Tak Ah Knitwears & Grament Factory Ltd v. Triple Crown Ltd

HCA007052/1985

Contract - sale of goods - claim by manufacturer for balance owing by buyer under series of CMT knitwear garment contracts - claims by buyer for damages due to delay, defects, loss of profits on rejected garments and for unreturned surplus raw materials - whether Triple Crown entered into 3 of the contracts as agent for Ananas as an undisclosed principal - whether garments rejected due to manufacturer's defaults or due to inferior yarn supplied by buyer - whether surplus raw materials returned to buyer - Held: 1. In first contract Triple Crown was agent for undisclosed principal but Ananas was disclosed principal in later contracts; 2. Defects in Purchase Order A049 garments caused by manufacturer; 3. Manufacturer not responsible for defects under other purchase orders; 4. Manufacturer only liable for loss of profits on admitted defective garments; 5. Surplus raw material claim dismissed; 6. Judgment for manufacturer Tak Ah in sum of HK$176,325; Judgment for buyer Ananas for US$37,625.28 and HK$6,893.98.

H.C. Action No. 7052 of 1985

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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H.C. Action No.7833 of 1985

BETWEEN

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Coram: Deputy High Court Judge Cruden

Dates of Hearing: 26th-30th October; 2nd, 23rd-27th & 30th November; 1st-4th, 7th-11th, 14th-18th December, 1987

Date of Judgment: 18th January 1988

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JUDGMENT

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1. During 1984 Triple Crown Limited (hereinafter called "Triple Crown") placed a large number of Purchase Orders with Tak Ah Knitwears & Garment Factory Limited (hereinafter called "Tak Ah") for the manufacture of ladies knitwear garments. Tak Ah accepted those orders and manufactured the garments. Later disputes arose between the parties on a number of issues. Tak Ah became concerned that the invoices it issued for those purchase orders, were not paid in full. Counter allegations were made against Tak Ah that it had failed to manufacture the garments in a good and workmanlike manner and that it had failed to deliver the garments by the contractual delivery dates thereby causing loss.

2. The disputes were further complicated by Triple Crown's allegation, that it had not entered into the contracts evidenced by the accepted purchase orders as principal, but merely as agent for Ananas Limited (hereinafter called "Ananas") or Shee Hing Trading Company Limited (hereinafter called "Shee Hing"). The disputes were not resolved and on 15th November 1985 Tak Ah commenced High Court Action No. 7052/85 against Triple Crown for payment of the balance of $176,325 alleged to be owing under those contracts. On 23rd December 1985 Ananas and Shee Hing commenced High Court Action No. 7833/85 against Tak Ah for damages in relation to their counter allegations.

3. On 21st March 1986 the two actions were consolidated. Tak Ah was the plaintiff in the prior action but the defendant in the latter action. The Master made a bare order for consolidation and no consequential order was made, re-entituling the pleadings to achieve a full consolidation. At the hearing of the consolidated action, Ananas, Shee Hing and Triple Crown were represented by the same firm of solicitors, who instructed one Counsel to appear for them. By agreement between all parties, Counsel for Ananas, Shee Hing and Triple Crown opened. Tak Ah, at the hearing of the consolidated action, therefore assumed the position of defendant.

4. Before going on to consider the lengthy and often contradictory evidence relating to the alleged late deliveries and defective garments, I will deal with the issue of agency.

Agency

5. Tak Ah's claim against Triple Crown for $176,325 was simply based in the pleadings, on that sum being the balance owing for the knitting work done by Tak Ah for Triple Crown at Triple Crown's request. Triple Crown admits it placed that knitting work with Tak Ah but, after referring to the previous course of dealing between the parties, pleads in paragraph 3 of its Amended Defence that:

"3.    During this course of dealings, the Plaintiff knew or ought to have known that the Defendant was, at all material times, acting as agent for and on behalf of Ananas Limited and/or Shee Hing Trading Co. Ltd."

6. Whether the status of Triple Crown was that of an agent for a disclosed or undisclosed principal is important. For the claim for $176,325 is made solely against Triple Crown. On the law, I was referred to "Bowstead On Agency" and have considered the appropriate passages in the 15th Edition. Where the principal is disclosed, only the principal can sue or be sued - Montogomerie v. United Kingdom Steamship Association (1891) l QB 370. On the other hand, where an agent having authority to contract for his principal, does not disclose that he is merely acting as agent, the doctrine of undisclosed principal arises. Under the doctrine the agent may be sued - Sims v. Bond (1833) 5 B & Ad 389. If agency existed, then the claim for $176,325 can only succeed if Triple Crown entered into the contract as agent for an undisclosed principal.

7. Tak Ah's statement of claim referred to the contract between the parties being on CMT terms. As will become apparent, that description of the contract is more relevant to the issues of late deliveries and defective garments, than to agency. The letters CMT stand for "Cost", "Manufacturing" and "Transport (Local)'. Under a CMT contract the buyer generally supplies all the raw materials. The manufacturer merely manufactures the buyer's goods with the buyer's raw materials and delivers them to the place of shipment. During evidence, CMT contracts were contrasted with FOB contracts, under which instead the manufacturer is responsible for obtaining and supplying all the raw materials. It was common ground between the parties that all the disputed contracts were CMT contracts. Under CMT contracts the buyer, as also the supplier of the raw materials, obviously plays a greater part, than in an FOB contract.

8. Turning to the evidence on agency, I find that all the Purchase Orders were in the name of Triple Crown as purchaser and each was countersigned by Tak Ah as manufacturer. The Purchase Orders executed in this manner constituted the contract between the parties. None referred to Triple Crown merely giving such orders as agent nor do the names of either Ananas or Shee Hing appear on any of the Purchase Orders. If the evidence did not extend beyond the Purchase Orders, I would have had no difficulty in finding that Triple Crown entered into the manufacturing contracts either as principal, or as agent for an undisclosed principal. Under either of those alternatives Triple Crown would have been prima facie liable to Tak Ah, for the balance of $176,325.

9. However, in its amended defence, Triple Crown set out 4 particulars to support its pleading, that Tak Ah knew or ought to have known that it acted only as agent. According to Triple Crown, during the course of dealing between the parties both before and after the first Purchase Orders were accepted by Tak Ah on 28th February 1984:

10. Mr. S.T. Cheung, who gave evidence, is a director and the largest shareholder of Ananas. The share capital of Ananas is $600,000 divided into 600,000 shares of $1 each. Mr. S.T. Cheung holds 240,000 shares in Ananas. Shee Hing holds 50,000 shares. Mr. Shee Wing Ching, a major shareholder in Shee Hing, also holds 70,000 shares in Ananas. The shareholders of Triple Crown are Mr. Shee Wing Ching and one of his other companies. Mr. Shee Wing Ching is a director of Ananas. On the other hand, Mr. S.T. Cheung is neither a shareholder nor director of Triple Crown or Shee Hing. However, Mr. S.T. Cheung described himself as a manager of Shee Hing and also as a consultant to Triple Crown. Apart from Mr. Shee Wing Ching's shareholding in all three companies, I am also satisfied that those three companies closely co-operated in respect of business transactions in the textile trade.

11. Tak Ah's claim for $176,325 is specifically based on the three invoices particularised in its statement of claim which, in turn, were issued in respect of three earlier accepted Purchase Orders from Triple Crown. The relevant details contained in those related documents may be summarised as follows:

12. However, in order to determine whether in relation to those three Purchase Orders, Triple Crown's status as agent, was disclosed or undisclosed, it is necessary to consider the course of dealing between the parties, throughout the relevant period. This period extends at least from the pre-contract negotiations before the first 36 Purchase Orders were issued and accepted on 28th February 1984, down until the final Purchase Orders A431 and A432, were issued by Triple Crown and accepted by Tak Ah on 30th August 1984.

