XCHRX Lam Fun Shi t/a Tong Shing Garment Factory v. Si Seung Hong (Pinki Si) t/a Pi Ra Co.

1995, No.A13001

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is an appeal from the Order of Master Jennings dated 22 May 1996 granting summary judgment in favour of the Plaintiff in the sum of HK$1,091,625.75. The writ in the action was for over $5 million being the price of goods sold and delivered by the Plaintiff to the Defendant. The O.14 summons related to $2,574,675.61 of the total claim. The Defendant was granted unconditional leave to defend as to the balance of the claim but the learned Master refused to stay the execution of the judgment entered.

Chronology of events

2. Since 1993, the Plaintiff has been supplying garments to the Defendant for export to the United States under several master orders. So far as the present claim is concerned, the relevant events, in chronological order, are set out below :

i) 21/12/95

The Defendant notified the Plaintiff by facsimile that the Defendant had been notified by its client Happy Kids that the end buyer (Walmart) had cancelled the following styles and quantity :

Style	Quantity
MKN-001	450 dozens (dark blue combination)
MKI-001	450 dozens (dark blue combination)
MKN-030	785 dozens (dark blue combination)
MKI-030	785 dozens (dark blue combination)

The Plaintiff was informed that Happy Kids requested a 20% discount of the price or it would return all the above styles.

ii) 5/1/96

Happy Kids wrote to the Defendant referring to the major cancellation from Walmart for the four styles of merchandise totalling 2,470 dozens and that all the styles cancelled were in navy ("the rejected goods"). The Defendant was informed that Happy Kids was in the process of arranging the return of the merchandise, the cost of the merchandise returned being US$101,637.67, broken down as to $79,057.50 for the cost and $22,580.17 for air-freight.

(iii) 29/1/96

This is a statement prepared by the Defendant setting various claims against the Plaintiff which included the claim for the rejected goods as per the letter of 5 January 1996. The amount of the claim converted into Hong Kong dollars at the exchange rate of 7.70 was HK$782,610.06.

The Defendant also prepared a statement of account showing the amount due to the Plaintiff as of 29 January 1996 in the sum of $1,185,936.41 after allowing, inter alia, for the claims shown in the separate statement.

(iv) Undated debit note

There is an undated debit note issued by the Defendant to the Plaintiff which was exhibited to the Defendant's affirmation of 13 February 1996. This debit note contained a breakdown of the cost of the shipped goods referred to in the 5 January letter plus air-freight charges as follows :

Style	Quantity	US$/dozen	Total (in US$)
MKN-001	450 dozen	$27.50	$12,375.00
MKI-001	445 dozen	$29.50	$13,127.50
MKN-030	785 dozen	$33.00	$25,905.00
MKI-030	790 dozen	$35.00	$27,650.00
		Total:	$79,057.50
	Plus the air charge:		$22,580.17
	Total claim amount:		$101,637.67

Remark : above price per dozen including $3.50/dozen as the loss when goods were cancelled from our client.

(v) 18/4/96

The Defendant was notified by Happy Kids that they were returning the rejected goods. Happy Kids stated that it had spent the past few weeks trying to negotiate with their customer to accept the goods but were unsuccessful. It is to be noted that Happy Kids did not identify the "customer" with whom they were negotiating.

(vi) 25/4/96

The rejected goods arrived in Hong Kong but the Plaintiff informed the Defendant that it would not be collecting them.

(vii) 2/5/96

The Defendant notified the Plaintiff that it would collect the rejected goods on the Plaintiff's behalf.

(viii) 14/5/96

Happy Kids wrote to the Defendant in the following terms :

"Dear Pinki,

Re:	Style # MKN-001	450 Dozen
	Style # MKI-001	440 Dozen
	Style # MKN-030	805 Dozen
	Style # MKI-030	790 Dozen

As you are aware the above, this merchandise was of very poor quality, and since the customer would not accept the merchandise, we were left with only one choice, which was to return the merchandise to your company.

In addition, the defected shipment has really caused a disaster for us. Apart from rejecting the merchandise, the customer - Wal-Mart has also claimed US$200,000.- for its losses and threatened to cancel or stop all future orders. Wal-Mart is a $10 million customer which I cannot afford to lose and could never replace. As such we are forced to file a claim against you for additional US$300,000.- for damage to our reputation, loss of existing and future orders, and loss of profits.

Please settle our claim within 14 days or else we will file a lawsuit against you."

(ix) 21/5/96

The Defendant wrote to Happy Kids regarding the additional claim for US$300,000 made in their letter of 14 May. It asked Happy Kids to provide the Defendant with "particulars and evidence" of the following :

A) The charge backs.

B) Discounts offered to Walmart in order to have them take delivery of all balance Mc Kids styles because of the problem of defective merchandise.

