Report of 7th September 1994. Thus, the Plaintiff should have no incentive to withhold disclosure of the November samples. Some of the documents, e.g. the Defendant's fax of 18th November 1994 and the Plaintiff's fax of 21st November 1994 support the existence of some samples in November. I do not believe I need come to any firm conclusion on this. However, I am inclined to the view that probably some samples were supplied on or about 29th November 1994. I shall proceed on that basis.

19. On 15th September 1994, an order was placed by Capital Asia Trading Co. Ltd. ("CAT") to buy a total of 7,560 mugs in 15 designs at a unit price of HK$25 FOB HK. Delivery was to be 15th November 1994 and delivery port, Hong Kong. I think this sale to CAT was the first shipment referred to in one of the bullet points in the 7th September 1994 Contact Report.

20. There is an earlier unsigned purchase order dated 11th October 1994. This contained the same details as the order dated 25th October 1994 with one exception. In this earlier document, the delivery time was stated to be "on or before November 30, 1994".

21. At about the same time as the order of 25th October 1994, there is a fax from CAT dated 26th October 1994 but chopped received 25th October 1994 which provides:

"4. Mug

Determination of delivery place, preferably in China. Confirm: the delivery date to be postponed from mid-November to the beginning of December"

22. A 40% deposit (HK$60,480) was paid by the Plaintiff to the Defendant. By a cheque dated 16th November 1994 (HK$75,600). CAT also paid a deposit to the Plaintiff.

23. There is a fax dated 18th November 1994 from one Deseree Cheung of the Defendant, where it is said

"Black and white series will be finished on 29/11/94".

24. In this fax, there are references to "4C series".

25. 4C stands for 4 colours. Apart from the mugs, the subject of this action, which are either black and white or gold, the parties were involved with a project whereby mugs with 4 colours were to be produced by the Defendant for the Plaintiff; for example, there was an order for 4 colour samples for which $10,000 was paid by the Plaintiff to the Defendant (Job No.A033). There is also a fax from the Defendant dated 19th October 1994 stating that

"Four colour samples will be ready 3 weeks after receipt of development charges"

26. I refer to the 4C series, because they are referred to in some of the documents.

27. On 21st November 1994, an internal memo, which was copied to Deseree Cheung, after dealing with the 4 colour mug, it states,

"Mug (B/W or Gold Colour)

- All sample will be available 29 Nov

- If there is nothing correction to be made, delivery time for partial shipment will be 10 Dec"

28. It is not clear whether any samples were supplied on 29th November but as I have said I will proceed on the basis that they were, and that these samples were improvements on the samples discussed in the 7th September 1994 Contact Report.

29. On 25th November 1994, the Plaintiff placed an order for 20,000 pieces of cup boxes at a unit price of 70 cents.

30. There was a meeting on 2nd December 1994 between Deseree Cheung of the Defendant and members of Alan Chan Creation, including Alan Chan. The Minutes of this meeting dated 6th December 1994, and copied to the Defendant, is important. It is set out in full below:

"S&S pointed out that if we need a new set of pre-production sample the stock will not be available for December shipment.

Solution

ML to check with client if they will accept the quality as per the colors mugs pre-production sample (thick edge and thick body). If client accepts, we will go ahead with their orders only.

Remainder of the orders will wait for a new pre-production sample. That sample should has a thinner edge for better feel.

S&S agrees with the following

All handles of the mugs are to be in white.

For ACC client's order, S&S promise the final output will have a smoother glaze on both sides, especially the inside.

The mugs will be ready as early as the 15th and no later than 17th.

Design that are okay:

CD001	CD002	TR001	HK002	HK001
DH001	CP001	CC001	ST001	CG001
D0001	MJ001

Orders was placed on December 5 for ACC's clients, quantity 108 pcs per style:

CD001	CD002	TR001	DH001	CP001
CC001	HK001	CG001	D0001	MJ001

Mug-ST001 (star in gold and black), the black line at the "join" area should be 5mm.

S&S has faxed over the revised transparency on D0001 and MJ001, ACC has approved the changes. These two models will also go into production.

S&S agrees to have a plain white mug with thinner edge for our approval on December 7th - 9th.

S&S promise to have 4 pcs of each style (on thinner edge mug) made by December 20th for ACC and Client. If ACC not satisfy with the quality of prints on the mug, amendments could be done at that stage.