13. On the evidence I have no difficulty in holding that Triple Crown entered into all the Purchase Orders as agent for its principal, Ananas. The more difficult and crucial question is whether that agency was disclosed. Before the first 36 Purchase Orders were issued and accepted on 28th February 1984, it is common ground that there was a meeting between representatives of the parties. This meeting took place earlier in February at a restaurant in Mei Foo Sun Chuen and was attended by Mr. H.L. Lau of Tak Ah, Mr. Shee Wing Ching and Mr. S.T. Cheung. In relation to these personalities and their companies I accept that Mr. Shee's company, Shee Hing had textile dealings with Tak Ah since 1976; that Tak Ah had dealings with Triple Crown in 1983; and that Mr. Shee in 1983 introduced Mr. S.T. Cheung to Mr. Lau.

14. Although Mr. S.T. Cheung's own evidence, in relation to the nature of the orders placed in 1983 by Triple Crown with Tak Ah, was at times contradictory, I find that those orders were placed by Triple Crown as principal. Certainly on the evidence I am unable to find that those 1983 orders, which were all on a F.O.B. basis, were placed as agent for Ananas. I accept Mr. Cheung's evidence that late in 1983, Ananas had obtained large knitwear orders from United States buyers, which his company's own factory was unable to manufacture by itself and he decided to attempt to arrange for some of the manufacturing to be done by Tak Ah.

15. Mr. Cheung further explained that as these new orders were to be on a CMT basis, Ananas had to purchase the raw material. However, because of the substantial quantity of raw materials required, Ananas was unable itself to arrange finance for their purchase. To overcome this difficulty, he arranged with Mr. Shee Wing, for his two financially stronger companies, to take over the financial arrangements. Triple Crown and Shee Hing thereafter became involved in much of the surrounding documentation on an agency basis. This was a reason why, according to Mr. Cheung, Triple Crown issued the Purchase Orders and why Shee Hing was a party to some of the letters of credit. Mr. Cheung also informed the Court of the commission and other charges Ananas had to pay to Mr. Shee's companies for this financial assistance.

16. Mr.S.T. Cheung alleged that at the early February meeting he explained to Mr. Lau that although Triple Crown would issue the Purchase Orders it would do so as agent for Ananas. Mr, Cheung further alleged that he explained to Mr. Lau. that the reason was because Ananas was unable to finance the raw materials and related charges for these large orders and had sought the help of Mr. Shee's companies. Mr. Lau denied that Mr. Cheung at that meeting disclosed that Triple Crown was only his company's agent and equally denied that Mr. Cheung had informed him of the financial reasons for the agency. According to Mr. Lau, Mr.Cheung was solely present in relation to the supply of yarn for Triple Crown and limited his contributions at the meeting to that subject.

17. Mr. Shee was not called as a witness, so I did not have the benefit of his evidence in attempting to resolve this direct conflict. Mr. Cheung was a more articulate and at times a more coherent witness, than Mr. Lau but that did not assist in reaching any decisive finding on credibility. At the time it seemed a little unusual that Mr. Cheung would not merely have stated that Ananas was the principal but would have gone on to make such a full disclosure of the inadequate financial resources of Ananas. For after all, Tak Ah was the creditor under the manufacturing contracts and on such disclosure being made, might reasonably have been concerned at the ability of Ananas to meet its invoices.

18. If such adverse financial disclosure were made it would not have been surprising, in the normal course of business, if the manufacturer had insisted on the agent being liable as a principal party or granting a guarantee. However, it is possible that a party in the position Ananas found itself, may have shown such candour to a manufacturer, without the manufacturer requiring any further financial protection.  In considering Mr. Cheung's allegations, I appreciate that throughout Mr. Shee was at least in the wings and there is the possibility this was sufficiently reassuring to Mr. Lau. On that evidence alone, it would have been too speculative to have made a finding adverse to Ananas.

19. However, the evidence went considerably further. Mr. S.T. Cheung himself went on, later in his evidence, to elaborate on a second reason why the Purchase Orders were placed with Tak Ah, in the name of Triple Crown and not in the name of Ananas. Mr. Cheung stated that Mr.Shee had a long association with Tak Ah and that his company Triple Crown, had done business with Tak Ah for many years. In fact it was Mr. Shee's other company Shee Hing which had for more than 7 years done business with Tak Ah but this error does not affect the outcome of Mr. Cheung's evidence. Because of this longer association, Mr. Cheung stated that Ananas was unable to deal with Tak Ah direct but had to deal with Tak Ah through Triple Crown.

20. I accept that Mr. Cheung decided to place the orders with Tak Ah in the name of Triple Crown for these two reasons. I was not surprised to find that he never disclosed the second reason to Mr. Lau. But that is not the end of the matter. For the second reason he gave for the agency, is completely inconsistent, with his disputed allegation that he disclosed the first or financial reason to Mr. Lau, at the early February meeting. However, I appreciated that it was possible that such a candid and damaging disclosure may have been made.

21. I am prepared to infer that Mr. Cheung, faced with orders much larger than his company's productive capacity, was anxious to obtain the services of another factory to manufacture the substantial balance of the orders. Having already sought the financial assistance of Mr. Shee's companies, he further elected to use their longer connections and greater goodwill with Tak Ah, to secure Tak Ah's acceptance of those orders. In order to obtain the benefit of those connections and that goodwill I am satisfied that Mr. S.T. Cheung would not have been anxious to disclose the existence of the agency to Tak Ah any more that he would have been willing to disclose the financial position which had also brought it about. On this issue I prefer Mr. Lau's evidence and find that the agency was not disclosed to Tak Ah at the early February meeting.

22. Before reaching that conclusion, I have fully considered the implications of the other documentation. Each of the contracts evidenced by the Purchase Orders between Triple Crown and Tak Ah, also invariably involved the supply of two further documents to Tak Ah. These were the Production Orders and Size Lists. The Production Orders and Size Lists all originated from Ananas. These documents provided the detailed specifications and shipping details, without which the garments could not have been manufactured or delivered. It is common ground that where more difficult styles were involved Tak Ah also had to have discussions and obtain further production details orally.

23. The Production Orders were on printed Ananas stationery and included cross-references to Triple Crown's Purchase Orders and also to the Contract Number of the contract between the American buyer, or its Hong Kong agent, and Ananas. The Production orders were also dated. The evidence was that the Production Orders either accompanied the Purchase Orders or were forwarded to Tak Ah a few days later. The Purchase Orders were signed by Miss Stevi Chan, an executive of Triple Crown or by her successor. Purchase Order A049, in the name of Triple Crown, dated 28th February 1984, was produced as Exhibit P.12. The related Production Order, in the name of Ananas ,produced as Exhibit P.14, was dated 7th March 1984. I accept that Tak Ah received that Production Order on 7th or 8th March 1984.

24. Both Mr. Lau and Mr. K.S. Cheung were cross examined on the fact that for each Purchase Order in the name of Triple Crown, they received a Production Order but in the name of Ananas. It was put to them that the fact that the Production orders were in the name of Ananas and that they increasingly discussed production details with Ananas, indicated that they knew full well that Ananas was the principal. In relation to Tak Ah's Invoice B/294 for $95,190 I am only concerned with the effect of this evidence, in relation to Purchase Order A049 dated 28th February 1984 and the related Production Order, dated 7th March 1984.

25. I am satisfied that when on 28th February 1984 Tak Ah accepted Purchase Order A049, it was not accompanied by any Production Order. I further find that the relevant Production Order, on Ananas stationery, only arrived 7 or 8 days later. I hold that when the contract for Purchase Order A049 was formed on 28th February 1984, Tak Ah neither knew nor ought to have known, that Triple Crown was merely acting as agent for Ananas. I further hold that Triple Crown entered into this contract as agent for an undisclosed principal. Under that contract Triple Crown is personally liable as debtor.

26. I appreciate that Tak Ah did not issue the disputed invoice for Order A049, until several months later on 15th September 1984. By that time the relationship between Tak Ah and Ananas had become more direct. The effect of that altered relationship will have to be fully considered in relation to the remaining disputed invoices for Purchase orders A431 and A432, which Tak Ah accepted much later on 30th August 1984.

