DAYON WEAVING & DYEING FACTORY LIMITED v. HANG TAT PIECEGOODS COMPANY LIMITED

Action No. 8393 of 1984

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. This is an action for breach of contract on a counterclaim. The defendant Hang Tat Piecegoods Company Limited (Hang Tat) bring an action against the Dayon Weaving & Dyeing Factory Limited (Dayon) for breach of contract in relation to the dyeing of cloth. This was the first of a short chain of contracts which in due course led to the cloth being delivered to Asia Knit in Sri Lanka. The contracts were these: Asia Knit in Sri Lanka purchased fabric which they required of specific colours from Marubeni Hong Kong. Marubeni Hong Kong are the subsidiary of a very large Japanese company. Marubeni Hong Kong contracted to purchase the cloth from Hang Tat. Hang Tat in their turn had the cloth dyed at Dayon, that is the cloth in dispute. There were, in fact, between Asia Knit and Marubeni two contracts. The first dated the 17th July 1984 was for about 120,000 yards of Cotton Dyed Calico of a specific width and manufacture for shipment September/October 1984. The second, dated the 30th July 1984 for about 150,000 yards of the same type of material for delivery earlier, August/September 1984. It is the second of those contracts, the purchase no of which is TT3914 with which I am particularly concerned for it was the fabric in that contract which was dyed by Hang Tat. The fabric in the other contract was dyed by another dyeing company. Hang Tat, of course, owned the fabric. They sent it to Dayon to be dyed. The system was this: swatches were received from Asia Knit to Marubeni to Hang Tat who then, of course, supplied them to Dayon. Those swatches had to be matched for colour.

2. The contract between Hang Tat and Dayon was oral, backed up with notices for processing instructions. Those notices set out the instructions; in particular the instructions in relation to colour. Exhibit D1 originally contained the swatches in relation to these colours. The cloth was then delivered to Dayon and they processed. The processing instructions not only had the colours upon them but there were other matters to which I will refer in due course. They set out, for example that a test would be required; that meant a laboratory test and there were certain instructions about the colour, about fading, about matching properly and so forth. In accordance with the usual practice, at the beginning of the process, samples were provided by Dayon to hang Tat who in their turn provided them to Marubeni so that from those samples it could be seen whether or not the fabric was going to match the swatches. That of course is usual practice in the trade

3. It was said that there was pressure for time and so the processing began and delivery was made between the 14th September and the 15th October. Some of the fabric was delivered to Hang Tat but a great deal was also delivered to Ching Hing, the packers. It was part of the contract between Marubeni and Asia Knit passed on to Hang Tat that the rolls of fabric would be packed in a way described as standard export packing. In fact, it was poly-wrapped and then put into cartons.

4. Some of the fabric being delivered to Ching Hing was for immediate packing. The rolls, I was told, varied between 40 yards and 80 yards. The goods were delivered in about 10 lots. Originally Asia Knit wanted all the goods in one lot but that had to be changed because Hang Tat informed Marubeni that this could not be done. So to that extent the contract was varied.

5. There are issues about inspection of the goods with which I will deal. After the fabric had been delivered to Asia Knit in Sri Lanka it, or part of it, was passed to Oriental garments, another company whose relationship with Asia Knit is not clear on the evidence. It is clear however that Oriental Garments Limited were doing CMT work either as a subsidiary of Asia Knit or as an independent contractor. When Oriental garments began to cut the cloth it was found that the dyeing was defective. The defects were that there was shading and variation of colour one end of a roll to the other and also it varied from side to side. The defects were such that some of the cloth could not be made up into garments. Other parts of the cloth were made up but after the garments had been made some were found not to be marketable. The amount which was involved was not great in relation to the whole of the contract. I am told it was something like 10,000 yards out of the 150,000 yards that had been delivered.

6. Asia Knit complained to their contractor, Marubeni. They complained on the telephone and in due course a telex was sent which is in the bundle of documents and I do not need to refer to it specifically. Marubeni, of course, turned to Hang Tat and in due course Hang Tat turned to Dayon who had done the dyeing.