C) Orders cancelled by Walmart.

D) Loss of profits.

E) Loss of existing and future orders.

F) Damage reputation.

G) All other losses caused by the bad merchandise.

(x) 24/5/96

The Defendant wrote again to Happy Kids reminding them to provide full particulars and evidence of their additional claim.

(xi) 29/5/96

Happy Kids wrote to the Defendant regarding contracts for 27,390 dozen assorted "Mc Kids" styles including the rejected goods. Happy Kids quantified its losses at US$782,857.84 without taking into account "the definite loss of orders which will not happen in the future". It then gave a breakdown of the loss claimed in the following terms :

1)	Markdown Money US$150,000 See the attached markdown agreements from Walmart
2)	Quality control charges from warehouse US$25,338 See debit note authorization from warehouse
3)	Price Reduction given to have Walmart take the merchandise Phase 1 - US$49,043.04 Phase 2 - US$176,152.80
4)	Loss on reselling merchandise cancelled by Walmart US$341,889 This does not include the interest cost of carrying this merchandise until January 1997 delivery
5)	Loss on merchandise returned to maker US$40,435 MKN/MKI 001 895dz sold at US$55.80; cost US$41.10 MKN/MKI 030 1575dz sold at US$66.00; cost US$48.68

Happy Kids informed the Defendant that as a gesture of goodwill, they were prepared to accept a "non-negotiable lump sum of US$300,000 in full settlement".

The US$300,000 claim

3. The only issue in this case is whether this additional claim is believable. The Defendant's submission is that as it cannot be dispute that 2,470 dozen of the merchandise had been found to be defective and were rejected, it is wholly unexceptional that the US buyer, i.e. Happy Kids, suffered a loss of profits which it could legitimately claim against the Defendant. Whether or not the claim is unliquidated or as yet unquantified is immaterial. The Defendant relied on the decision of British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1979] 2 All ER 1063 as authority for the proposition that an unliquidated demand could give rise to an equitable set-off against a claim for a debt, and, since unliquidated damages by their nature remained unquantified until an award was made, there was no reason why demand could not be used as a set-off merely because it was unquantified.

4. For the Plaintiff, it was contended that the additional claim was not bona fide. The first intimation of this additional claim which was "for damage to [Happy Kids] reputation, loss of existing and future orders and loss of profits", was on 14 May 1996, a week before the hearing of the O.14 summons before the Master. Although the letter referred to a US$200,000 claim made by Walmart, that was not, seemingly, part of Happy Kid's claim against the Defendant. That the Defendant should seek particulars and evidence of the additional claim referred to in the 14 May letter was unexceptional. However, its letter of 21 May went beyond that because it sought elaboration of claims that have no counterpart in the 14 May letter, namely items A), B), C) and G) of that letter. The inescapable conclusion is that there was further communication between the Defendant and Happy Kids which is not before this Court. Further, the letter can only be construed as an open invitation to Happy Kids to inflate their claim. This is remarkable coming as it were from a potential defendant to a lawsuit to be brought by Happy Kids. When one turns to the letter of 29 May, what is more remarkable is that of the five items of loss that were quantified, only one was ostensibly referable to the items of damage mentioned in the 14 May letter, namely loss of profits.

5. As to the five items of quantified loss, they are all problematic and highly dubious for the following reasons :

1) Markdown Money US$150,000

This item clearly has nothing to do with the rejected goods since it can only relate to goods that have been accepted but marked down. That apart, the three so-called "markdown agreements" from Walmart in support do not appear to be markdown agreements at all. In each of the three agreements, all of which were dated 11 January 1996, surprisingly, the sum of $50,000 was not entered against the description "markdown monies" as one would expect had the payment genuinely been for markdown. Rather, it was entered against the description "other" which was one of the five alternatives appearing on the document.

No reason is discernible from the face of the agreement as to why the sum of money was payable and for what purpose. There is no reference to defective goods, two of the payments being for months subsequent to the month the agreements were entered into. Moreover, it would be unusual for a true markdown to come to a round sum of $50,000. It is the more remarkable when the markdowns for the subsequent months were for an identical amount. If, as the agreements suggest, US$150,000 was paid in January, one would have expected Happy Kids to have claimed repayment of this amount much earlier than 29 May and without repeated reminders from the Defendant.

2) Quality control

Costs of $25,000 odd have allegedly been incurred, the supporting documentation being two special service authorizations dated 12 January 1996. There is nothing on the face of these authorizations to suggest that the service provided and therefore the cost incurred had anything to do with the goods being defective. The descriptions of the service provided were "separate into colours repacked for stock" and "separate into colours plus QC plus repack for shipping" respectively. Whilst one of the authorizations (the first of the two referred to above) appeared to correspond in terms of style and quantity to three of the four component parts of the rejected goods, there is no indication and no grounds for inferring that the service required had anything to do with the goods being defective.