27. For the purpose of Purchase Order A049, I am prepared to assume that after the contract evidenced by that order was formed on 28th February 1984, it was disclosed to Tak Ah, that Triple Crown had only acted as agent for Ananas. Would Tak Ah's post-contractual knowledge, relieve Triple Crown of the liability earlier imposed on it as agent for an undisclosed principal? I am satisfied that such post-contractual knowledge does not prejudice Tak Ah's position. I am satisfied that, whether on grounds of commercial convenience or otherwise, Tak Ah, as a matter of law, cannot in the absence of its consent, be deprived of the agent's personal liability 'Bowstead on Agency' (15th Edn.) 313. Tak Ah's actions throughout, culminating in the issue of its writ, have indicated that it does not desire to be deprived of its rights against Triple Crown.   I accordingly hold that Tak Ah is entitled to judgment against Triple Crown for the sum of $95,190 particularised under Invoice No.B/294.

28. I move on to consider the balance of Tak Ah's claim in respect of the contracts evidenced by Purchase Orders A431 and A432 both dated 30th August 1984 for which Invoices B/297 and B/298 for $37,000 and $44,135 respectively, were on 20th September 1984 issued by Tak Ah against Triple Crown. The contracts for these invoiced amounts, were created on 30th August 1984, so the intervening factual developments from 28th February 1984 to 30th August 1984 become relevant.

29. During this intervening period there was a marked increase in the dealings between Tak Ah and Ananas. These dealings included the fact that where Production Orders were not attached to the Purchase Orders, they were supplied by or uplifted from Ananas. This practice even applied to some of the original Purchase Orders dated 28th February 1984. For example, in the case of Purchase Order A049, 7 or 8 days after it was accepted, Mr. K.S. Cheung went to the business premises of Ananas and obtained from its Miss Lily Chan, the related Production Order Exhibit P.14. Counter and production samples were also obtained from Ananas. At first Tak Ah referred its production queries to Miss Stevi Chan of Triple Crown but she invariably referred them on to Mr. S.T. Cheung or other employees of Ananas. Within a short time nearly all production queries were made by Tak Ah direct to Ananas.

30. Notwithstanding Mr. Lau's consistent stance that he contracted solely with Triple Crown, even he stated that on production matters he had to deal with Mr. S.T. Cheung, because Miss Stevi Chan was not familiar with production details. During the manufacturing process and on completion of the contracts, employees of Ananas attended, often with representatives of the American buyers, at Tak Ah's premises in order to check the quality of the garments. Ananas staff visited Tak Ah's factories in China to explain and improve production methods. On some occasions Mr. S.T. Cheung either refused or approved shipments. When a problem arose over alleged defective garments due to impurities, negotiations took place between Tak Ah and Mr. S.T. Cheung and other employees of Ananas. In relation to some of the impurities, Mr. S.T. Cheung arranged for them to be removed by two other factories, namely Ocean Knitting Factory and Ngai Sing Knitting Factory. After the work was done those factories rendered invoices to Ananas which were produced as Exhibits P.89 and 99 dated 18th July 1984 and 24th July 1984 respectively. These various actions by Ananas and Mr. S.T. Cheung are different not merely in degree but in kind, to merely being a supplier of yarn to Triple Crown for CMT contracts between Triple Crown and Tak Ah.

31. When I consider these dealings between the parties, together with the other evidence adduced in respect of that period, I am satisfied that when on 30th August 1984, Tak Ah accepted Purchase Orders A431 and A432, it knew or ought to have known, that Triple Crown was contracting as agent for Ananas. By that date the identity of Ananas as principal was well disclosed. The evidence is overwhelming that Tak Ah, with that knowledge, accepted those two Purchase orders. Tak Ah's claim in respect of Invoice B/297 and B/298 therefore fails.

32. I now move on to consider the claim by Ananas and Shee Hing against Tak Ah. An undisclosed principal has the same right to sue as a disclosed principal, so this claim is not affected by any agency considerations. The claim was brought by Ananas and Shee Hing jointly and in the alternative. Their pleadings were unattractively littered with the repeated use of the bastard "and/or" conjunction. However, when the evidence unfolded, no claim was pursued by Shee Hing nor were any officers or employees of that company called. I am therefore on the evidence solely concerned with the claim by Ananas and am not obliged to consider the position of Shee Hing.

33. The claim by Ananas may be considered under two main heads. First, damages were claimed for Tak Ah's alleged delays in delivering garments including additional air freight and other expenses. Secondly, Ananas claimed that it suffered further loss, due to some of the garments manufactured by Tak Ah being defective. Tak Ah in addition to filing a defence to these claims, also counterclaimed against Ananas and Shee Hing for the same HK$176,325 which was the subject of its own action, in the event of it being held that Triple Crown only acted as agent. These claims will be considered in turn.

Delays

34. Ananas claimed that garments under 25 of the Purchase Orders were late delivered. The late deliveries, it was claimed, obliged Ananas to send garments by air instead of by sea. Ananas claimed the separate sums of HK$109,902.14 and US$22,808.16 for the additional air freight charges incurred.   In addition, it was averred that because of the particular delays in delivering garments under Purchase Order A049, Ananas had to reduce the price charged to its American buyer for those garments. For the loss represented by this reduction US$9,294.42 was claimed.

35. The printed form of the Triple Crown Purchase Orders, included a space headed "Shipping late".  It was common ground that the date inserted in this space was the date the completed garments were to be delivered by Tak Ah. For example, many of the Purchase Orders dated 28th February 1984 provided that the shipping dates were to be 30th April 1984.  In evidence the shipping dates were generally referred to as the delivery dates.

36. The shipping dates specified in the Purchase Orders were clearly set out and those dates are undisputed between the parties. it was similarly undisputed, that delivery of the garments under the 25 disputed Purchase orders was not made on those specified dates. Tak Ah's main defence was that the late delivery of the completed garments was due to the late supply of yarn. In the typical F.O.B. contract the supply of yarn would have been the responsibility of the manufacturer and late supply would not normally assist the manufacturer, in meeting a damages claim from the buyer of the garments, for late delivery. But for the instant 25 C.M.T. contracts, the position is quite different. Under those contracts, in view of my conclusion on the agency issue, Ananas was obliged to supply the yarn. Delay on the part of Ananas in supplying yarn might therefore be relevant to any delay by Tak Ah in delivering the completed garments to Ananas.

37. Tak Ah averred that it was an implied term of the C.M.T. contracts that yarn was to be supplied so as to allow sufficient time for Tax Ah to manufacture the garments in compliance with the delivery dates specified in the Purchase orders. I hold that there was such an implied condition. Tak Ah further averred that the time required for manufacturing was about 65 to 70 days, depending on the time of year, quantity and style. The evidence given by Tak Ah's witnesses was that not only was yarn often late but that some of the yarn was even supplied to it after the specified delivery dates for the completed garments had passed. Tak Ah further asserted that where yarn was delivered late, it not only affected the particular Purchase Order for which it was supplied. The late delivery was claimed to have a spill-over effect and upset the timing schedule for the manufacture of garments under other Purchase Orders.

38. On the evidence I am well satisfied that Ananas experienced considerable difficulty in supplying yarn to Tak Ah in sufficient time for many of the garments to be completed by the specified delivery dates. I accept that in some cases delivery of the yarn was only made after those specified delivery dates had passed. For example, Purchase Order A049 had a specified delivery date of 30.4.84 but 3 of the 6 differently coloured yarns for the combination colours of the styles under that order, were made on 22.5.84, 5.6.84 and 11.6.84. The other colours were earlier delivered on 10.3.84 and 26.4.84. Purchase Order A090 had a specified delivery date of 30.3.84 but one of the two yarn colours was delivered on 26.4.84 while even the other colour was only supplied shortly before the specified delivery date on 19.3.84. Purchase Order A091 with a specified delivery date of 30.3.84 had yarn supplied on 7.3.84, 12.3.84, 18.4.84 and 26.4.84. Yarn was received for Purchase Order A104 with a delivery of 30.3.84, on 12.3.84 and 26.4.84. One of the 5 coloured yarns for Purchase Order A126, with a delivery date of 30.3.84, was received on 26.4.84.