7. Events thereafter were these; Marubeni sought to settle their liability with Asia Knit as soon as they could. Mr. Cheung of Marubeni went out to Colombo and he saw certain cloth there at the factory. He was satisfied that it was the fabric that Marubeni had sold to Asia Knit. He was satisfied that it was defective and so some time later a director of Asia Knit came to Hong Kong in order to settle the matter; it was Mr. Fernandopulle. The meeting to achieve a settlement was attended not only by Marubeni but also by Hang Tat and a settlement was achieved. I will refer to the settlement in due course.

8. Dayon were not concerned in that settlement and the action arose because after defects became known and were passed onto Mr. Wong of Hang Tat, he stopped the cheque for payment to Dayon. They brought an action on the cheque and then Hang Tat counterclaimed for breach of contract.

9. There are admissions in the pleadings: first, the contract is admitted. Second, the implied terms that the dyeing work would be carried cut in a workman like manner and that the colours would correspond to the colours stipulated are admitted. Third, it is admitted that Hang Tat required the materials to sell to its customer to be manufactured into garments at a profit.

10. Let me turn now to the issues in the case. The first issue is a fundamental one. Dayon say "We are not satisfied that the cloth at Asia Knit and Oriental Garments was the cloth which we dyed". If Hang Tat fail to prove that then the whole claim founders at the outset. I am quite satisfied on the evidence that the defective fabric complained of, which was delivered to Asia Knit and to Oriental Garments, was in fact dyed by Dayon under this contract.

11. The evidence is quite conclusive when one considers.

                the evidence of Mr. Cheung of Marubeni. He went out, as I have said, to Colombo when the complaints had been made. He saw at the factory both cloth and garments. He saw that the cloth was defective and he saw some garments which had been made up were defective. The reason for the defects was the dyeing. He said the colours were different and there was substantial shading. Basically, he said, this could not be caused in any other way than the dyeing, if the dyeing process had been controlled well, it would not have happened. He said that defective dyeing was consistent with the defects that he saw in the uncut fabric in Colombo when the cloth was spread out for his inspection. He saw other matters which indicated that this came from Hang Tat. He saw 10 cartons of finished garments. He saw them sorted out. They were still manufacturing garments, they were cutting the cloth and he also saw some cloth in cartons. He said the colours matched, the cloth being used was the same as the cloth which had been sent. He recognised those cartons as coming from Hang Tat, some which were still not unpacked. He then saw some of the garments. He looked at D2, (about 12 garments) which had been eventually brought to Hong Kong by Mr. Fernandopulle. Mr. Cheung recognised those garments when he saw them in court as the ones that had been brought by that gentleman from Asia Knit. He saw that they were of the same cloth, same style and same design as those that he had seen in Colombo. So Mr. Cheung had certainly satisfied himself that the defective cloth which he saw in Colombo was the cloth that Marubeni had supplied and he had satisfied himself that it was also the cloth that Marubeni had received from Hang Tat. On his evidence I am quite satisfied that it was so.

12. Turning now to the evidence of Mr. Cheung of Hang Tat. Mr. Cheung of Hang Tat described the cloth which was dyed by Dayon in pursuance of the contract that Hang Tat had with Marubeni (the contract TT3914). He described the colours under that contract and matched them with the colours that were sent to Dayon for dyeing. It was impressive evidence and I am quite satisfied that the fabric which was dyed by Dayon under the contract in dispute in this case was indeed the fabric which was found to be defective in Colombo.

13. The next matter of fact about which there is a serious dispute is this; it said by Dayon that the cloth was inspected at their factory by Mr. Cheung of Hang Tat during and at the end of the processing . Not simply a casual inspection of the cloth but inspections, some of which took many hours for each day over the period of a week. Six days one following another, than a gap of a Sunday, and the Monday and that was not the only time that inspections were carried out by Mr. Cheung, that he visited from time to time to carry out inspections and Mr. Leung of Dayon said that that was all part of the custom of the trade. (I will return to the question of the custom of the trade) It is necessary first to deal with the issue about inspection for whereas that is what Mr. Leung says. Mr. Cheung of Hang Tat says it was not so. He visited from time to time in order to hurry the process along because there was an urgency but it was not his task to carry out inspections of the processed cloth. He says that his task in this regard was to supply the swatches, to receive the samples and to inspect the samples and make sure they matched the swatches. He had to organise the processing, (the dyeing) and to receive the goods back and ensure that they were delivered on.

