May Wah Garment Manufacturing Co v. Melchers (HK) Ltd

HCA009288/1982

IN THE HIGH COURT OF JUSTICE

BETWEEN

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Coram: Hon Mantell J.

Date: 17th October, 1983.

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J U D G M E N T

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1. The plaintiffs are garment manufacturers. The defendants are merchants in Hong Kong dealing in the export and import of goods which include garments. The plaintiffs claim damages for breach of contract arising from the defendants' refusal to accept a consignment of ladies' blouses made by them to the defendants' order.  The defendants contend that they were entitled to reject the goods by reason of breaches of conditions on the part of the plaintiffs and counterclaim damages for breach of contract arising from their loss of profit on resale. The last figure has been agreed subject to liability but the plaintiffs' loss has not been agreed as the plaintiffs' duty to mitigate their loss by selling elsewhere has been made an issue in the action.

2. By agreement, the case was opened by Mr. Smith on behalf of the defendants since he accepted that in all respects, save as to mitigation of loss, the evidential burden rested with him, although he contends, and after some hesitation I think riqhtly that the overall burden of proof remains with the plaintiffs if the plaintiffs are to succeed on their claim.  In other words, once the issue of breach of condition be raised whether it be as to unmerchantability, or the failure to supply goods corresponding with sample, or to supply goods fit for the purpose indicated, it is for the plaintiffs to show that they did supply goods in accordance with contract. Failure to discharge that burden on the balance of probabilities would lead inevitably as I find, having acceded to Mr. Smith's submission, to the plaintiffs failing to establish their action for the price of the goods. Thereafter, it seems to me, that for the defendants to succeed, they would have to satisfy me on the balance of probabilities that the plaintiffs were in breach of condition resulting in loss of profit to the defendants.

3. The goods in question were the subject matter of two contracts, separately numbered, to be found in the Agreed Bundle of documents. Those two contracts were part of a series of contracts, under which the plaintiffs agreed to make garments to the defendants' order. I have heard no evidence about the ether contracts save that goods were made and delivered and, as far as I know, paid for. And I have heard no evidence as to complaints about the quality of the goods delivered under those other contracts but I do not think that fact of itself assists me to decide the case which has now arisen.

4. The blouses under the two contracts were to be made in the same style as a sample which the defendants supplied and has been shown to me. That did not make it in all respects a sale by sample because each contract expressly stated that the sample was to be copied as to style. Now, it may be that the sale was by sample as to quality in that the contracts went on to provide for the provision by the plaintiffs of two counter-samples for approval. But those counter-samples have not been produced in evidence and the evidence did not go to the question of whether or not the goods when offered by the plaintiffs did correspond with those two samples. And although one of the breaches of condition pleaded by the defendants is a breach of the implied condition under section 17 of the Sale of Goods Ordinance, Mr. Smith has not pursued that allegation acknowledging, I think realisticly end correctly, that the gravamen of the defendants' contention here is that the goods when produced under these two contracts were not of merchantable quality which is the second allegation made by the defendants.

5. There is a third allegation of breach of condition which comes in by way of late amendment that the plaintiffs were in breach of the condition to be implied by virtue of section 16(3) of the Ordinance, namely, that having made known expressly the purpose for which the goods were intended that there was an implied condition that the goods supplied under the contracts should be reasonably fit for that purpose. Well, upon reflection, Mr. Smith concedes that that allegation would involve the same issue as the second as to whether or not the Goods were merchantable because although it is common ground that it was made known to the plaintiffs that the goods were for resale in Germany, there is no evidence before me that the marker was of such a kind as to require the manufacture of goods to an exceptional or unusual or special standard. It being conceded that there was an implied condition under Section 16(2) what was required here under the contract was for the plaintiffs to produce and deliver goods of merchantable quality and that has been the issue which calls for my decision on the evidence.

6. Now, the first of the two contracts provided for the manufacture and delivery of 3,306 garments at a price of $250 per dozen and the second contract provided for the manufacture and delivery of 320 at the same price per dozen. Originally, the goods under the contracts were to be delivered for shipment at the latest by 20th July 1982 but that delivery date could not be met by the plaintiffs and the time for delivery was, by agreement, enlarged. In the first instance, I think I am right in recalling it was extended until 20th August 1982 and thereafter again, by agreement, a further four days were allowed. So that the last date upon which the contracts could be performed by the plaintiffs was 24th August. Nothing turns upon the question of time because it is conceded that either the plaintiffs were able to and did offer delivery on that date or were in breach and the sole issue is, on the evidence, whether or not on 24th August the plaintiffs were offering to deliver in accordance with the terms of the contracts, these two orders for ladies blouses and, as I have indicated, that in turn resolves itself into the question of whether or not the goods manufactured and offered for delivery on that date were of merchantable quality.