39. For many of the later Purchase Orders, the same late delivery of yarn occurred. Purchase Order A279 with a delivery date of 10.7.84 required two different yarns, one of which was delivered on 11.7.84. Purchase Order A280 sharer the same date and one of its yarns was also only delivered on 11.7.84. Purchase Order A093 required 7 different coloured yarns but, with a delivery date of 5.4.84, the two final yarns were only delivered on 5.4.84 and 26.4.84. Four different coloured yarns were required for Purchase Order A113, with a delivery date of 30.3.84, but two of those colours were supplied on 23.4.84. Purchase Order A124 with the same delivery date of 30.3.84, also had to wait until 23.4.84 for 2 of its 4 coloured yarns to be received. Three coloured yarns were required for Purchase Order A150. The delivery date was 20.4.84. The final delivery of yarn was made on 24.4.84.

40. I find that in relation to a substantial number of the disputed Purchase Orders, Ananas failed to supply the yarn by the specified delivery dates of the completed garments. In other cases, yarn was supplied less than 30 days before the specified dates for the delivery of the completed garments. Into this latter category fell at least some of the yarns for Purchase Orders A049, A090, A091, A093, A104, A111, A145, A154, A155, A156, A245, A279, A280, A305A, A305B and A305C.

41. I further find that when yarn was delivered late for one particular Purchase Order, the adverse effect upon Tak Ah's production schedule was not limited to that order. The total number of orders was substantial. Tak Ah required to use both its two factories in China and its factory in Hong Kong to complete these orders. At the same time it had orders to discharge from other customers. I am satisfied that the substantial late delivery of yarn for the orders already referred to also adversely affected the delivery times for other orders.

42. Other explanations for the alleged late delivery of the finished garments were that Ananas was also late in delivering accessories; altered the design of some of the garments; requested that the manufacture of certain 12 gauge garments be varied and grouped together; and that garments manufactured under 5 of the later contracts being Purchase Orders A319, A320, A326, A330 and A331 were in fact delivered in compliance with the original contract dates. These further allegations will be considered in turn.

43. I am satisfied that under these particular C.M.T. contracts, although Ananas had to supply the yarn and other raw materials, Tak Ah had to supply some of the accessories including buttons and beading. Tak Ah advanced delay on the part of Ananas, in supplying buttons and beadings, as one reason why there was late delivery of some of the completed garments. Tak Ah's witnesses stated that the buttons were obtained from Ananas. Ananas agreed that was the position but explained that Tak Ah purchased the buttons from them quite independently of any contractual requirement. Tak Ah agreed that it was free to purchase the buttons from any supplier.

44. The relevance of the delay caused by the non-availability of buttons, is really only significant in respect of Purchase Order A092. While the non-availability of buttons or beadings was also raised by Tak Ah in respect of other purchase orders, those orders were also affected by delay in the supply of yarn, so it is not factually necessary to consider non-availability of buttons when resolving liability under those other orders. The decisive factor in relation to Purchase Order A092, is that when Ananas approved the production sample of that style, it had been manufactured with buttons of the kind Ananas later rejected. As a matter of law, if Ananas after approving those buttons, varied the contractual sample by requiring buttons of a different quality which had to be imported, any consequential delay was caused by Ananas and not by Tak Ah. I find that the failure by Tak Ah to complete Purchase Order A092 by 30th April 1984, was due to Ananas varying those contractual requirements.

45. Tak Ah also asserted that another reason for delay, in the case of some of the 12 gauge garments, was due to a combination of design changes, variations in beading and the fact that the delay in supplying yarn for other orders, had upset the overall production schedule. Purchase Orders A228, A272, A297, A298, A299 and A301 were alleged to be affected by some or all of these factors. Certainly there were no delays in supplying yarn for any of these 6 orders.

46. The evidence of Mr. K.S. Cheung and Mr. Lau was that the design and beading variations were requested by Miss Stevi Chan. According to them they discussed these alterations with Miss Stevi Chan against the background that other current orders were behind due to late delivery of yarn. According to Mr. K.S. Cheung, it was agreed that the remaining 12 gauge orders with beading would be grouped together and deferred with priority being given to completing outstanding smaller gauge garments. Mr. Lau confirmed the main elements of this alleged agreement. Mr. S.T. Cheung denied that there was ever an agreement. In any event, he asserted, Miss Stevi Chan never had authority to enter into such an agreement.

47. In assessing this evidence, I appreciate that Miss Stevi Chan is apparently overseas and was not available to be called. I take into consideration the submission made by Ananas that her known absence encouraged TakAAh's witnesses to extend their evidence in relation to their dealings with her, beyond what had actually occurred. I also note that while it is true that Purchase Order A272 dated 22.5.84 is on the face of the document, expressly described as a revised order, the delivery date shown thereon was 10.7.84, which is the same delivery date relied on throughout by Ananas. I have also considered that there were a total of fourteen 12 gauge orders.

48. Two of those 14 orders were alleged to have been affected by late delivery of yarn and the present 6 orders were alleged to have been deferred, under the arrangement now being considered. That leaves 6 orders unaffected by either of these two alleged delaying factors. On the other hand, it is undisputed that the 6 orders alleged to have been deferred, do represent the final 6 orders delivered in August. After considering the whole of the evidence, I find that it is more probable than not, that for some or all of the reasons advanced, it was agreed between the parties that delivery of the garments under these 6 purchase orders, could be deferred until after the original contractual dates, specified in the Purchase Orders.

49. The remaining group of purchase orders which it is alleged were late delivered, giving rise to additional air freight charges, are Purchase Orders A319, A320, A326, A330 and A331. These 5 purchase orders shared common characteristics, quite different to all the other purchase orders in dispute. They were all dated 30.8.84.; each was signed in the name of Triple Crown not by Miss Stevi Chan but by her successor; no precise delivery day was specified the delivery condition merely providing "Shipping Date August". The garments under these 5 orders were respectively delivered by Tak Ah to Ananas on 20.8.84, 27.8.84, 31.8.84, 21.8.84 and 27.8.84. So in terms of the August delivery date stipulated on the face of the purchase orders, Tak Ah appears to have complied with that requirement.

50. In fact, in a Statement of Claim which was amended 4 times, Ananas under its Re-Amended Statement of Claim amended the August delivery date to 20.8.84. and that latter date survived in the final Re-Re-Re Amended Statement of Claim. Clearly instructions for the garments under these 5 orders preceded the common date of the Purchase Orders. As these were the first Purchase Orders to be signed by Miss Chan's successor it may be that due to pressure of work during the time of her departure and replacement, that the documentation fell behind and that is a reason why the Purchase Orders were completed after the garments were finished. Although eventually Ananas did not pursue a claim for air freight in respect of these 5 orders, as I heard relevant evidence relating to them, it is desirable that I should make findings upon that evidence.

51. Tak Ah's witnesses agreed that there would have been prior oral instructions or a written memorandum, conveying similar information to that contained in the purchase orders, to have enabled manufacture to have proceeded. The related Production orders in the name of Ananas were produced and these were dated very much earlier, namely on 10.4.84. Ananas alleged that those Production Orders were given to Tak Ah on about those earlier dates. Tak Ah's name does not appear on the Production Orders. The evidence is unclear as to when the instructions were given to Tak Ah either under these Production Orders or otherwise.

52. The earlier date of the Production Orders is also complicated by the fact that of the large orders Ananas obtained from the United States, it manufactured some itself, instructed Tak Ah to carry out part of the work, while it placed the remaining orders with other manufacturers. The 20th August 1984 delivery dates pleaded in the Re-Re-Re -Amended Statement of Claim correspond with entries made by Mr. S.T. Cheung in his Company's Shipping Schedule produced as Exhibit P.507.

53. When I consider all the evidence in relation to these 5 orders, I do not consider it necessary to pursue their history any further. The primary contractual documents are the Purchase Orders dated 30th August 1984. The Purchase orders in this group, are not only the primary documents, but also the most recent contractual documents executed by the parties in relation to these orders. It is undisputed that each of these purchase orders were duly executed by or on behalf of Tak Ah and Ananas. I hold that provided the garments under those orders were delivered by Tak Ah to Ananas no later than 31st August 1984, Tak Ah had complied with the delivery condition as to time. Delivery having been made under each of these 5 orders during August 1984, the claim by Ananas for air freight in respect of these 5 orders must fail.