ACC awaiting S&S reply on the faxed dated December 2, 1994 regarding shipment schedule and documentation"

31. According to Mr. Alan Chan, what was agreed at this meeting was that although the Plaintiff was not satisfied with the mugs because they had thick edge and thick body, instead of the thinner edge, that is to say, an edge which is thinner than the body, he was prepared to accept 1,080 mugs which would have the thick edge and thick body, if their customer, CAT, would accept it. Mr. Chan's evidence is that eventually CAT agreed to accept 1,080 mugs with thick edge and that was communicated to the Defendant on or about 5th December 1994. Perhaps because Mr. Chan was spread too thin because he was involved with too many aspects of the Plaintiff's business, he was at times vague. But I do not agree with Mr. Wright who appears for the Defendant that he was evasive. In my view, he gave his evidence frankly and as well as he could remember the events. However, where his recollection differs from the documents, I prefer to rely on the documents.

32. On 2nd December 1994, but obviously after the meeting referred to above, there was a fax from Ann Hsu (Mr. Chan's personal assistant) to Deseree Cheung. This is relied on by Mr. Smith to show that the Plaintiff wanted thick body and thin edge mugs for the 16th December delivery.

33. There is also a fax dated 5th December 1994 from Ann Hsu to Deseree Cheung which states

"As per our telephone conversation, please find below the model number of the mugs. As we have agreed we want this order no later than 16 December 1994"

34. It seems that the same 10 designs (with some changes in the design number) referred to in the 2nd December 1994 Minutes were set out. It concluded by saying

"Please confirm your acceptance on this order"

35. According to Mr. Smith, the deadline of December 16 was meaningless. According to him, on December 2, 1994, the Plaintiff opted for a mug with a thick body but a thinner edge. He relies on Ann Hsu's fax of that date.

36. According to Mr. Smith, this fax of 2nd December 1994, read together with the Minutes of December 2 meeting, made it quite clear that even in respect of the 1,080 mugs referred to in the 2nd December 1994 Minutes, (108 pcs per style, 10 styles), the Plaintiff was asking for mugs with thick body and thin edge and not thick edge and thick body.

37. I do not believe that is right.

38. As I read the 2nd December 1994 fax, it is quite clear that in respect of the thin edge mugs, the Plaintiff was asking the Defendant to supply them with a sample and also whether the Defendant could supply 4 samples on each style for delivery on December 20. That being the case, when in the fax of 5th December 1994, they said

"As we have agreed we want this order no later than December 16, 1994"

it is clear that this delivery could not be of thin edge mugs.

39. Indeed, a sample of a thin edge mug (Exh.D9) was delivered to the Plaintiff on 9th December and approved by them on 10th December. 4 samples on each style were delivered to the Plaintiff on 20th December.

40. I believe when the 2nd December 1994 fax says "we now opt for the 2nd choice" that was a reference to the balance of CAT's order i.e. after the delivery of 1,080 mugs on 16th December 1994.

41. Ann Hsu was not called as a witness. Indeed, each party called only one witness. This is unsatisfactory because some of their evidence is hearsay and some incomplete. However, this is a small claim. I can understand why the parties wanted to save costs. Costs consideration apart, I would have expected both parties to have called substantially more witnesses.

42. Also as I read the 2nd December Minutes, unless CAT were to accept mug with thick edges and thick bodies, no delivery could be made in December at all. Delivery between 13th and 17th December could only be of mugs with thick edge and body.

43. The 2nd December 1994 Minutes states:

"ML to check with client if they will accept the quality as per the colour mugs pre-production sample (thick edge and thick body). If client accepts, we will go ahead with their orders only"

44. This when read with the provisions that:

"S&S agrees to have a plain white mug with thinner edge for our approval on December 7th - 9th.

S&S promise to have 4 pcs of each style (on thinner edge mug) made by December 20th for ACC and client. If ACC not satisfy with the quality of prints on the mug, amendments could be done at that stage"

shows quite clearly that it was not contemplated that if CAT were to opt for thinner edge mug there would be any delivery between 15th and 17th December.

45. The 2nd sentence under the heading "Solution""

"Remainder of the orders will wait for a new pre-production sample. That sample should have a thinner edge for better feel"

also supports this view.

46. I am unable to accept Mr. Smith's evidence in this respect. I think he is wrong when he said the Plaintiff had chosen thinner edge mugs for the December 16th delivery.

47. Now this is important because Mr. Smith's case is that because the thinner edge sample (Exh.D9) was only approved on 10th December 1994, there was insufficient time for the Defendant to produce mugs of the requisite quality.

48. Mr. Wright has argued that the 25th October Order should be read as subject to an implied term that the Defendant would be allowed at least 45 days from the approval of the pro-production sample to produce the mugs for delivery.