7. The defendants have a system, of which I thoroughly approve because it seems to me to be a sensible and helpful to both sides, of inspecting the goods during the course of manufacture and in particular during the latter stage of manufacture so that they can give an indication to the manufacturers of any faults or defects which they noticed at that stage and which may give rise to problems under the contract later on, and to give the manufacturer the opportunity of putting things right while there is still time to do so. There was, in this case, such an inspection on 18th August by a gentleman who did not give evidence but whose report is included among the Agreed Eundle of documents, at page 27. That gentleman, a Mr. Wong, using a system of random sampling, examined altogether some 40 garments. He noted that on three of the garments which he examined, there were uncut thread-ends. His report does not indicate whether those were inside or outside the garment or in any particular case as to the number of uncut thread-ends. In his report, he specifically drew the attention of the plaintiffs to the fact that there was loose threads lying on the garments to which he asked them to pay special attention. There were a number of other faults which were noticed which do not pay a significant role in this dispute. He did notice that the ironing of these blouses had not been completed. In fact, it is common ground that only 40% of the garments had been ironed at that time. On 20th August, the Senior Quality Control Inspector employed by the defendants himself carried out an inspection. He found that out of thirty garments which he selected at random that thirty were defective in having uncut thread-ends which is, of course, in stark contrast to the finding by Mr. Wong two days earlier and for which some explanation must be sought. He also noticed that in all the examples he looked at, the ironing was poor. Now, that is not necessarily inconsistent with Mr. Wong's report because Mr. Wong was speaking of ironing being incomplete with some 60% of the garments needing to be ironed and Mr. Whitehead explained to me that he was not complaining about the failure to iron at all but about ironing in the wrong way. He explained that it had to do with the little pleats round the top of the blouses and it is not of any materiality in this case because by the date for delivery, it is agreed on all sides that fault had been put right. He noticed various other faults. His report does not make any distinction between uncut thread-ends outside the blouses and uncut thread-ends inside the blouses nor does his report, so far as I can see, make any reference to loose thread-ends lying on the garments themselves. Mr. Whitehead carried out a further inspection close to the deadline for delivery on 24th August. This time, his report does make a distinction between uncut thread-ends on the outside of the blouses and uncut thread-ends on the inside of the blouses finding a reduced number of uncut thread-ends on the outside of the blouses and uncut thread-ends inside the blouses and also to number of cut threads lying on the fabric itself. There are, once again, other defects noted including one serious one, a hole, which under the system employed by Mr. whitehead would render the garment, in his judgment, unsaleable The result of that report if one totals up the various defects and accords to them demerit points in accordance with the scale adopted by Mr. Whitehead, is to take the consignment outside what would be allowed on the defendants' system as being an acceptable margin for defects. Mr. Whitehead brought away from his inspection "D4" which I have seen and which is one of the garments which he saw, with uncut thread-ends, I think, both outside and inside. They are certainly present and in considerable number. The upshot of Mr. Whitehead's inspection was that the defendants declined to accept delivery of these goods.

8. There was some discussion between Mrs. Bertelsmann who works for the defendants and Mr. Yuen who is, I think, the proprietor of the plaintiffs as to what could be done about it. According to Mr. Yuen, two compromise arrangements were offered to him, one was that the goods should be taken on a consignment only basis and the other was that the goods should be taken from the plaintiffs at half the contract price. Mr. Yuen in his evidence says that he rejected both those suggestions. Mrs. Bertelsmann agreed that she offered to take the goods on a consignment basis only. But she denies that she ever offered to buy the goods at half the contract price.

