GLOBAL PRESTIGE LTD v. SEAPHONE TEXTILE LTD

HCA 146/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 146 OF 2004

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J U D G M E N T

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Introduction

1.  This is a claim by the Plaintiff in the, now revised, sum of $1,135,161.00 being the outstanding balance due on the sale of a quantity of corduroy to the Defendant.  The Defendant refuses to pay on the basis that the corduroy is defective and now counterclaims $917,265 being the outstanding net amount that it would have received from its client who has refused to pay it due to the alleged deficiency of the material.  It also seeks an indemnity to be assessed in respect of further claims that it anticipates will be made against it by its clients arising out of their losses of profit due to the defective material which was turned into jeans and which were rejected.

2.  As to the quality of the material, I have heard evidence from textile experts whose evidence must have a crucial bearing on the outcome of the action.

The course of the transaction

3.  The matter itself is relatively uncomplicated.  The Defendant had been approached by a company called Golden Horse International Trading Limited (“Golden Horse”) to supply it with corduroy  which it required it to deliver directly to Wei Fung, a garment manufacturer which was to make up a very substantial quantity of jeans for a United States importer called California Concept.  This company was then to sell on the jeans to Target, a US mass retailer.  The Defendant purchased the corduroy from the Plaintiff.  It is this purchase which gives rise to the dispute which is the subject matter of the action.  The purchase order is No. P-337 dated 5 May 2003 and is at Bundle D512.  It is for a very substantial quantity of corduroy at a cost of $4,186,634.80.

4.  On 14 May 2003, the Defendant entered into a separate contract BR03062 with Wei Fung, who had been appointed by Golden Horse, to manufacture  the jeans [see page 64 Bundle A].  The order was for 150,000 pairs of jeans which were to find their way into Target’s shops in time for the autumn season 2003.

5.  The specifications for the corduroy ordered by the Defendant from the Plaintiff was as follows:

Fabric:	98% Cotton 2% Spandex 21 Wales stretch corduroy
Construction:	44x134/16Sx20S+20S(70D)
Width:	43/4”
Colour	Quantity
Pink	45,980 yds
Indigo	45,980 yds
Lt. Od.	103,840 yds
Canvas	65,230 yds
Ebony	43,250 yds

6.  Having had the fabric delivered to it by the Plaintiff, Wei Fung began to manufacture the jeans.

7.  The Defendant’s witness Mr Wong Sing Nang says that it started to receive complaints from Wei Fung in early June regarding the width of the cloth and its colour variance in that the colours varied from lot to lot.  As to width variations, the complaint was that the width of the cloth also varied from lot to lot.  As a result of these complaints, he and Mr Lam Po Ling, a director of the Plaintiff visited Wei Fung’s Shanghai factory, as did Mr Lam and another member of the Defendant’s staff to address a second complaint at the end of June.  This was resolved when the Plaintiff agreed to re-wash and tint the fabric to address colour variations and to provide an extra 800 yards of fabric to deal with width variations.

8.  Whilst these were complaints that could and were addressed during the manufacturing process, Target would only carry out their own quality control testing on the finished article.  Having regard to the tight shipping schedule to ensure that the jeans got to the shops by the autumn, finished jeans were sent to California Concept as soon as they were completed.  This was down before Target’s commissioned laboratory tests were known.

The laboratory tests

9.  Many of the finished jeans, already having gone to the US, Target’s Hong Kong-based laboratory MTL, part of an international testing organisation, commented very adversely on the jeans that it inspected.  It is on the basis of this test that the Defendant rests its justification for not paying the balance of the Plaintiff’s invoices and to justify its counterclaim.  The MTL report is at page A275.  The report speaks for itself but it is useful to note its principal conclusions.  The overall rating of the garment was “Unsatisfactory”.  In the Executive Summary the following are the results :

“EXECUTIVE SUMMARY / RECOMMENDATIONS FOR IMPROVEMENT :

1. Under lab analysis, the actual fibre content of the sample reads : “93.5% Cotton 4.6% Rayon 1.9% Spandex”, which does not conform to the claimed in the lab. request form “98% Cotton 2% Spandex”.

