Apollo Handbag Company Inc. v. L & Leung Handbags Manufactory Ltd.
Read the full judgment text of HCA 14/1999 on BabelCite. This High Court CFI judgment was delivered on 12 January 2001.
1. The plaintiff is a company incorporated in the United States of America which is in the business of selling handbags to retail outlets in that country. The defendant is a company which is incorporated in Hong Kong, and is in the business of manufacturing handbags, with its office in Hong Kong, although the manufacturing is carried out in Mainland China. The defendant has, since 1991, been manufacturing handbags for the plaintiff according to purchase orders submitted by the plaintiff which sp
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HCA000014/1999 HCA14/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.14 OF 1999 -------------
----------------------------- Coram: Deputy High Court Judge Whaley in Court Dates of hearing: 4-8 and 12-14 December 2000 Date of judgment: 12 January 2001 ------------------------ J U D G M E N T ------------------------ 1. The plaintiff is a company incorporated in the United States of America which is in the business of selling handbags to retail outlets in that country. The defendant is a company which is incorporated in Hong Kong, and is in the business of manufacturing handbags, with its office in Hong Kong, although the manufacturing is carried out in Mainland China. The defendant has, since 1991, been manufacturing handbags for the plaintiff according to purchase orders submitted by the plaintiff which specified its precise requirements in relation to the bags to be manufactured, including the type of leather to be used, the style and the colour. 2. The plaintiff sues the defendant for damages in respect of the bags manufactured and delivered by the defendant in the second half of 1997 and early 1998 under approximately 23 purchase orders, as set out in the Schedule to the plaintiff's Statement of Claim, which are alleged to have been defective and in breach of the defendant's express and/or implied contractual obligations in terms of the aforesaid purchase orders. The plaintiff alleges that in relation to eight of the purchase orders, the defendant wrongfully manufactured the handbags out of Laurel leather, contrary to the express stipulation that they be made out of Canyon leather. Further and in any event, in relation to the same purchase orders and further purchase orders as particularized, the handbags were defective in one or more of the respects particularized in the Statement of Claim, and were thereby rendered unmerchantable, in contravention of the defendant's implied obligation to deliver goods of merchantable quality. 3. At all material times, the plaintiff acted through its President, Mr Michael Spector, who was clearly the driving force behind the business. It was he who at all times liaised with not only the defendant, but also the leather suppliers as well as his retail customers. When he dealt with the defendant, it was invariably with either Mr Andrew Leung, who was its Managing Director, or Mr Dennis Li, its Production Manager. He and the designer whom he employed at the relevant times, one Ms Susan Heiser, frequently travelled to Hong Kong to liaise in person with the defendant. 4. Mr Spector, who was the main witness for the plaintiff, impressed me as an intelligent and "switched-on" businessman, who was very much in charge of all aspects of his business. He testified at length, and his demeanour was good : I could not detect any signs of evasiveness or discomfort in his dealing with the facts. 5. Mr Dennis Li was the main witness for the defendant, who testified that he had been involved in the manufacturing of leather and related business for over 23 years. He is clearly a person of great experience in and knowledge of his trade. His demeanour was also good. The demeanour of the witnesses has played no part in influencing me in making the findings of fact which follow. 6. The purchase orders submitted by the plaintiff to the defendant all specified, inter alia, the types of leather in which the defendant was required to manufacture the handbags, the various leather types, at the material times, being either Cameo, Canyon or Aspen, which were custom-made leathers supplied by Leathers Best International ("LBI"), or Laurel, which was also a custom-made leather supplied by Hason International Limited ("Hason"). 7. The system in place at all material times was as follows. It was Mr Spector who selected the leather suppliers to supply the leather from which the handbags would be manufactured, and negotiated and agreed the prices with them. It was also he who specified to them his precise requirements as to the type and quality of the leather which he required to be supplied (in accordance with the demands of current taste and fashion of the market in the United States where he sold the finished products). The defendant made no input in developing or specifying the quality of the leather to be supplied, nor in ultimately approving the samples supplied. 8. Once he had approved the type and quality of the leather required, Mr Spector arranged for pieces of the approved leather to be sent to the defendant, together with sketches for a new range or style of handbag required, and the defendant would then manufacture a sample of such a handbag from the approved piece of leather, which sample was then sent to the plaintiff. After Mr Spector had approved the sample for production, the remaining parts or "swatches" of the approved leather were kept by the defendant as approved samples against which to monitor the type and quality of the leather delivered to it by the nominated leather suppliers. Mr Spector made projections at various times, from the orders which had been placed with him by his customers, of the different types and colours of leather which would be required to fulfil such orders, on the strength of which he placed an initial blanket order with the leather supplier, which was the go-ahead for it to start production of the different types and colours of leather specified, on a "good faith" basis, which was not contractually binding. Mr Spector faxed copies of the blanket orders to the defendant for confirmation by the defendant of the exact quantities of leather which would be needed to fulfil the purchase orders in question, copies of which had already been sent to the defendant. 9. The leather supplier then issued a proforma contract to the defendant which specified the exact quantities of the different types and colours of leather which were to be shipped to the defendant, together with the charges for such. The defendant in turn issued a letter of credit in favour of the leather supplier to pay it for the leather thus supplied. 