54. In summary, Tak Ah complied with the delivery dates under the final 5 Purchase Orders A319, A320, A326, A330 and A331 and was not in default in failing to deliver the garments under the other Purchase Orders by the original delivery dates specified therein. If the action had proceeded no further, it would now be necessary for me to determine whether the actual delivery times of the garments under those other purchase orders was reasonable. However, as even the evidence from Mr. S.T. Cheung unfolded, it became apparent that late delivery of yarn by Ananas was a major factor contributing to Tak Ah's late deliveries. This led to a further amendment of the statement of claim.

55. Counsel for Ananasin opening had recognised that there was some documentary evidence that Ananas had accepted delivery of garments at dates later than those in the Purchase Orders. The Court was told that this merely indicated that Ananas was prepared, at its discretion, to grant Tak Ah periods of grace when it fell behind in meeting the specified delivery dates. However, when the evidence showed that Ananas and not Tak Ah was responsible for at least some of those specified dates not being met, Counsel for Ananas applied on the 7th day of the trial, to amend further its statement of claim.

56. The application to amend was granted and in effect added an alternative averment to paragraph 8 of the statement of claim. Paragraph 8 as a result, in the alternative ,pleaded that the defendant had failed to deliver garments under some of the Purchase Orders by the agreed revised delivery dates set out in the 5th Column of the First Schedule.  In effect, the periods of grace had changed to revised delivery dates. It was further pleaded that instead of complying with the revised delivery dates, Tak Ah had only delivered the garments on or about the dates shown in the 6th Column of the First Schedule. Revised delivery dates were only pleaded for the first 12 Purchase Orders in the First Schedule. In respect of the following 7, which remain in issue, the sole question will be whether delivery was made within a reasonable time. The actual delivery dates listed in the First Schedule for these 19 Purchase Orders are not disputed.

57. Unfortunately there was no written agreement in respect of these alleged revised dates. There were occasions when the other particulars of Purchase Orders were varied, the parties executed a new revised Purchase Order.  Tak Ah's witnesses maintained that was also the trade practice when there were major alterations to delivery dates of the kind alternatively alleged by Ananas. In the absence of any written agreement, it is necessary to look elsewhere.   Mr. S.T. Cheung produced his Company's Shipment Schedule as Exhibit P499 to 507. This was a typewritten document prepared by Ananas for its internal use on which a column headed "Shipment Date" listed the shipment dates for all the Purchase Orders. These shipment dates were, in accordance with Mr. S.T. Cheung's practice, usually 5 to 10 days later than the delivery dates in the Purchase Orders.

58. In relation to the 12 Purchase Orders I am now concerned with, there are annotations endorsed in Mr. S.T. Cheung's handwriting, which include the later dates now pleaded as the revised dates. Mr. Cheung stated that when Tak Ah requested an extension of time, he conveyed the request to the American buyers and if they had no objection he approved the extension and so informed Tak Ah. Some of these later dates also appear on Tak Ah's internal Production Sheets.  Mr. Cheung stated that these revised dates were final dates for sending the garments to the United States by sea and Tak Ah was obliged to comply with those dates. If Tak Ah was even 1 day late, Mr. Cheung considered he was entitled to reject the garments.

59. Both Mr. Lau and Mr. K.S. Cheung stated that due to the yarn delivery and other delays on the part of Ananas, production was delayed. After Ananas accepted that the original dates had to be extended, Tak Ah agreed they were given later dates by Mr. S.T.Cheung. However, they denied that these later dates were ever accepted by Tak Ah as the new contractual delivery dates. Both witnesses consistently ssserted, that they only replied to Ananas that they would do their best, to meet those new dates. Mr. K.S. Cheung described these new dates as estimated or approximate dates. He conceded that Tak Ah needed to know the new dates to rearrange its production schedules but denied that Tak Ah ever agreed to meet those new dates. It appears that the main discussions in relationto new dates were held between Mr. S.T. Cheung and Mr. Lau. Mr. Lau agreed that these new dates were conveyed to Tak Ah but he repeated that Tak Ah only agreed to do its best, to meet those new dates and never accepted them as substituted contractual delivery dates.

60. I accept Mr. S.T. Cheung's evidence that the later dates he noted on the Shipment Schedule, were dates approved by his American buyers. However, his evidence was much less emphatic on the crucial issue whether Tak Ah had also agreed to those new dates. He stated that he spoke to Mr. Lau and Mr. K.S.Cheung on more than 10 occasions about revised dates. Those discussions were after April 1984 but he could not remember precisely when they occurred. He claimed that Mr. K.S. Cheung had handed him a document containing all the new dates but he had been unable to  locate it, explaining that he may have "thrown it away out of rage".

61. A fundamental difference between the parties, was their approach to why the later dates were not met. Mr. S.T. Cheung while conceding that later delivery of yarn made some of the original dates impossible to meet, considered that the failure to meet the later dates was due to the poor management and inadequate production capacity of Tak Ah. Tak Ah's witnesses contended that their efforts to do their best to meet the new dates, were largely frustrated by the failures already referred to on the part of Ananas. Although Mr. K.S. Cheung agreed that production capacity was also a factor, he said that was only because of the distortion caused by the prior defaults by Ananas.

62. There was lengthy evidence on the productive capacity of Tak Ah's 3 factories. There was also evidence, which I accept, that some of the work was sub-contracted out by Tak Ah. I accept Mr. Lau's evidence that before the Purchase Orders were accepted, he had made preliminary arrangements with various sub-contractors in China to do some of the work. There was contradictory evidence from witnesses called by Ananas, that Tak Ah's productive capacity was both sufficient and insufficient to meet the contractual delivery dates. I am satisfied that with the assistance of sub-contractors, Tak Ah although fully extended originally had adequate capacity to meet these large orders but that any delay in the supply of raw materials or alteration fo their production schedule, would have had a serious adverse affect on completion.

63. However, if the later dates were not contractually accepted by Tak Ah, the actual productive capacity of Tak Ah would become of less improtance. When I review the whole of the evidence on the issue of the later delivery dates, the difficulty caused by the absence of any revised written contracts recording the new dates, is at once again emphasised. The remaining evidence falls far short of satisfying me that Tak Ah agreed to meet those new dates. I can only find that, in what the parties themselves described as the confusing situation which had arisen, Tak Ah agreed it would do its best to meet those dates.

64. The result of these findings is that there were no express or precise agreed contractual delivery dates for these 19 Purchase Orders. In such circumstances the obligation imposed on Tak Ah, was to deliver the garments within a reasonable time. Evidence was adduced as to the time the various orders would take to complete, from the date when yarn and other raw materials became available, I accept that even when all the raw materials were available production time could also be affected by considerations. directly related to a particular Purchase Order such as the complexity of style and to more general considerations such as the time of the year the order was placed. As to the latter factor, I heard evidence that factories are less busy during the earlier part of the year down to May or June and then tend to become under pressure, as the peak manufacturing season developes, from July to September.

65. There is no question that Tak Ah accepted the original orders and was in normal circumstances obliged to provide or find the productive capacity. I am prepared to accept differences in style as a major factor varying production time. However, to the extent that defaults on the part of Ananas, put back the overall production schedule, the arrival of the peak production season is also a relevant, if less important factor. Depending on styling and other factors, the evidence from Tak Ah was that production times would vary from 50 to 70 days. There was evidence from Ananas that 40 to 50 days were more realistic periods.

66. After reviewing the whole of the evidence, I can only take a broad approach and on this basis find, after taking into account style differences, that in the absence of any complications 40 to 70 days would be a reasonable production period. In the present case . further days would have to be added for the other factors which I have already held, through no fault of Tak Ah, had put back the original production schedule. There were a number of orders completed under 70 days. These included Purchase Order A305A - separate lots completed in 30 and 56 days; A305B - 56 and 69 days; A305C - 56 days; A104 - 49 days; A126 - 58 days; A279 - 40 days; and A280 - 44 days. I find these actual production times to be reasonable.