Counsel for the Defendant invited attention to the fact that the rejected goods were of one colour only, namely navy and submitted that it was necessary to separate the goods into colours. But if that was the case, the sorting would have been confined to navy coloured garments. Moreover, that still cannot explain why the goods had to be "repacked for stock". In my judgment, there is simply no evidence to support the view that such quality control charges would not have been incurred but for the defective goods.

3) Price reduction given to Walmart

Two computer generated tables were submitted in support of this claim but it is not known who was responsible for generating these tables. It is not apparent from the tables the reason(s) for the markdowns. Defective goods is but one of many possible reasons for a price markdown. Stock clearance is an equally plausible reason. There is again no basis for the Court to draw the inference that the rejected goods was the cause of the alleged price reduction.

4) Loss on reselling merchandise cancelled by Walmart

The supporting documentation is a table in the same format as the two previous tables referred to in 3). The comments relating to 3) above are, mutatis mutandis, applicable.

5) Loss on merchandise returned to maker US$40,435

This item ostensibly relates to the rejected shipment. However, the cost at which Happy Kids acquired the defective shipments which is referred to in the 5 January letter and broken down and particularised in the undated debit note considered at para.(iv) of the chronology cannot be reconciled with the cost shown in the 29 May letter : (a) the price shown in the breakdown is different for each of the four styles; in the 29 May letter, there are only two prices, one for the two 001 styles and another for the two 030 styles; (b) the cost stated in the 29 May letter is over 40% higher than the price at which Happy Kids purchased the merchandise from the Defendant.

Counsel for the Plaintiff also invited attention to the fact that in calculating such a loss, it is normal to credit costs and expenses, such as transportation charges which would have been incurred had the goods not been rejected. No such credit appears in the present case. Moreover, other than the bald assertion, no evidence was adduced in support of the alleged loss when clearly the relevant documents must have been in the possession of Happy Kids. It is inexplicable that these did not form part of the supporting documentation submitted with the 29 May letter and raises doubts as to the amount claimed.

Is the defence raised bona fide?

6. Is Happy Kids' claim believable? In evaluating that claim, I am bound to have regard to how the claim was initially put (on 14 May) and subsequently developed (on 29 May). Insofar as the developed claim is not referable to any head of damage initially claimed, its bona fides must be in question in the absence of any satisfactory explanation. Even the Defendant had to acknowledge that Happy Kids' claim is grossly inflated.

7. As regards the first four heads of loss contained in the 29 May letter, they are to be rejected for the reasons set out above. It is not so much a question of these claims being inflated; rather it is the lack of evidence to properly ground such claims. Having regard to the problems with each of them identified above, I am of the view that these four heads of loss comprised in the additional claim lack bona fides. Dole Dried Fruit & Nut Co. v. Trustin Kerwood Ltd [1990] 2 Lloyd's Rep 309 is of no assistance to the Defendant where, assuming in the Defendant's favour that the heads of loss asserted arise out of the same transaction and are inseparably connected, the documents adduced in evidence do not support the loss claimed to have been sustained.

8. Therefore, of the five heads of loss which Happy Kids attempted to quantify only one, namely, Happy Kids' loss of bargain relating to the rejected goods, is directly referable to loss mentioned in 14 May. Prima facie, the claim is plausible. However, the amount claimed is unsubstantiated and no explanation has been given of the discrepancies in terms of the cost of the merchandise to Happy Kids.

9. It was held in British Anzani that if a defendant claimed unliquidated damages and bona fide claimed that they would exceed the amount of the plaintiff's claim, he was entitled to a set-off amounting to a complete defence. The British Anzani decision does not appear to apply to the present case because, here, we are not dealing with an unliquidated claim. Rather, a precise sum is being claimed. Accordingly, that holding is of little assistance to the Defendant not only because the damages here claimed are not unliquidated but, more importantly, the Defendant cannot, on the facts, bona fide claim that the damages would exceed the amount of the Plaintiff's claim. In these circumstances, a case for unconditional leave to defend has not been made out and the appeal must be dismissed.

10. As to the amount claimed for loss of bargain which converted into Hong Kong dollars amounts to $311,349.50, whilst loss of bargain may have been sustained, the amount claimed is highly questionable. For this reason it would not be appropriate to grant unconditional leave to defend up to this amount. Instead, I will order that the Order of the learned Master be varied to the extent that execution be stayed as to HK$311,349.50 of the judgment sum of $1,091,625.75.

11. So far as costs are concerned, I will not disturb the costs below since the limited stay of execution that I have granted arose from matters that were not before the learned Master. As for the costs of this appeal, I will make an order nisi that there be no order as to costs.