14. In this, there is a conflict of evidence to some extent between him and Mr. Wong who is the proprietor of Hang Tat. Mr. Wong says that it was Mr. Cheung's duty as his employee to inspect goods which were received.

15. Having considered their evidence, I am satisfied that there is not quite such a stark conflict between Mr. Wong and Mr. Cheung of Hang Tat as would at first appear. When one considers the point in a practical way, there was here a very large quantity of fabric to inspect, if the object is to inspect for defects of dyeing in the two contracts which went to Asia Knit there was about 150 miles of fabric divided up into rolls 40 yards to 80 yards long. So in respect of the amount that Dayon were dyeing only, I am considering something like 2,000 rolls. Those rolls were poly-wrapped, they had to be further packed. The only way in which inspection of this kind could be done was for some person from Hang Tat to spend all their time at Dayon during the processing to see the cloth rolled at the end of the process and to inspect it as it was rolled. It was suggested, as I understand it, by anyone, certainly not by counsel for Dayon, that anyone should have been doing that during the whole of this process.

16. In the end I am driven to reject Mr. Leung of Dayon on this matter. Having seen him give evidence and having considered the import of what he was saying, I am quite satisfied that Mr. Cheung was not attending 7 days a week in order to inspect the fabric. He did attend from time to time, he attended in order to urge the contract along. When he was there would have a look at any cloth that was being processed at the time.

17. On delivery back to Hang Tat what inspection was done there? Well, there was casual inspection, it was clear that from time to time an odd roll was looked at, perhaps because it had to be rolled at Hang Tat because of shortage of time. A great deal of the fabric went straight to Ching Hing for packing; I think that was packing into cartons because it was poly-wrapped at Dayon. In any event, it was no part of the packer's duty to inspect; their task was to pack.

18. The casual inspection which took place at Hang Tat (I suppose random inspection would be a better way of putting it) did reveal that 5,000 yards of the fabric was defective. It was not properly dyed. Mr. Cheung of Hang Tat said that he became aware of the problems because of this 5,000 yards. He described it according to my note as, colour not matching, variation of colour from start to end and the self edge. So it was that it was sent back for re-dyeing. That was the sort of inspection which was taking place, no question of inspecting the whole of the goods, no intention of doing so and that was supported by Mr. Wong of Hang Tat who said they simply could not inspect the whole of the goods.

19. The next issue is was time pressing in relation to this contract? Of this there is no doubt. There is no doubt because every witness who knew about the matter spoke of the urgency in relation to the contract. It was clear from the outset that this contract TT3914 made on the 30th July 1984 (after the earlier contract that Marubeni had with Asia Knit) and (both of which were passed on to Hang Tat) required an earlier shipment. It is clear that there was urgency from the very fact that Hang Tat could not deliver in bulk, (that is the whole contract at once) that could only be a question of time so they delivered in lots. Further, Mr. Leung when asked about this matter said of Mr. Cheung (Hang Tat):- "He did ask about progress, all along he pressed for delivery, and he also came to monitor the progress. I knew time was pressing, I was aware of the shipping schedule, I did not know the exact date but I was told we had to hurry up".

20. So there is no doubt that time was pressing. How much was it pressing? Marubeni were pressing Hang Tat. They-had asked for some extensions and it was thought, depending upon the shipping date, a 10 days delay would probably have been acceptable but that depended very much upon the actual sailing date. I have no doubt, having heard the whole of the evidence, that Marubeni were pressing Hang Tat and that Hang Tat were not aware that any leeway was likely to be given so they had to hurry the contract and they had to persuade Dayon to hurry the contract as well.

21. Let me now turn to the contract between Dayon and Hang Tat. I am satisfied (there is no dispute about this) that the oral contract did have the usual implied terms of this type of contract. That is Dayon were warranting that they would carry out their work with all due care and diligence; that they would do it in a good and workman like manner and with good and proper. materials. It follows that they would first of all match the colour swatches (which broadly they did) and also that the finished articles would not have variation of colour one end of any roll to the other and would not have shading.