49. I do not accept that. This is inconsistent with e.g. the fax dated 21st November 1994 which was copied to the Defendant referred to above. Nor is this consistent with the Minutes dated 2nd December 1994.

50. The above references are consistent with my view that the mugs which "will be ready as early as the 15th and no later than 17th" were to be produced of mugs with thick edges.

51. On 9th December 1994, Ann Hsu faxed Miss Deseree Cheung and asked

"Anyway, what is the situation on the mugs" Is there another for pick up? What about the thick body, thin edge sample mug?"

52. And it went on to say:

"Port of discharge in China. She mentioned you will fax it over to her. Also the mugs that are currently in production, all the items are for China except item #: HK001 and HK002 to be shipped back to HK" (emphasis added)

53. This fax is relevant in 2 respects.

54. First, the part italicized by me, indicated that mugs were then in the course of production. Hence, this was inconsistent with Mr. Smith's case that until the thinner edge sample is approved (and which was not approved until 10th December 1994) production could not begin. Mr. Smith says that it is just a matter of language. Unfortunately, writers of the various documents which I have to consider did not always write with clarity and precision. Thus, the matter is not as clear as it might be. However, I do not believe Ann Hsu was referring to mugs to be produced after approval of Exh.D9. I believe she was referring to mugs then in the course of production.

55. The other aspect arises from Mr. Smith's suggestion that the real reason why the Plaintiff terminated the order was because the Plaintiff or CAT wanted to sell the mugs in China. Hence "port of discharge in China".

56. However, under Chinese regulations, the Defendant could not lawfully produce for domestic sale.

57. Mr. Wright has suggested that the real reason why the Plaintiff terminated the contract was because the mugs could not be sold in China and not because of their quality.

58. It is said that CAT wanted to sell the mugs in China. But, even so, there is no reason why the Plaintiff should refuse to accept the Defendant's products. After all, the Plaintiff had a contract with CAT and had received a substantial deposit and stood to make a substantial profit. I do not accept that was the reason for rejection.

59. This is an appropriate time for me to return to the question of whether Exh.P2 to P14 were supplied by the Defendant to the Plaintiff.

60. It will be recalled that according to Mr. Smith, Exh.P2, 4, 5, 8, 10, 11, 12 and 13 were not produced until after 10th December, because they were of the thin edge type. In my view, more likely than not, Exh.P2 to P14 were all delivered by the Defendant to the Plaintiff prior to 7th September 1994. Mr. smith claims that Exh.P2, 4, 5, 8, 10, 11, 12 and 13 were produced after 10th December 1994 because they have thinner edges as compared with Exh.P3, 6, 7, 9 and 14. I do not believe Mr. Smith is correct:

(1) His evidence depends on my accepting his evidence that the mugs delivered on 16th December 1994 were manufactured following the approval of Exh.D9. As will have been seen, I do not accept Mr. Smith's evidence in this respect

(2) So far as Exh.P2 is concerned, it suffers from precisely the same defect as outlined in the Contact Report of 7th September 1994, namely, that the image is put on in the wrong way (left to right). It is too much of a coincidence for samples or mugs to be produced after 10th December with the same defect

(3) So far as Exh.P5 and P11 are concerned, I do no believe it is likely that they were produced after 10th December 1994. The Contact Report of 7th September 1994 calls for 2 pieces of mahjong to be removed from the design in Exh.P5. Thus, if Exh.P5 was produced after 10th December 1994, it should have two mahjong pieces less. As for Exh.P11, it should have at least one less piece of domino. Yet Exh.P5 and Exh.P11 have two extra pieces of mahjong and one extra piece of domino respectively. Thus, it is unlikely that they were produced after 2nd December, when the new designs were approved by the Defendant

61. I have considerable doubt about the reliability of Mr. Smith as a witness. I believe he was too anxious to support his case that the poor quality of the mugs delivered on 16th December was due to a late requirement by Mr. Chan of thin edge mugs. As the exhibits P2 to P14 show, the edges of the mugs were of varying thickness. I believe they were never meant to be thick edged. Rather, they were supposed to be like Exh.P1 or Exh.P1A. However, probably due to bad quality control, the Defendant was unable to produce the thin edge type or at least unable to do so consistently.