67. Purchase Orders having longer completion times included Purchase Order A090 - 71 days; A092 - 74 days; A245 - 77 days; A091 - 98 days; and A156 - 99 days. When to the base period of 40 to 70 days is added a further period, for the delay factors already referred to, I am unable to find that periods of 71, 74, 77, 98 and 99 days are unreasonable.

68. The position in respect of Purchase Order A049 is a little more complicated. There were 6 separate deliveries under this order The original delivery date was 30.4.84. Deliveries of yarn on 22.5.84, 5.6.84 and 11.6.84 made it impossible to comply with that original date. If the eventual deliveries are dated from the last supply of yarn, that would produce completion periods of 35 days, 59 days, 72 days, 81 days, 95 days and 19 days. However, those periods are misleading for some of the lots were able to be completed from earlier delivered yarn. The late delivery of yarn caused Mr. S.T. Cheung, to note substantially later dates in his Shipment Schedule, which were acceptable to his American buyers.

69. If the dates noted and conveyed by Ananas to Tak Ah, which Tak Ah indicated it would try its best to meet, are contrasted with the actual delivery dates, the position may be better appreciated. These dates are :

70. I confirm that I have already held that the later days noted by Ananas, were not revised agreed contractual dates but were dates in respect of which, Tak Ah undertook merely to try it best to meet. In fact, except for the last entry in the foregoing table, Tak Ah was able to deliver within a few days of those non-contractual dates. The actual deliveries were respectively made 1 day, 2 days, 7 days, 6 days and 19 days after those non-contractual dates. When I review all the circumstances surrounding the delivery of the 6 lots under Purchase Order A049, I am unable to say that those actual delivery dates were unreasonable.

71. The final group of Purchase orders comprise the 12 gauge garments where I have held it was agreed, that the orders were to be grouped together and production deferred. There were 6 Purchase Orders in this group and only one of which had a revised date noted by Mr. S T Cheung in the Shipment Schedule. This was Purchase Order A228 where the original contract date was 20.6.84. The remaining 5 Purchase Orders all had common original contract dates of 10.7.84 with no later dates noted. Delivery under those orders were made during August 1984. Purchase Order A272 was delviered on 16.8.84; A297 on 17.8.84; A298 on 20.8.84; A299 on 24.8.84; and A301 on 4.8.84.

72. These figures show that for the latter 5 of those purchase orders, delivery was respectively made 37 days, 41 days, 38 days, 41 days, 45 days and 25 days after the original contract delivery dates. For Purchase Order A228 delivery was made 58 days after the original contract date and 34 days after the later date noted by Mr. S.T. Cheung in the Shipment Schedule. I have already found that the parties agreed that production of the garments under these orders was to be deferred. Unfortunately, there was no direct evidence on the precise period of deferment. What is clear is that it necessarily followed from the agreement reached, that delivery would not be made on 20.6.84 or 10.7.84 but on some later date. Dealing as best as I can with the minimal evidence relating to the period of deferment, I am unable to find, in the light of all the circumstances, that the actual delivery dates set out were unreasonable.

73. In view of conclusions I have arrived at in relation to the alternative allegations of breach of contract in paragraph 8 of the Re-Re-Re-Amended Statement of Claim, it follows that Ananas has not established that any of the garments in these purchase orders were wrongfully or in breach of contract, late delivered. This part of the claim brought by Ananas must therefore fail.

Defects

74. Ananas further averred in paragraph 11 of its Statement of Claim that Tak Ah had wrongfully and in breach of contract, failed to exercise reasonable care and skill and failed to perform the knitting work in a good and workmanlike manner. As a consequence Ananas alleged that it had suffered losses in the sum of US$49,883.28 plus HK$78,337.51. These sums are made up of various amounts paid as compensation to 3 buyers in the United States, cleaning charges paid to two other Hong Kong factories and loss of profit on rejected garments.

75. Some of the alleged defective garments were produced. However, the evidence generally suffered from the disadvantage that even though disputes over quality arose before shipment, neither party instructed an independent surveyor to examine the garments and furnish a written report. Ananas relied on Mr. S.T. Cheung's evidence and the evidence of other employees involved in the production process. Tak Ah in addition to Mr. Lau and Mr. K.S. Cheung, called a Mr. David Yeung who never saw the garments before shipment but had the opportunity to examine the few garments produced at the hearing.

76. The alleged defective garments comprised part of Purchase Orders A049, A305A, A305B, A305C and A261. I am satisfied that some of the garments in each of those orders were defective. Because those orders were on a C.M.T. contract basis, that finding does not necessarily render Tak Ah liable. Under the C.M.T. contracts Ananas supplied the yarn. The condition of the yarn became a central issue as to who was responsible for the condition of the defective garments. Ananas claimed that the defects were Tak Ah's responsibility, as they resulted from bad workmanship during the knitting process. Tak Ah alleged that the defects resulted from the inferior quality yarn supplied by Ananas, for which Tak Ah was not responsible. This issue was of particualr importance to the garments manufactured under Purchase Orders 305A, 305B, 305C and A261. Although the evidence called on this issue ran into many hours of testimony, the strongly opposed views of the parties and the absence of any expert evidence by witnesses who had examined all the defective garments, made the resolution of this question difficult. I will consider the relevant purchase orders in turn.

Purchase order A049:

77. By this order Tak Ah agreed on 28th February 1984 to manufacture 789 dozen ladies sweaters under Style 3347. These garments were in turn, to be sold by Ananas to an Americanbbuyer called Marigot Inc. Because of defects, Ananas averred it had to pay Marigot Inc., by way of compensation, the sum of US$37,625.28. This was a large order of 789 dozen garments which were delivered in 6 lots during the period from 7th July to 14th September 1984.

78. The garments were inspected by Mr. S.T. Cheung or Miss Chow, on behalf of Ananas, on at least 4 occasions. According to them defects were found on inspection, including loose seams, unmatched stripes, ridges facing the wrong way, open stitching at the cuffs and dropped stitches at the neck seams. It was common ground between the parties, that on the intended final inspection, representatives of Ramtex Trading Ltd., the Hong Kong agent for Marigot Inc., also attended. The prior observed defects resulted in an inspection of all the garments being made instead of merely a random sample examination.  It was undisputed that of 1500 garments inspected at that stage, 30% to 40% were found to have defects.

79. Mr. K.S. Cheung, while agreeing that many of the garments were at that stage defective attributed the major problem of holes, to inferior yarn and claimed that those defects were repaired at Tak Ah's expense before shipment. I am satisfied, from the documentary evidence from the United States buyer and its agent that even if some remedial work was carried out before shipment, that a substantial number of the garments were defective on their arrival in the United States. The fact that Tak Ah carried out the remedial work free of charge also leaves the evidence at least open to the inference, that the defects were not solely due to inferior yarn. Tak Ah also asserted that additional goods of the same style were manufactured by Ananas in its own factory and that it had not been established that the defective goods were from Tak Ah. I am satisfied that the defective goods which arrived in the Untied States included those manufactured by Tak Ah and found to be defective on examination at Tak Ah's factory in Hong Kong.

80. The difficulty of determining whether the defects were due to bad workmanship or inferior yarn did not, because of the manner in which the evidence evolved, become a crucial issue in respect of this Purchase Order. For when Mr. Lau gave evidence, he conceded that the defects were due to a number of causes. In his opinion one-third of the defects arose from his company's factories bad workmanship, one-third from difficulties in style and one-third from inferior yarn. He further agreed that as Tak Ah had accepted the Purchase Orders, which with the supporting documents gave full details of the style, it was the contractual responsibility of Tak Ah, as manufacturer, to complete the garments in accordance with the style.

81. On Mr. Lau's evidence the alleged inferior yarn was responsible for only one-third of the defects. Two-thirds of the defects were, according to Mr. Lau, the fault or responsibility of Tak Ah. Mr. Lau, who is the majority shareholder and Managing Director of Tak Ah, was the senior official called to give evidence for Tak Ah.  The proportion of defective garments in this order were high.  I am satisfied that even if only two-thirds of the defects were caused by Tak Ah, those defects alone, entitled Marigot Inc. to obtain compensation for those defects from Ananas. I further find that the US$37,625.28 paid by Ananas was reasonable and is properly recoverable from Tak Ah.  There will therefore be judgment in respect of Purchase Order A049 for Ananas in the sum of US$37,625.28.