2. The sample demonstrates unsatisfactory seam strength properties as shown :

Seat : 31.46 lbs (Fabric Rupture) (fail)

Inseam : 34.29 lbs (Seam Failure) (marginal)

Crotch @ Inseam : 34.68 (Fabric Rupture) (marginal)

Zipper Stress Area : 23.57 (Fabric Rupture) (marginal)

Back Pocket : 10.11 lbs (Fabric Rupture) (fail)

(Desirable : 35 lbs For Bottom, 20 lbs For Pocket, 25 lbs For Zipper Stress Area)”

The effect of this, according to the Defendant’s case, is that the strength of the fabric has been seriously undermined.  Subsequently, and for the purpose of the trial, the Plaintiff has had prepared its own laboratory test.  For its part the Defendant has also obtained a report from a textile expert for his commentary on the MTL test.  I will relate the effect of this evidence presently.

What happened following the MTL test result?

10.  As a result of these tests discussions ensued between the parties.  It should be observed that hitherto they had had a very good business relationship, in the course of which the Plaintiff had supplied the Defendant with fabric which had fully complied with the terms of those previous orders.  Given the importance of satisfying such an important customer as Target, the parties decided that further samples should be submitted for testing by MTL until a satisfactory outcome was arrived at.  The Plaintiff was requested to improve on the quality of its fabric.

11.  Mr Wong says that in order to maintain a harmonious relationship the Defendant continued to pay the Plaintiff’s invoices that it had submitted for fabric already delivered to Wei Fung, notwithstanding failed laboratory tests.  In this regard, Mr Lam of the Plaintiff has said that such payment could only have been consistent with the fact that the Defendant had no complaint with the corduroy.  In the event, Mr Wong has said that there was no improvement in the quality of the Plaintiff’s fabric.

12.  The Defendant issued five invoices to Wei Fung for fabric supplied to it for this order totalling $4,053,715.  Wei Fung has only paid $2,006,289 of this amount, leaving over $2,052,426 unpaid.  I will need to say more on quantum when I have completed my review of the evidence on the parties respective cases on liability.

13.  The final unhappy conclusion to all of these was that because of the MTL tests, Target rejected the whole consignment of jeans in mid-October 2003 and returned these to California Concept.  California Concept stored some of these in a warehouse and others were sold to discount stores with a view to mitigating their losses.  Mr Wong says that as a result, all of the participating parties have sustained losses to varying degrees.  For its part of the Defendant has not been paid in full by Wei Fung and it has also advised of a claim against it for its provision of defective jeans to Golden Horse and through Golden House to California Concept who will no doubt be in trouble with Target.  This potential liability is the subject of the Defendant’s additional counterclaim for an indemnity from the Plaintiff should it have to face such a claim.  This therefore is how the matter stands at present.  The Defendant has refused to pay the Plaintiff for its outstanding invoices in the sum of $1,135,161.00.  The Defendant says that it does not have to because of the defective quality of the Plaintiff’s product.  The quantified part of its counterclaim for $917,265.00 is arrived at by taking away the amount of the claim from what Wei Fung decline to pay it, leaving over what it would have received in full from Wei Fung had the Plaintiff produced corduroy of an acceptable quality and had it therefore itself paid the Plaintiff in full.

The expert evidence

14.  The Defendant having raised the question of defective material, the evidential burden would lie with it to show that the corduroy did not comply with the terms of the contract so as to justify  non-payment for it, this once the Plaintiff has proved the fact of delivery and non-payment which is not in dispute.  This is how I propose to approach the expert evidence through which the Defendant seeks to prove its case.

15.  Miss Cheung is the Plaintiff’s expert.  She is well qualified to speak to such matters having obtained all the necessary academic qualifications as well as having nearly 28 years experience in the field of textile testing.  Her curriculum vitae is contained in a letter dated 12 October 2005 from her on the letter heading of her employer Intertek Labtest.  The Defendant has instructed Dr Au Kin-fan of the Hong Kong Polytechnic University who holds a PhD in Textiles.  He too is eminently he qualified to provide expert assistance in this matter.

16.  The approach of the experts has differed.  Miss Cheung has examined a sample of the corduroy with the view to discovering whether the material conforms with the specifications of the contract and she has concluded, given the industry standard of + or – 3% tolerance for fabric made up of two types of material, that what the Plaintiff has supplied is as per the contract.  Dr Au has provided a report which is a commentary on the MTL laboratory test.  His conclusion is the following :

“My conclusion after studying the test reports and making reference to the purchase order is remarked as follows.  In the case that the sample testing results are representatives of the bulk supply of the purchase order P-337, the fabrics provided are considered not satisfying the suitable and acceptance quality requirements of corduroy fabrics for the subsequent production of garments.  As the garments produced would be less durable while worn-outs and fabric tearing are liable to occur during wearing and washing.”