62. I return now to the events following the 2nd December meeting.

63. There is a fax from the Defendant dated December 13, 1994 which is important. This reads

"Regarding the delivery of 16th, because of glaze problem on the blank, we have to postpone delivery to 18th"

64. The 13th December fax elicited a strongly worded reply dated 14th December 1994:

"Further to your fax dated Dec 13, 1994 regarding the postponement of the delivery of the order, we now express our standing point clear that we could not accept any delay of the order.

In early December, we were so depressed when we were first told that your company was unable to abide by the delivery date (Dec 10, 1994) of our purchase order (our job no.A032). An immediate meeting was then held to discuss this issue with you in Dec 2, 1994. A decision of the change of delivery date to Dec 15, 1994 was then confirmed with both parties though we were less enthusiastic but willing to. It is then of our great concern that this must be the exact delivery date of our order, at least 1080 pcs (see our contact report dated Dec 2, 1994), no more delay.

We then could not accept nor even imagine that you have to further delay the shipment. With this delay, our customer claims to cancel their order and this will lead to the total loss of our time, investment and profit.

We strongly request you to consolidate the shipment as we agreed in Dec 2, 1994. Of course, the quality must up to the standard we have specified"

65. According to para.29 and 30 of Mr. Smith's statement:

"On 13th December 1994, the Defendant informed the Plaintiff by way of a facsimile, of production quality problems, namely that the Defendant was encountering glaze problems on the "blank" mug and requested for an extension until the 18th December 1994 to enable the Defendant to rectify this problem ...

In reply, the Plaintiff informed the Defendant by way of facsimile dated 14th December 1994, that under no circumstances would any delay or sub-standard quality mugs be accepted. ... The Plaintiff referred to its facsimile dated 2nd December 1994 which specified the delivery date as 16th December 1994. However, I consider that given that the Plaintiff had approved the samples on 12th December 1994, and had agreed in the meeting on 2nd December 1994, that the partial shipment could be delivered as late as 17th December 1994, I consider that it was not unreasonable given the shortness of production days available, to request an extension of one or two days for delivery. However, since the Plaintiff was not willing to extend that date, the Defendant proceeded according to the 16th December 1994 delivery date"

66. I cannot believe, having observed Mr. Smith in the Witness Box, that if he only had 5 working days from 10th December to produce the 1,080 mugs, he would have taken the Plaintiff's rebuke so meekly.

67. Or that if the Plaintiff had agreed to tolerate a lower quality or been warned about that, he would have failed to remind the Plaintiff. The reply of 14th December 1994 which insisted that "the quality must up to the standard we have specified" is inconsistent with para.27 of Mr. Smith's statement and Mr. Smith's oral evidence that the Plaintiff had been told not to expect the same quality because of the short time available for production. I do not believe the Defendant would have failed to reply and make this point.

68. I do not believe that Mr. Smith only had 5 days to produce the 1,080 pieces which were delivered on 16th December 1994.

69. Indeed, in para.14 of Mr. Smith's supplemental statement he said

"... by the time final go ahead was received by (the Plaintiff), the Defendant had only 11 days in which to complete the said initial partial shipment of mugs on the order ..."

70. Mr. Smith said that was a mistake, the Defendant did not have 11 days. I believe the Defendant indeed had 11 days because they were told on 5th December that CAT would accept the thick edge mugs and the Defendant had from 5th December to 16th December to complete the initial shipment. On the evidence it seems 11 days would have been sufficient time for the Defendant to produce the 1,080 mugs, especially if they already had most, if not all, of the plain mugs ready.

71. I note that the size of the mugs was approved as early as 7th September 1994. There is no reason why after the Defendant had received the deposit they should not have started production of the plain mugs. My reading of the 2nd December 1994 Minutes is that mugs (with thick edge) could be delivered between 15th and 17th December. That is probably because the Defendant had already begun production of at least some of the plain mugs.

72. Mr. Smith left for the Christmas holidays prior to 16th December.

73. There was an aborted delivery of 1,080 mugs on 16th December 1994. According to the Plaintiff, the delivery was rejected principally because they were sub-standard. I will deal with this in greater detail later.

74. The Defendant's case is that, they were nevertheless of merchantable quality. Also that, if they were sub-standard, that is because effectively they only had 5 production days to produce them. Five days because the Defendant was only told in the afternoon of 10th December, a Saturday, that the thinner edge sample Ex.D9 was approved. Sunday was a holiday. So the Defendant only had 12th to 16th inclusive to produce the 1,080 mugs which were delivered on 16th December.

75. Mr. Smith said the short time for production was bound to affect quality. He said the Plaintiff was warned of that, and it was willing to take the risk.