9. After the goods had been rejected, but not before the passage of several days, the plaintiffs sent the goods to a body called Labtest (Hong Kong) Limited who carry out quality control inspections, I think with particular reference to the textile and garment manufacturing industries. Mr. Smith for the defendants invited me to speculate as to what might have happened to the goods in that interval of seven days, putting forward the possibility that some of the defects noticed by Mr. Whitehead might have been remedied. I suppose they might. But Mr. Yuen has told me that that did not happen and the goods went to Labtest in the same condition as they were in at the time of Mr. Whitehead's inspection. There is no direct evidence to support the suggestion put forward by Mr. Smith nor could there be, save to the contrary effect, which there is and that comes for Mr. Yuen. But Mr. Smith says, Well, it is a matter of inference for the court and it is an inference which the court ought to draw having accepted as Mr. Whitehead as a witness. It must follow Mr. Smith says that since Mr. Koo who conducted the report for Labtest found no uncut ends at all or at least make no reference to them in his report that something must have happened in the meantime. I do not find that that is the only explanation. Mr. Koo told me that for uncut thread-ends on garments to register at all with him as a defect under the system which he employed, there would have to be at least two on the outside of a particular garment or at least four on the inside or a combination of at least one outside and three inside and if those figures are exceeded to whatever extent, he would register the defect as a miner one, otherwise, not at all. Although I have investigated the matter with counsel because I appear not to have any clear note on it, I believe the witness, Mr. Koo, said nothing as to how he might regard the presence of cut thread-ends lying on the garments. But, as I have said, Mr. Koo makes no mention of either uncut or cut thread-ends. Mr. Whitehead had told me that he would register uncut thread-ends as a defect no matter how few there were even though there might only be one and it seems to me that on that basis, it is possible to reconcile the two reports and I think that that is the correct way to regard them, particularly in view of the fact that Mr. Wong conducting an inspection two days before Mr. Whitehead's first report found far fewer examples of garments with uncut thread-ends showing as a proportion of the samples he examined and at that time, as I find on the evidence of Mr. Yuen, it was the case that some 90% of the blouses had been made even though, perhaps, not packaged. It could be, I find, and probably was the case that Mr. Wong was applying a less stringent test than that employed by Mr. Whitehead and it seems in that, his approach was almost certainly followed by Mr. Koo. I note in passing that Mr. Koo inspected a total of some 200 samples but at any one of the earlier inspections, I think the greatest number to be inspected was 40. Against that conclusion, Mr. Smith argues on the basis of the inference to which I have earlier referred and also on the basis of the fact that the one example Mr. Whitehead did bring away from the second inspection, so he said and I accept, did have notably more than the permitted number of uncut threads whichever standard one might apply. Well, I do not find that is an easy matter of fact to resolve but in the end, I have come to conclusion that the inspection carried out by Mr. Koo has produced the more reliable result and I bear in mind that Mr. Koo had more time at his disposal than Mr. Whitehead and that Mr. Whitehead was obliged through no fault of his as I find, of the defendants to carry out what was in effect a last minute inspection. So, how is the question of merchantability to be determined accepting as I do that Mr. Koo's report of the 3rd September 1982 is to be regarded as the more reliable both as to the quality of these garments in general and in particular, as to whether or not a single thread-end on the outside of the garment or fewer than four thread-ends on the inside of the garment are to be regarded as defects at all.

10. Well, I have to apply the definition of merchantability as it appears in the Ordinance and which is to be found in section 2(5):

"Goods of any kind are of merchantable quality within the meaning of this Ordinance if they are fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances."

I have in mind the glass which it may be appropriate to place upon that definition to be found in the decision of Jackson v. Rotax,⁽¹⁾ although the decision predates the statutory definition by a number of years. I do take those matters into consideration and as I have indicated in the course of submission I do not regard the question of price as being an important one. There has been no direct evidence as to the custom of the trade in this area but it is apparent that the defendants themselves accept that there must be some margin allowed and that it would be unreasonable to expect every single garment in a large order such as this to be totally free of any defect. That must be commonsense and not merely an application of the "de minimis" principle. What the margin should be in any particular case must depend upon, I suppose, trade custom and the test of reasonableness as required by statute. I have to regard not only to the evidence to which I have adverted but also to the fact that in any event on these two contracts, the plaintiffs had over produced and what they were offering exceeded the original order by approximately 10% and so it may be that even if the number of garments with defects were thrown aside, the total order could still have been met. That is just one of the factors which I take into account. Principally, however, I take into account Mr. Koo's report and accepting his assessment as being a correct one and his standard as being a reasonable one, I find that the plaintiffs have satisfied me on the balance of probabilities that the goods offered for delivery on the contracts were of merchantable quality and, therefore, the plaintiffs will succeed on their claim subject to the question of damages. And it will follow, of course, from that that the defendants' counterclaim fails.

11. Mr. Smith makes no point that an offer was made on 24th August to take the goods on a consignment only basis but he does make the point reticently that if I accept the evidence of Mr. Yuen that there was an offer to take the goods at half the contract price. It might be a matter that I could take into consideration. He does not, of course, and it would be inconsistent with his case, urge me to accept Mr. Yuen in preference to his own witness but says that if that is the conclusion I reach, it is a matter of which I should take account. He has referred me to certain authorities dealing with offers made by the party in breach of a contract and as to whether or not such an offer should be taken up in mitigation of damage. Even on the account given by Mr. Yuen, if I were to accept it, what was being offered was a compromise of the plaintiffs' rights under the contract, not an offer without prejudice to those rights and in those circumstances, as I find, the plaintiffs were not bound in mitigation of their own loss to take up that offer. The question remains as to whether or not the plaintiffs could have done more in the way of trying to dispose of these blouses since the date of the breach. Mr. Yuen told me that he has not in the business of selling but in the business of manufacturing and that he made such enquiries as he thought might lead to a sale, and that none had resulted in a sale. I take into account the fact that these garments were made to the defendants' design or what must be taken to be their design and consequently, I do not find that the plaintiffs have failed in their duty to seek out an alternative market and so reduce the damage suffered by them. Consequently, there will be judgment for the plaintiffs in the amount of the claim, that is in the sum of $76,420 and, of course, the plaintiffs must hold the contract goods available for delivery to the defendants.

12. Costs of the action to the plaintiff.

13. By agreement, interest at the rate of 11½% from 25th August 1982.

(1)    [1910] 2 K.B. p.937

Representation:

John Lee (John Ku & Co.) for Plaintiffs.

Clifford Smith (Stevenson Wong & Co.) for Defendants.