22. The fact that I am satisfied that some of the cloth did have those defects means that Dayon were in breach of those terms of the contract but Dayon say I must not so hold because even if they are in breach of the contract no damage flows from it. The reason is this. They say there is a custom of the trade and the custom of the trade is that the person requiring the dyeing will inspect the goods that have been dyed and if they are found to be defective, they will then return the goods for re-dyeing and the goods will be re-dyed. Alternatively, they say, that if the fabric is to be made up into garments here in Hong Kong, the defects will be discovered as soon as the cloth is placed on the cutting table and the rolls which are found to be defective will then be returned to be re-dyed by them. It is said that this is a custom of the trade and that is all that is in their contemplation in making any contract and is therefore the limit of their liability.

23. It is put in several ways, first this is put as a custom of the trade so that it is an implied term of the contract. Second, it is put in this way; that the defects ought to have been discovered by Hang Tat before shipment and therefore Dayon are not liable for any damages which may arise in the string of contracts which follow. They say that this was a patent defect, it was the duty of Hang Tat to discover defects which were easily discoverable and these were easily discoverable (a patent defect rather than a latent one) and that as they passed the cloth on, Dayon are not to be held responsible for any damages that arise thereafter.

24. Let me deal with those matters. First custom of the trade. Now I have little doubt that because businessmen are practical in their dealings with one another and they rely greatly upon trust in their dealings if defects are discovered by a person requiring dyeing often cloth is returned to be re-dyed. That will happen also if local garment manufacturers get the cloth onto their table and see that it is defective and can be remedied by further work. That, of course, will happen as a practical matter; but what a businessman describe as something which it happens as a practical way of dealing with a situation that has arisen and the proof of a custom or usage of the trade which has contractual effect and the effect of limiting damages which arise in the normal course of a contract have different considerations. A custom or usage of the trade which is considered by the court on the construction of a contract must be notorious; it must be certain; and of course it must be reasonable. So for proof of a custom of the trade, one would expect independent evidence from experience people in the trade who would say to the court this is known by everybody, this is the practice, it is never varied and it is notoriously known and it is certain because everybody knows about it and it need not be expressed in any contracts.

25. I was greatly impressed by the evidence of Mr. Wong of Hang Tat. It was clear to me that in giving his evidence he was not seeking to trim his evidence by consideration of his own interests and the interests of his company. He was asked at the end what customs of the trade were embodied in the contract. He was asked not as a lawyer, of course, but simply as a businessman. He said "Well, in my view, trade customs include prompt payment when due. It would not be possible for all goods to be inspected, should something go wrong we would get together and try to sort out who was responsible for the problems. If goods were found to be defective then the goods would have to be sent back to be re-dyed, if the goods were not found to be defective the goods would be shipped and if something was found to be wrong then, we would get together and try to sort out who should be responsible". He said about inspection "There is no custom of inspection in Hong Kong. There are textile companies situated in Central with only an office yet they do large business. No warehouses, they simply trust the dyeing factories. They cannot carry out inspections, they cannot inspect the goods, they can only inspect samples submitted to them. In other words, the trade is by sample; for an example of that in practice here in Hong Kong, we only have to look at the way in which Marubeni carried out their contracts in this case." "Is there any custom" he was asked "that Dayon would not be responsible after export?" "No" he said "it is the same as someone buys some garment, who is going to be responsible for the defects?" He said "You would not say, in those circumstances, that Hang Tat was responsible but the dyers".

26. Now of course that is a layman speaking and he is not giving his views about the law but it is evidence which I accept. On that evidence, I have to reject, and I do reject, any custom of the trade which throws upon the owner of the fabric being dyed the responsibility of inspection in order to discover defects before exporting whether these defects are patent or latent. As I have said in the course of argument, I think the use of the words "patent" and "latent" is misleading. What is meant is simply were the defects obvious and easily discoverable so that the breach would be known by Hang Tat and that, therefore, Dayon would not be responsible for Hang Tat passing on goods which they knew were in breach of the contract. That is because their duty is to limit the damages and passing on, in those circumstances, would make the damages too remote. Well, in this particular case when one considers the number of rolls involved and the fact that each roll would have to be unrolled in order to discover the defects it is something totally unreasonable to expect Hang Tat to do in these circumstances. It is unreasonable to expect anyone in the chain of contracts to do that. He will work on sample, he may examine certain rolls at random in order to check and indeed it seems clear insofar as it was possible within the time limits here that was done.