76. Now in para.27 of Mr. Smith's witness statement, which stood as his evidence in chief, he said

"I therefore explained that although the Defendant could deliver the Partial Shipment by the date specified, it would be unrealistic for the Plaintiff to expect that the quality of the mugs would match the samples approved as the Defendant had only 4 production days with which to complete the Partial Shipment"

77. Indeed, in his oral evidence, Mr. Smith said he was surprised that the 1,080 mugs came out as well as they did. He said

"I was expecting trash"

78. I cannot believe that astute businessmen like Mr. Smith and Mr. Chan would have been prepared to accept a state of affairs where the product to be delivered were expected to be trash. I cannot believe Mr. Smith would have knowingly entered into an engagement to produce (or Mr. Chan to accept) 1,080 mugs in the expectation that they would be trash. They might have turned out to be trash because of poor quality control. But I cannot believe it was expected.

79. Mr. Smith returned to Hong Kong in mid January.

80. There was a meeting on January 18, 1995, between Mr. Smith and Mr. Alan Chan and others. According to Mr. Smith, the meeting took place on 17th January. According to Mr. Chan 18th January. Nothing really turns on that though if the meeting did indeed take place on 17th January then it is possible that the cancellation letter dated 18th January 1995 and referred to below was produced subsequent to the meeting.

81. There is a Contact Report dated 18th January 1995.

82. Now, Mr. Smith regarded the content of this Contact Report to be self-serving. He also made the reasonable point that this document was not supplied to the Defendant until discovery.

83. However, it is clear that the meeting of 18th January 1995 was not a success. According to him, after he returned to his office, he rang and spoke to Mr. Chan with a view to salvaging the contract.

84. It is Mr. Smith's case that he was given a copy of a pre-drafted settlement letter dated 18th January 1994 at the meeting. Mr. Chan's evidence on this is unsatisfactory. In his witness statement, he said

"At the request of Smith, a settlement letter was drafted and sent to Smith for his confirmation"

85. That is inconsistent with the Contact Report of 18th January 1994 which says

"a termination letter was given to (Defendant) during the meeting for them to review and response to (Plaintiff) by Monday, January 23, 1995"

86. I am inclined to the view that the letter was produced at the meeting.

87. However, I do not agree with Mr. Wright that this discrepancy shows that Mr. Chan is dishonest. On the contrary, although Mr. Chan was at times vague , because he had difficulty in recalling an event, my impression of him is that he is an honest witness.

88. It is worth noting that although the meeting on 18th January 1995 went badly, and despite the "settlement letter" of 18th January 1994, Mr. Smith did not write and put the record straight. That is to say, putting on record that either that the quality of the mugs "delivered" on 16th and 20th December was satisfactory, or if the quality of the delivery on 16th December and 20th December 1994 was unsatisfactory, that was because of the short production time and that the short production time was the Plaintiff's fault because they wanted a new sample (D9) which was not approved until 10th December 1994. Or that the Plaintiff had been told to expect difficulty with quality if they insisted on delivery on 16th December 1994.

89. I regret to say on this aspect of the matter, I find Mr. Smith unconvincing. He is an intelligent and articulate person. I have no doubt that he can hold his own in any company. I do not believe he would have kept quiet, if his evidence on this aspect of the case is true. Indeed, after the Plaintiff had threatened to sue, the Defendant wrote a long letter (16th March 1995) in which many of the points relied on now were then made.

90. Mr. Smith's evidence on 18th January 1995 meeting is that the Plaintiff was complaining mainly about the location for the delivery of the 16th December 1994 and that the mugs could not be sold in China.

91. I have no doubt that the Plaintiff did complain about the location chosen by the Defendant for the 16th December. I do not believe there was any complaint about not being able to sell the mugs in China. It may be that there was no need to talk at length about the quality because the Defendant could not and, therefore did not, dispute that the quality was unacceptable.

92. I also believe that despite Mr. Smith's defence of his products in Court, he was professional enough to realise, at the meeting on 18th January 1995, that they were indefensible. The following also supports my view that there was unlikely to have been any real argument over the quality of the mugs which were rejected.