17.  Miss Cheung has provided her evidence based on her company’s tests which are at pages 259-263.  She says that the sample which has been examined is well within the parameters of the contract.  She frankly accepts that her company was not asked to conduct strength tests.

18.  Dr Au’s report starts at page 264.  He has, at page 267, identified three features of the fabric which cause it to fall outside the requirements of the contracted for corduroy.  His observations merit repetition here :

“The tested samples exhibit poor strength in back pockets area as well as the weft direction.  This would be due to the following reasons including the use of poor quality weft yarns in the fabric, the improper control and machine settings in the corduroy fabric during the manufacturing stages and the wrong conditions in the fabric treatment processes.

The incorrect fibre content arises from the yarn manufacture process.  Rayon fibre is not specified in the purchase order while its incorporation will lead to reduced strength.  Rayon fibre has a poorer tenacity than cotton fibre, especially in wet state.

The finer warp yarn identified in the sample is obviously one of the reasons for the poor strength of the fabric.  Besides, the finer warp yarns used will result in a lighter weight per unit area of the fabric which does not conform with the requirement in the purchase order.  For example, a tested sample only has 8.67 oz/sq. yd. Compared with the required specification of 10 oz/sq. yd.  The unit price of textile fabrics is based on weight and a lesser weight supplied is considered non-compliance with order.”

19.  This fabric having failed strength tests on the finished product, he says is not suitable for the manufacture of jeans but that it is better suited for the making of upper garments which are less subjected to the stresses and strains of daily use.  He has also drawn attention to incorrect fibre content which includes the presence of rayon.

Conclusion on expert evidence

20.  It is important not to lose sight of the fact that the Plaintiff was only contracted to supply fabric, not a finished product and, if the evidence demonstrates that it did, then the fact that it has proved unsuitable for the manufacture of jeans is not a matter that it needs to be concerned with.  That shortcoming will need to be debated amongst others, such as the ultimate user, Target, the manufacturer Wei Fung and/or Target’s supplier California Concept.

21.  There is a dispute as to whether the Plaintiff had been made aware at the time of the contract that the corduroy was to be used to make jeans.  I am satisfied that this must have been the case.  This was a substantial order and in this regard I prefer the evidence of Mr Wong to that of Mr Lam which was the effect that the Plaintiff was made aware of this matter.  Nevertheless, provided that the material produced complied with the contract specifications, I would have thought the Plaintiff must succeed.  The Plaintiff after all was not responsible for the selection of the fabric.  This must have been decided further up the contractual line for which the Plaintiff can have no responsibility.

22.  The Defendant needs to demonstrate that these defects are the result of the method of manufacture of the fabric which take it outside the contract specifications.

23.  Applying that test, I have concluded that the Defendant has succeeded in doing so.  Dr Au’s evidence amply demonstrates in the passages that I have recited from his report which he was able to amplify in the course of his oral evidence that shortcomings in manufacture have resulted in a weaker fabric than would be the case with properly manufactured fabric of this type made up of the content which the purchase order has required.  It is the combination of defects which Dr Au has spoken of which has resulted in this sub-standard product.  What the Plaintiff has produced is therefore not of merchantable quality nor is it fit for its purpose and most importantly it is not of the quality contracted for.

The result

24.  This being so I hold the Plaintiff to be in breach of contract on this occasion.  In such circumstances, the Defendant must be entitled to damages which it must be able to set off against the Plaintiff’s claim.  I uphold Miss Chow’s submission that this must be the difference between what it would have been paid in full by Wei Fung, $2,052,426.00, being the amount outstanding from Wei Fung, less what it still owes the Plaintiff, $1,135,161.00 giving a balance over of $917,265.00 which I hold is what it is entitled to.

25.  Accordingly, the claim must stand dismissed and there must be judgment to the Defendant on the counterclaim in the sum of $917,265.00.  Insofar as the Defendant counterclaims for an indemnity I propose to make no order about that.  No such claim has as yet crystallised against it.  If it does then the Defendant would have to bring a separate claim on that matter against the Plaintiff.

Interest

26.  The Defendant will have interest on the amount of its judgment at half the judgment rate from the date of the writ until judgment and thereafter at the judgment rate until payment.

Costs

27.  I make an order nisi that the Defendant do have the costs of the action to be taxed on a party and party basis.