Purchase Orders A305A, A305B and A305C:

82. The garments under these 3 purchase orders were all related to Style 9083. Ananas claimed US$4,248 being the compensation it had paid to its United States buyer, Contempo Fashions Ltd., (hereinafter called "Contempo") for delay and defects. There was a further claim for HK$16,320 being charges paid to two Hong Kong factories, Ocean Knitting Factory and Ngai sing Knitting Factory for remedial work, carried out at the request of Ananas, on some of the alleged defective garments manufactured by Tax Ah.

83. I accept Mr. S.T. Cheung's evidence that on the final inspection representatives of Contempo refused to accept the garments in their then condition. After negotiations between Ananas and Contempo, the latter agreed to accept the garments subject to remedial work being carried out and the price being reduced by US30 cents per garment. According to Mr. S.T. Cheung, the defects were foreign yarn, grease, loose trimmings and some undersized garments. Mr. Cheung stated that removing the foreign yarn was a time consuming   job and at the time was beyond Tak Ah's capacity. He therefore arranged to have the work carried out by Ocean Knitting Factory and Ngai Sing Knitting Factory whose charges of HK$12,000 and HK$4,320, make up the further sum of HK$16,230 also claimed in respect of these orders.

84. Tak Ah alleged that the only final defects found by Contempo, arose from the inferior yarn supplied by Ananas. Any undersized garments were re-ironed to overcome this problem, loose trimmings were also easily remedied. The garments were delivered in various lots on 20th July and 2nd August 1984.  On 23rd July 1984, Contempo wrote to Ananas and apart from a packaging problem, which it required to have corrected before shipment, set out its complaint in a letter produced as Exhibit P.98 in these terms:

The letter concluded that as 100% of the garments had not been inspected, that although shipment was authorised, Ananas was to be held responsible for any claims. I am satisfied from the evidence, reinforced by this letter, that the major complaint from Contempo, related to silk chips.

85. The clarity of Contempo's complaint was, unfortunately, not rivalled by the remaining evidence. Mr. S.T. Cheung during his evidence-in-chief denied that silk chips originated from the yarn. On the other hand, Miss Chow, the Production Manageress of Ananas since 1980, stated that there had been no complaint from Contempo about silk chips. Miss Chow further stated that silk chips were an essential ingredient of the yarn supplied by Ananas to Tak Ah for these orders. In her view silk chips were a "necessary" part of the yarn and were not defects unless the proportion was excessive. She was shown Exhibit P.512, a garment taken from these orders and stated that the silk chips in that garment were not excessive.  In addition, she stated that at the inspection Contempo's representative also considered the quantity of silk chips was within acceptable limits.

86. Miss Chow was also referred to other particles in the body of the garment Exhibit P.512, which Mr. S.T. Cheung had earlier criticised. These particles were described  by Miss Chow as fibre. In her opinion such fibre within the yarn was "inevitable" and did not affect the quality of the garments. Her major criticism was of a third element in the garment, which she described as "foreign yarn". Miss Chow said that this foreign yarn had probably become imbedded in the garments during production, due to poor factory conditions, and would have come from yarn stored at the factories but for other orders. According to her, the reason why the garments were sent to the Ocean Knitting Factory and Ngai Sing Knitting Factory, was to remove the exotic foreign yarn and not to remove the natural silk chips.

87. The invoices from the factories do not provide any detailed assistance, in ascertaining precisely what was removed. Ocean Knitting Factory's invoice described their charges as being for "cleaning (Defilement)". Ngai Sing Knitting Factory's invoice records that the work done was to "Re-check for elimination of impurities". Mr. S.T. Cheung finally accepted that the silk chips in the garments were a normal element of the specified yarn. Perhaps Contempo's representative gave a wider or different definition to silk chips. However, between Mr. S.T. Cheung and Miss Chow's evidence, and Contempo's complaint, there is a clear conflict. While Ananas produced and relied on Contempo's letter, no witness was called from Contempo to elaborate on that complaint or to explain what Contempo understood by silk chips.

88. Both Mr. Lau and Mr. K.S. Cheung accepted that on inspection there were impurities in the garments and that some were sent by Ananas to Ocean Knitting Factory and Ngai Sing Knitting Factory so that those impurities could be removed. According to them, the impurities were in the yarn when it was first supplied and did not consist of foreign yarn from their own factories. Samples of the yarn were produced as Exhibit D1 and the Court was able to observe elements of both silk chips and fibre, when these were pointed out by witnesses. Obviously on inspection impurities were found, which led to Contempo rejecting the garments until the impurities were removed.

89. The difficulties on the evidence, are to determine the nature of the impurities and whether they were in the yarn when it was supplied by Ananas or arose later, due to bad management by Tak Ah, during the manufacturing process. Apart from Ananas not calling any witness from Contempo, it also did not call any witnesses from Ocean Knitting Factory or Ngai Sing Knitting Factory, who may have been able to assist by describing the nature of the impurities they had removed.

90. The burden of proving that the compensation paid to Contempo was due to failure on the part of Tak Ah, rested with Ananas. On the evidence Ananas has failed to discharge that burden. The Court simply has insufficient evidence to be satisfied that it is more probable than not that the defects were caused by Tak Ah. The claim by Ananas under Purchase Orders 305A, 305B and 305C for US$4,248 and HK$16,320 must therefore fail.

Purchase Order A261:

91. Purchase Order A261 was for 50 dozen garments. Ananas placed this order with Tak Ah because it had entered into a contract to sell these garments, to De Rotchild Knitwear Inc., (hereinafter called "Rotchild") a buyer in the United States. When the garments arrived in the United States they were rejected by Rotchild on the ground that they contained barries. Ananas produced a letter dated 23rd October 1984 as Exhibit P.353 from Rotchild which expressly stated that the garments were rejected on that ground. Rotchild claimed US$8010 compensation. Ananas accepted that claim and now seeks to recover that sum from Tak Ah.

92. The witnesses called by both Ananas and Tak Ah were in agreement that a garment from this order, produced as Exhibit P.514, contained barries. The dispute was whether the barries resulted from the uneven quality of the yarn supplied by Ananas or arose from bad workmanship during the knitting process. Barries appears to be a term widely used in the textile trade. In practice, like many trade terms, it turned out that there were at least some differences between the witnesses, as to its exact meaning.

93. However, the witnesses were generally agreed that in a knitted garment, barries create a visual impression of uneveness in texture. Where the pattern specifies an even texture, the garment appears to have bars or lines of uneven texture. In Counsels search for precision, I was referred by Miss Lau to the following definition in 'Webster's Third New International Dictionary' at page 179:

"barry:

divided into an even number of horizontal bars of two tinctures arranged alternatively."

The definition, expressed in neutral terms, derives from a description of heraldic bars. In the textile trade I am satisfied it is used to describe defects in knitted garments and applies not merely to different coloured bars but also to the existence of bars within a knitted garment where even only one colour is used. That was the position with Purchase Order A261.

94. Mr. S.T. Cheung and Miss Chow stated that barries showed up in Exhibit P.514 as bars and that they were clearly visible. They may well be clearly visible to an expert but the Court at times had trouble in locating them in Exhibit P.514 and even some of the experienced witnesses, had to hold the exhibit up to the light for some time, in order to ascertain their position. Mr. Cheung and Miss Chow attributed the existence of the harries to uneven knitting. Miss Chow went into more detail, explaining that they were caused by a combination of poorly adjusted, manually operated knitting machines and uneven application of force by the workers operating the machines. The result was that some areas were too tightly knitted and some areas were too loosely knitted. Visually the comparision, between these differently knitted areas, creates the impression of bars.

95. Mr. K.S. Cheung and Mr. Lau agreed with Miss Chow's description of the appearance of the barries but not with their cause. In their opinion the barries in Exhibit P.514, arose from the inferior quality of the yarn. The yarn, they alleged, was of uneven count and the light colour of the garments under Purchase Order A261, made the barries more noticeable than in the darker colours used in other orders. Mr. Cheung stated that where uneven yarn is used, it is only possible to reduce but not eliminate the problem, by adjusting the knitting machines.