(1) The Defendant's fax of 20th December 1994 relating to the 20th December 1994 delivery. It says

"Please note that some of them are not very good quality. We will replace any defective mugs after receipt of your requirement"

93. This shows that it is probable that the Plaintiff would have reason to complain about quality

(2) After the Plaintiff rejected the 16th December 1994 delivery and took away 20 samples, there was no suggestion from the Defendant that the rejection was unreasonable because the quality either of the 20 samples or the bulk was acceptable

(3) (a) In the Plaintiff's letter to the Defendant dated 22nd December 1994, this was said

"4) we strongly feel wrong about the quality of the mugs. They were far away from our standard and expectation. Most important of all, they were not the standard you promised to provide"

(b) The Plaintiff suggested a meeting. The reply from the Defendant dated December 23, 1994 was that

"Your strong feelings are noted but they are no specifics for us to work from. Please submit whatever critique you may have about the quality of the shipment supported with specifics and statistics. This is the kind of information which will make our discussion on the 23rd or 24th productive and allow this project to move forward"

(c) Now the Defendant had the rejected 1,080 mugs in their possession. If their quality was up to standard, one would have expected them to say so. However, because Mr. Smith and Mrs. Cheung were away, no meeting could be held until after Mr. smith's return, because

"... there is presently no staff ... with the technical expertise or complete knowledge ... sufficient to make a 'face to face' meeting productive or useful". Defendant's fax 24th December 1994.

(d) Para. 41 of Mr. Smith's statement referred to below.

94. On 15th February 1995, the Plaintiff wrote to the Defendant to remind the Defendant

"that there are only three days left before the deadline of your submission of the letter (the cancellation letter of 18th January 1995) and the refund of the deposit as agreed in our meeting on January 18, 1995. Could you please proceed necessary arrangement in order to meet the deadline without any delay. ..."

95. There is a fax dated 17th February 1995 addressed to Mr. Smith/Ms. Deseree Cheung, it says:

"Further to our conversation with Ms. Deseree Cheung, we are pleased to re-fax the letter for your kind reference. We would be much pleased to arrange our staff to pick the cheque up at your office tomorrow at any time"

96. The cancellation letter was faxed to the Defendant with this fax. Then there is a letter dated 28th February 1995 from the Plaintiff to the Defendant. It reads:

"Re: Ultimatum

Since there are ten days exceeded our agreed deadline, it is much of our regret that we have not received any instruction or advice regarding the collection of the payment and box from you. This ultimatum serves the purpose that should no reply is received from you on/before March 3, 1995, we received the right to take appropriate action against you"

97. It is worth noting that there was no reply to either the fax of 17th February 1995 or the so-called ultimatum.

98. Paragraph 41 of Mr. Smith's witness statement is relevant. It reads:-

"During several weeks thereafter, the Defendant telephoned the Plaintiff and made many overtures and proposals on how the Order generally and the Partial Shipment could be proceeded. These proposals included free replacement of the Partial Shipment which the Plaintiff considered to be defective, to free advertising to help promote the sale of the remaining mugs for the mutual benefit of both parties. However, the Plaintiff rejected all overtures and in or around mid-February, advised the Defendant of its final cancellation"

99. I do not believe Mr. Smith would have behaved in this way, if the problem was not of the Defendant's making. If the poor quality was the responsibility of the Plaintiff (because it was responsible for the short production time), or that the mugs delivered were not sub-standard, it is inconceivable that the Defendant would not have written to put the record straight.

100. Mr. Yeung, who appears for the Plaintiff, has also made the point that it was not possible for the 1,080 pieces to have been produced within 5 working days, given Mr. Smith's evidence of the minimum time which it would have taken to produce master moulds, production moulds, a total of 3 firings and decalling prior to the final firing. I must say I found Mr. Smith's evidence that it was possible unconvincing and strained. Under cross examination, Mr. Smith said as at 12th December, the Defendant only had a master mould and 3 production moulds. Realising that in that case the Defendant could not have produced 1,080 mugs by 16th December, he returned, after a weekend and allegedly after making inquiry with the factory, to say that the Defendant had on 12th December, 6 master moulds and 9 production moulds ready. These were supposedly made even before D9 was approved by the Plaintiff.

101. I must say I find his evidence unconvincing. Of course, this could only be true if I accept Mr. smith's evidence that the 1,080 mugs ready on 16th December were produced after D9 was approved. I do not accept that at all.

102. I am clearly of the view the 1,080 mugs which were rejected on 16th December were rejected because of their poor quality. And the poor quality was not because the Defendant only had 5 production days to produce them.

103. I must now explain why in my view the 1,080 mugs were sub-standard and that the Plaintiff was entitled to reject them.

104. There is a Mug QC Report dated 17th December 1994 which contains a description of the faults found in the samples taken by the Plaintiff of the 1,080 mugs. I accept this report as reliable. Those faults, of course, are of varying importance. Overall, I have no doubt that the Plaintiff was entitled to accept delivery.