27. So I am quite satisfied that these defects were not easily discoverable, they were not obvious. It was not the duty of Hang Tat to examine so as to discover this sort of defect either under the contract or generally out of their duty to mitigate the damage. Also I am quite satisfied that these defects were not in fact known to Hang Tat.

28. A possibility occurred to me. It was this : that in the course of processing both Hang Tat (in the person of Mr. Cheung) and Dayon (in the person of Mr. Leung) discovered certain rolls were defective but, appreciating the pressure of time they decided to overlook the matter and sent them to Marubeni and so on to Asia Knit. That did not happen. If that had been so it is a defence which the plaintiffs, Dayon, would have advanced.

29. The result is that the written terms of the contract must now be looked at to see whether they assist. They are relied upon by Dayon who say (in addition to the matters with which I have already dealt) if one looks at the processing instructions; for example, the translations of the documents at pages 14 and 32, that one finds there are added certain things such as "test required" and other matters urging the dyers to get it right. (It is under the box headed "starched sample" in document 14 and in document at 32. ) In addition on the document at page 32 there is "Please help to match the colour samples correctly. As shipment date is drawing near, there will be no time for making again. Customer is in Hong Kong, goods will not be shipped if colours are not correct. "

30. Dayon seek to rely upon those statements as being warranties that these things will happen; that the goods will not be shipped if the colours are not correct and that a test will be carried out before they are shipped. In defence, they say as it is agreed that Hang Tat did not inspect and that they said they were going to have a laboratory test and said that the goods would not be shipped if the colours were incorrect, they can now rely on those matters and say that as they were not done they (Dayon) are not responsible for what happened thereafter when the goods went to Asia Knit. Well, I am quite satisfied that they can do no such thing. Those remarks were put on the instructions not by way of any warranty that that was going to be done but simply in order to persuade Dayon to fulfil their contract properly and to draw to their notice the importance of doing so. It was urging them to get it right. Unfortunately, they were warnings which they did not heed.

31. The result is that Dayon were in breach of their contractual terms by producing this defective cloth; defective in the dyeing. In this contract, whether in a string or not, Hang Tat are entitled to rely upon the warranties in the contract, the warranties of which Dayon were in breach.

32. Let me turn now to damages. At the time of the dyeing and the contract Dayon were aware that this fabric was going to be exported and they were aware that it was going to be made up into garments. It must have been, therefore, in their contemplation at the time that they were carrying out the contract and (more important) at the time when the contract was made that if the dyeing was defective, the cloth could not be made into garments and that therefore the garment manufacturer would suffer a loss by having purchased fabric which was useless to him; second, that there would be consequential losses to him, loss of profit and may be other losses; if he was importing, perhaps-loss of duty. It would be also in the contemplation of anyone who knew anything about the trade (as the parties here did) that some fabric would inevitably be made up (if defective in the first place) which would be found not to be acceptable after being made up rather than before; whatever care the garment manufacturer took. Also, it would be in the contemplation of those who made this contract that when a garment manufacturer was trying to make up cloth which was defective, he would be put to expense in cutting out defective parts of the cloth and using the parts which were not defective. All those matters would be well within the contemplation of the parties making this dyeing contract.

33. The damage, sustained here by the end buyer, the manufacturer, was damage which was certainly not too remote to be recovered along the line and finally from Dayon. This damage was damage which naturally resulted from their own breach of contract and each contractor along the line can, therefore, recover from the one before. Of course, the dyeing contract was not a contract for sale but in this respect the warranties are effective because they were warranties which related to the very reason for which the fabric was being sold on one to another. So my decision is that the damages sustained by Asia Knit are not too remote. I say Asia Knit but, of course, the damages are passed back along the contractors and this court has to consider the damages that are sustained by Hang Tat for it is their loss for which Dayon are responsible in their breach of contract. To discover what damage they have sustained, it is necessary to consider what happened in relation to the settlement that was made by Marubeni and Asia Knit, and then in turn by Hang Tat and Marubeni.

34. It is settled law that one contractor along the chain may settle, and provided that his settlement is reasonable he can recover the full amount of his settlement and, if he has sustained costs as well he may recover those additionally from his earlier contractor.