96. Tak Ah also called Mr. David Yeung to give evidence on the barries issue. Mr. Yeung for more than 30 years was the Factory Manager of a large knitting factory.  In recent years he has operated his own textile export business and has had some of his export orders manufactured by Tak Ah. I accept that he is a person with considerable experience in this field and qualified to give his expert opinion on the questions put to him. I find him to be a knowledgeable witness with considerable practical experience. In weighing his evidence, I take into account the submission made by Counsel for Ananas, that as he at present has business dealings with Tak Ah, his evidence should be given little or no weight. I accept that his evidence should be considered with particular care and I approach it on that basis.

97. Mr. Yeung stated that barries was a well-known term in the knitwear trade. In his experience barries included knitwear manufactured with uneven thick and thin yarn but also with yarn containing other impurities. He examined Exhibit P.514 and was of the opinion that the barries appearing in that garment, were due to uneven yarn and not to bad workmanship during the knitting process. He extracted from Exhibit P.514 strands of yarn to demonstrate its varying thickness. Mr. Yeung went on to distinguish barries arising from inferior yarn, to the knitting problem which can result if the knitting machines are not properly set. The latter problem he described as "loose and close" but stated that it is relatively rare and was not present in Exhibit P.514. He confirmed Mr. K.S. Cheung's evidence that where uneven yarn is used, barries cannot be avoided by adjusting the knitting machines. He further confirmed that barries are more noticeable in lighter than in darker coloured garments.

98. The Court was again faced with a direct conflict of evidence between the officers or employees of Ananas on the one hand and of Tak Ah on the other. The evidence of those witnesses taken by itself, appeared to be equally credible. The only other witness was Mr. Yeung. I accept his expert qualifications but appreciate that as he has current business dealings with Tak Ah, his evidence is potentially of less weight, than if an expert had been called with no business or other associations with Tak Ah. On the other hand, I record that Ananas called no expert independent witness.

99. After considering the whole of the evidence, I see no reason to reject Mr. Yeung's evidence that the defects appearing in Exhibit P.514, described by both parties as barries, are due to uneven yarn and are not due to bad workmanship. Tak Ah submitted that in any event there was no evidence that the garments delivered to Ananas and exported by it to the United States, contained similar defects. I disagree and am prepared to find that Exhibit P.514 was a representative sample of the exported garments and that they were similarly affected.

100. It remained for Ananas to establish that it was more probable than not, that the defects in Purchase Order A261, were due to faults on the part of Tak Ah. I am well satisfied that Ananas has failed to discharge that burden. The claim for US$8010 under this Purchase Order therefore also fails.

Loss of profit:

101. Ananas also claimed in its Re-Re-Re-Amended Statement of Claim the sum of HK$62,017.51 loss of profits on the various Purchase Orders particularised in the Second Schedule thereto. At the conclusion of the trial, its Counsel accepted that the pleaded loss of profits was excessive, as no allowance had meen made for some of the rejected garments which had been returned to Ananas and resold to marine dealers at a price of $10 per garment. When a downward adjustment is made for those sums, it reduces the claim to HK$52,507.51.

102. This claim relates to Purchase Orders A228, A245,. A272, A280, A299, A300, A305B, A324, A326, A330 and A432. Mr. K.S. Cheung admitted that Tak Ah were liable for bad workmanship for 39 pieces in respect of Purchase Order A272; 54 pieces for A280; and 30 pieces for A330. Tak Ah accepted liability for those quantities not returned to Ananas. I accept that it is reasonable to assess damages for those unreturned quantities on the basis of the difference between the F.O.B. and C.M.T. prices. This produces a total sum of HK$6,893.98.

103. Evidential difficulties arise in relation to the balance of the rejected garments claim. Mr. S.T. Cheung asserted that the defects did not result from inferior yarn. His evidence was of a very general nature and he was unable to supply particulars of the actual defects Ananas contended, affected the various orders. Mr.K.S. Cheung evidence was that except for the pieces under Purchase Orders A272, A280 and A330 already referred to, the remaining garments defects, were due solely to inferior yarn.

104. If the same position had arisen with an F.O.B. contract, the delivery of rejected goods, without payment, to the buyer may well have supported an inference that the manufacturer was responsible for the defects. In such circumstances the buyer, after selling the defective goods elsewhere at reduced prices, would normally have a good claim against the manufacturer for his remaining loss. In the case of C.M.T. contracts the position is not so clear. The buyer has throughout owned the raw materials and the manufacturer's role was limited to carrying out the manufacturing process. If the manufacturer then delivers goods which, because of inferior yarn are defective, he would have a prima facie claim against the buyer for the cost of manufacture. Tak Ah has made no such claim. However, its failure to do so does not, because of the surrounding evidential uncertainties and inadequacies, justify any adverse inference being drawn. In the circumstances I am only prepared to allow judgment under this head in terms of Tak Ah's concession, for the sum of HK$6,893.98.

Surplus raw materials

105. I confirm that all the disputed contracts entered into under the various purchase orders were on a C.M.T. basis. The yarn supplied by Ananas under those contracts remained its property.  It followed that after the garments made under those contracts were completed, Tak Ah was obliged to return any surplus yarn to Ananas. In paragraph 13 of the Re-Re-Re-Amended Statement of Claim, Ananas claimed that 551.845 pounds of surplus of 1/16 yarn and 1503.45 pounds of surplus 1/6 yarn were not returned. The 551 .845 pounds were valued at HK$,38,240.39 and the 1503.45 pounds at $87,112.90. Ananas claimed HK$125,353,28, being the total of these two sums, for the loss suffered due to the alleged non-return of the surplus yarn.

106. Tak Ah pleaded that during the manufacturing process there is a natural wastage of 15%. I note that in the calculations on which Ananas based its claim, only 5% was allowed for natural wastage. Tak Ah further averred that after the completion of each purchase order, all surplus yarn was returned to Ananas. Particulars of the yarn alleged to have been returned were set out in Schedule C to Tak Ah's Amended Defence. The Schedule showed that 11 lots of yarn were returned during the period from 12th March 1984 to September 1984. The total quantity of yarn alleged to have been returned amounted to 5,574 pounds.

107. During the trial, Counsel for Ananas indicated that Ananas had changed its position and accepted that the 5,574 pounds, particularised in Schedule C, had in fact been returned. The quantity which Ananas pleaded had not been returned, amounted to the lesser amount of 2,055.295 pounds. While Ananas accepted that the larger quantity had been returned, it pointed out that Tak Ah had not apportioned the yarn returned into the two groups of 1/6 and 1/16 gauge yarn referred to in the Re-Re-Re-Amended Statement of Claim.

108. In any event ,quite apart from the concessions made by Ananas, there was insufficient evidence to establish this particular claim. The pleaded claim of HK$125,353.28 is dismissed.

Counterclaim

109. Tak Ah counterclaimed against Ananas for the same $176,325 it had claimed in Action 7052/85 against Triple Crown. I have already granted judgment in favour of Tak Ah against Triple Crown for the sum of HK$95,190 under Invoice B294 forming part of that sum. There remains to consider under the counterclaim, the two other invoices being B297 for HK$37,000 and B298 for HK$44,135. Tak Ah is entitled to judgment for the total of those sums, namely HK$81,135, subject to rights of set off in respect of the other sums for which judgment has been granted in favour of Ananas.

Summary

110. In the result Tak Ah has obtained judgment against Triple Crown for HK$95,190 and against Ananas for HK$81,135. Ananas has obtained judgment against Tak Ah for US$37,625.28 and HK$6,893.98. This is not a suitable occasion on which to make a costs order nisi. Leave to apply is therefore reserved as to costs and any other consequential matters.

Representation:

Miss Selina Lau instructed by Liau, Ho & Chan for Triple Crown Ltd., Ananas Ltd. and Shee Hing Trading Co. Ltd.

Miss Susan Kwan instructed by Robert W.H. Wang & Co. for Tak Ah Knitwears & Garment Factory Ltd.