105. Mr. Chan has also given evidence about some of these samples.

106. Briefly Mr. Chan's criticisms of the mugs, which I accept, are that:

(1) Exh.P2A :	The black is not dark enough. It is grayish black. The decal does not cover the entire surface of the mug, and the gap is very large.
(2) Exh.P5A :	The gold colour is almost completely gone. Thus, both the gold background as well as the gold on the mahjong pieces are not distinct. Indeed, because of the faded background the mahjong pieces themselves are not distinct.
(3) Exh.7(A) :	The gold has faded. The gold area of the star has a matted look. The decal does not meet perfectly at the handle.
(4) Exh.9A :	The gold is no longer recognisable as such. There are obvious and unsightly breaks on the glaze in the body. The windows at the handle are too big.
(5) Exh.P11(A) :	The same problems as with Exh.P5151 also the wrong code number is printed at the bottom.

So far as the criticisms are concerned, they are obvious to any person (with the possible exception of Exh.P2A).

107. As for the other exhibits which were put to Mr. Chan in cross-examination. Exh.P3A has a crack inside the mug which is 1.2 c.m. long. This is a fatal fault. Mr. Smith agrees with that assessment.

108. 10 of such samples, Exh.P2A, P3A, P4A, P5A, P6A, P7A, P8A, P9A, P10A, P11A, have been produced. Mr. Smith had gone through each one of them. On the whole, he said they were merchantable. Of the criticism by the Plaintiff, that the colours were not rich enough, he said the customers would not know the difference. Literally he is right. Customers would have no idea what the mugs should look like if they were produced according to Mr. Chan's design. But that is not the point.

109. I am here concerned with relatively expensive designer mugs. If they were bought, it is because they are considered more attractive than an ordinary mug. I agree with Mr. Yeung the words of Mustill L.J. in Rogers v Parish (Scarborough) Limited [1987] Q.B.935 are apposite. Lord Justice Mustill said

"Starting with the purpose for which goods of that kind are commonly bought, one would include in respect of any passenger vehicle not merely the buyer's purpose of driving the car from one place to another but of doing so with the appropriate degree of comfort, ease of handling and reliability, and one may add, of pride in the vehicle's standard and interior appearance. What is the appropriate degree and what relative weight is to be attached to one characteristic of the car rather than another will depend on the market at which the car is aimed"

110. Here, we are concerned with "designer" mugs to be sold in expensive stores. Applying such approach I have no doubt that the mugs are not merchantable.

111. I have no hesitation in saying that comparison between P2 - P11 with P2A - P11A show that they are clearly sub-standard. In the case of P2A, P5A, P7A, P9A and P11A there are substantial colour variation from the samples. I can understand why prior to the termination of the contract the Defendant had never asserted that there was nothing wrong with quality. That would be plainly untenable. That is 5 designs out of the 10 delivered on 16th December. I have no doubt that the Plaintiff was entitled to reject the 1,080 mugs on 16th December 1994.

112. The samples delivered on 20th December 1994 especially exhibits P5B, 7B, 9B, 11B and 12B, produced are even worse. They must cast serious doubt on the Defendant's professionalism.

113. I accept that the Plaintiff by 20th December 1994 could reasonably have come to the view that it was not possible to continue the contract with the Defendant. Mr. Smith said Mr. Chan is a perfectionist. If the connotation is that Mr. Chan is unreasonable, I do not agree. Mr. Alan Chan is a well known designer. Articles bearing his name are sold in expensive stores and gift shops. I think he acted reasonably in cancelling his contract with CAT and refunded the deposit paid. I think it is reasonable that he should refuse to even attempt to deliver the 1,080 mugs to CAT. To have done so would have harmed his reputation. The contract, however, was not terminated until after the ultimatum of 28th February 1995. But I do not believe it makes any difference. Mr. Wright says that this affects Mr. Chan's credibility. I do not think so.

114. Now, Mr. Smith has recently bought 13 mugs (Exh.D11 - 23) from Seibu. These are mugs carrying Mr. Alan Chan's name. Mr. Smith says these mugs compare well with exhibits with the suffix B and C.

115. I do not agree. I do not wish to prolong this Judgment further. Nor do I think it profitable to consider at any length the comments on Exh.D11 - 23. For example, it is said that the decalling has been made easy because of the blank space permitted at the handles. Mr. Chan said his contract with the suppliers of Exh.D11 - 23 permitted the blank space. However, the Defendant agreed to produce the mugs without the blank space. The overlapping of the decals were unsightly in the Defendant's mugs, e.g. Exh.P2A. P4A. That was a good reason, for rejecting the mugs on 16th December 1994, though not by any means the only or the most important.