35. Was the settlement, therefore, between Hang Tat and Marubeni one which was reasonable? The details of the settlement between Marubeni and Asia Knit are set out in the documents at pages 162-165. It was done was by meeting. The final settlement between Marubeni and Asia Knit was that they would pay to Asia Knit, in respect of several claims, these sums: there was a blazer claim which was relevant to the contract between Hang Tat and Dayon because the blazers were made out of the fabric dyed; there was a jacket claim also made out of that fabric and the total was US$33,781.38. There was additionally a claim under the other contract for US$5,941.89. Those claims were settled by Marubeni at those figures. Marubeni agreed to pay US$5,000 of that settlement and to pass on the remainder to Hang Tat and they also agreed.

36. The result was that Hang Tat were to pay Marubeni, for the breach of contract, US$31,000. That is the sum they seek to recover from Dayon. It is based upon Marubeni's settlement with Asia Knit, therefore, it has been necessary to consider the basis of the Marubeni/Asia Knit settlement. The way in which the settlement was reached is clearly set out in that letter. I deal in detail only with the blazer programme because the other claim was dealt with in the same way. The blazer programme involved a contract for over 16,000 pieces. It became impossible to cut the whole of that. The number which could not be cut was 684. That involved a wastage of material of 2.399 yards per piece and a loss to them of US$1. 23 per yard. So their claim was limited, in the first instance, to the fabric which they could not cut out. They did not claim for their loss of profit on garments which could not be cut, they simply claimed for the ice of the fabric which they had bought and which was useless. They had to pay duty on that fabric import and they claimed that as well. It was an inevitable loss to them if they imported the fabric and it was useless. It flowed directly from the defects in the cloth.

37. In addition, they had cut out 158 blazers which, in due course, were not up to contract standard. When one compares that figure with the total contract it is a perfectly reasonable figure for those who were trying to use as much cloth as they could but had made an error of judgment in respect of some of it. So the claim is for those but less US$2 each which they did get for them. That seems, on the face of it, to be perfectly reasonable. Also they had to obtain a licence in respect of those garments in the hope that they would be sold. "Receivable on F. O. B." is the way it is put. As I understand it, it would have been a return of money if they had been able to export, (and they were not). In any event, it was a loss to them of licence money, it was direct and it was inevitable loss to them as a direct result of the defects in the cloth. That is how the claim is worked out. On the face of it, it is a perfectly reasonable claim. It has to be noted that it does not include a claim for a loss of profit.

38. The jacket programme is worked out in the same way save for this; the jackets that were cut and were not up to standard were re-sold at US$2 whereas the price of the jacket if it had been up to standard was US$8. 61. There is no reason to think that is unreasonable.

39. In addition, there is a claim for air-freighting some garments which the customer was persuaded to take at a discount. This all clearly part of what can be described as the quid pro quo which Asia Knit were negotiating with their customers and it also became a quid pro quo in the negotiations with Marubeni.

40. In the result, the figures claimed by Asia Knit cannot be described as anything but reasonable. Mr. Cheung of Marubeni thought it was a reasonable settlement and that is why he agreed to it. On his evidence, and indeed all the other evidence that I have heard, I find it was a reasonable settlement.

41. However, the settlement that Marubeni made and that Hang Tat made with Marubeni included a claim for breach which is not claimed by Hang Tat against Dayon. It would, therefore, be unjust if Dayon were to be held liable to pay for part of the settlement in which they are not involved and for which they are not responsible. The only fair way that I have been able to achieve of deciding what loss is attributable to Dayon, in respect of the settlement of the loss Hang Tat sustained, is by working out the figures in proportion. I am greatly indebted to counsel for making the calculation. The way in which it has been done is this: taking into account that the settlement by Marubeni was US$33,781.38 in respect of the defective cloth claimed against Dayon and US$5,941.89 in respect of a claim which is not passed to Dayon and subtracting from that settlement the US$5,000 which Marubeni paid themselves and subtracting that US$5,000 in proportion to each of those two figures, one comes to a factor of 0.849. Therefore the fairest figure that can be calculated for Dayon's responsibility and Hang Tat's loss in respect of the breach of contract of Dayon is 0.849 of US$31,000. That produces a figure of US$26,324.

42. There will, therefore, be judgment for the defendant, Hang Tat, in the sum of US$26,324 on the counterclaim with interest at 13% from the 22nd December 1984. There will be costs to the defendant on the counterclaim.