116. Mr. Smith also said in D11 - D23, the decals did not cover the entire outside of the mug i.e. from top to bottom. Mr. Chan explained that by saying the other suppliers had not agreed to do so. All in all, I find the comparison unhelpful. Some of Mr. Smith's criticism of D11 - D23 may have some merit e.g. the crack in Exh.D17. However, for all we know D17 might have been the worst of the entire lot delivered to Mr. Chan.

117. But here, the samples I have seen of the 16th and 20th December deliveries were representatives of the bulk. There is certainly no evidence that they were not.

118. Mr. Wright has argued that even if the delivery on 16th December 1994 were rightly rejected, but that was only the first instalment. Now s.33 of the Sale of Goods Ordinance provides that

"it is a question of fact in each case depending on the terms of the contract and the circumstances of the case, whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated"

119. Mr. Yeung has referred me to a decision of Bigham J. in Millar's Karri & Jarrah Company v Weddel Turner & Co. (1908) 100 LT128 where he said

"If a seller delivers goods differing from the requirements of the contract and does so in such circumstances as to lead to the inference that he cannot, or will not, deliver any other kind of goods in the future, the other contracting party will be under no obligation to wait to see what may happen, he can at once cancel the contract and rid himself of the difficulty"

120. I am of the opinion that the following circumstances justify the Plaintiff in terminating the entire contract:

(1) Inability on the part of the Defendant to deliver on or before 10th December 1994. Although time might not have been of the essence, I do not believe, as Mr. Wright suggested, that it was irrelevant. I do not believe that it was the Plaintiff's fault that the delivery had to be postponed to 16th December, and even so, of only 1,080 pieces

Here, I should perhaps return to the 2nd December meeting. It is recalled there was a discussion about thick or thin edge mugs. Mr. Smith suggests that this shows once again how changeable Mr. Chan was. I do not believe it is fair to say so. As I understand the position, the Defendant was supposed to produce something resembling Exh.P1A or Exh.P1. In Exh.P1A the edge is thinner than the body. Exh.P1 is thin body and thin edge

In the samples produced Exh.P2-P14 by the Defendant, some of them have edges which are slightly thinner than their bodies. There are some which was thick body and thick edge. The latter was not what the Plaintiff was looking for. Thus, in my opinion, the discussion on 2nd December did not involve Mr. Chan asking for a change. It was Mr. Chan, who, subject to the agreement of CAT, was prepared to make a concession and accept mugs with with thick body and thick edge. Hence, the difficulty arose out of the Defendant's inability to produce mugs like Exh.P1A. I do not believe Mr. Smith would have agreed to produce samples with thinner edges if he was not obliged to do so because of Exh.P1A or Exh.P1.

(2) The delivery of 16th December 1994 were sub-standard, for the reasons given by Mr. Chan, especially, 2A, 5A, 7A, 9A and 11A

(3) The delivery of 20th December 1994 were even worse. Mr. Smith says the Contact Report of 2nd December 1994 provided

"If (Plaintiff) not satisfy with the quality of prints on the mug, amendments could be done at that stage"

But that cannot mean the Defendant could produce just any old mug. The quality of the exhibits cast serious doubt on the Defendant's professionalism

(4) The inability between 20th December 1994 and mid January for the Plaintiff to have a meaningful meeting with the Defendant. This is hardly the attitude one would expect of a responsible manufacturer

(2) and (3) alone, in my opinion, would be sufficient to justify the Plaintiff terminating the contract.

121. I turn to consider the question of damages.

122. There is no real dispute over them. The Plaintiff is entitled to a refund of the deposit of $60,480, $2,100 for the 3,000 boxes as well as the loss of profit on their sale to CAT of $75,600. It is clear that the Defendant was aware that the mugs were purchased for resale. Those figures being the only amounts claimed by the Plaintiff, I hold that the Plaintiff is entitled to Judgment in the sum of $138,180. The amount should carry interest at 2% over the best lending rate from time to time, from 9th March 1995 (the date of demand) until Judgment. Thereafter interest at the Judgment rate.

123. The Defendant's counterclaim, which is predicated on the Plaintiff and not the Defendant being in breach of contract, must fail since the Plaintiff's claim has succeeded. It is therefore dismissed.

124. I order accordingly.

125. I also make an Order Nisi that the Plaintiff should have the costs of its claim and the counterclaim.