10. While it was Mr Spector who had specified and approved the precise types and qualities of leather required from the leather suppliers, once the leather had been delivered to the defendant, it was the defendant's responsibility to inspect it against the sample swatches in its possession in order to ensure that it was of the correct type, quality and colour as ordered. The checks were two-fold : firstly, a spot check conducted on a random basis in Hong Kong, whereafter the leather was shipped to the defendant's factory in Mainland China, where a 100% pre-production check was conducted. If the leather delivered did not fulfil the required specifications, it was rejected by the defendant prior to its being cut, since the established trade usage was that once the manufacturer had cut the leather, it was deemed to have been accepted by him. 11. The interaction between the parties was a continuing and dynamic one : after the defendant had manufactured the bags to fulfil the purchase orders on hand, there was always surplus leather left over which, together with the leather newly delivered by the leather suppliers, constituted the defendant's leather inventories. The defendant regularly sent to Mr Spector leather inventories detailing the quantities of the different types and colours of leather which it had on hand. Based on these inventories and the new orders which had been placed with him, Mr Spector projected the further quantities of leather which would be required from the leather suppliers over and above the stock held by the defendant, and placed further blanket orders with them accordingly. Mr Spector was actively involved throughout the process, and would intervene with the leather suppliers whenever required in order to fine-tune the details as to the types and qualities of leather required from time to time and, if necessary, to resolve any difficulties which occurred in relation to the timeous delivery of the leather to the defendant, so as to enable the defendant in its turn to manufacture and deliver the handbags to the plaintiff within the deadlines specified to it by Mr Spector. (Not surprisingly, in a trade which was dependent on the changing tastes of the current fashions in the market where he sold the handbags, it was important for the plaintiff to abide by the delivery deadlines imposed upon it by its customers.) Defendant's alleged use of Laurel instead of Canyon leather 12. One of the plaintiff's major complaints in these proceedings is that in relation to eight purchase orders (which, except for PO No 2504, constitute page 2 of the Schedule attached to the Statement of Claim), the defendant wrongly manufactured the handbags in Laurel leather, instead of the Canyon leather which, it is common ground, was specified in all the said purchase orders. The defendant admits that of the approximately 20,000 handbags involved in these purchase orders, it did manufacture 2,075 of them in Laurel leather, and claims that Mr Spector had expressly and/or impliedly authorized it to do so. The plaintiff's case is that all of the bags, the subject of these purchase orders, had been wrongly manufactured in Laurel leather, which allegation was based upon a random inspection conducted of a "representative cross-section" of the bags delivered which disclosed that at least 8,748 of them had been made with Laurel leather, so as to render the entire consignment unmerchantable. 13. To examine the defendant's claim that Mr Spector had authorized it to use Laurel leather to manufacture the 2,075 bags which it admits to, it has been necessary to examine the correspondence between the parties in relation to some purchase orders which are not included amongst the eight claimed for by the plaintiff under this head. Thus, in a fax from Mr Spector to the defendant dated 12 September 1997, dealing with orders from two of his customers, namely "Sears" and "Target", Mr Spector, inter alia, stated :
It is evident, as accepted by Mr Reyes for the plaintiff, that Mr Spector was here giving permission to the defendant to use Canyon instead of the Laurel leather which had been ordered, to supplement the anticipated shortage of Laurel, in order to complete these particular orders for Sears and Target. 14. Subsequently in response to Mr Spector's request, the defendant, on 15 September 1997, faxed him a "Laurel and Bella leather Inventory" which, in common with all of the Inventories which it sent to the plaintiff, showed an opening balance of these two types of leather which existed in its stock in the various colours as itemized in the inventory, the respective quantities were then added together to show a "Balance on Hand" of Laurel leather; next, the Inventory estimated the precise quantities of leather which would be required to fulfil existing purchase orders as itemized, and deducted these quantities from the combined Balance on Hand, resulting in a final "Balance on Hand" of Laurel leather in the defendant's possession, after fulfilling all existing purchase orders. By fax on the following day, Mr Spector acknowledged with thanks receipt of the Inventory. 15. It should be recalled that the defendant sent this Inventory to the plaintiff in response to Mr Spector's request that the defendant inform him as to all the Laurel leather which was then available. The Inventory was headed "LAUREL N BELLA LEATHER INVENTORY", and in arriving at both the interim and final balances on hand, the defendant had combined, without comment, the stocks of Laurel and Bella leathers which were available. This was not criticized or even commented upon by Mr Spector, either at the time or in his testimony, from which it can be safely inferred that the defendant's "lumping together" of these two different types of leather was perfectly acceptable to him for the purposes of compiling a Laurel leather Inventory. 16. More significantly, in relation to PO Nos 2471 and 2473 (neither of which are the subject of the plaintiff's claims in these proceedings), Mr Spector faxed Mr Li in the following terms on 1 October 1997 :
17. Together with the aforesaid fax of 1 October 1997, Mr Spector sent an Inventory headed "LAUREL AND CANYON SPRING COLOR AVAILABILITY", which itemized the total quantities of Laurel and Canyon leather which were available in the various colours, added them together, once again in a combined total of the two leathers, subtracted the amount of leather which would be required to produce the Sears and Target orders, leaving a combined Balance on Hand of the Canyon and Laurel leathers, which would remain after making the Sears and Target orders. 18. By fax dated 17 November 1997, Mr Spector, inter alia, asked the defendant :
In response to this request, the defendant faxed to him on 18 November 1997 an Inventory headed "LAUREL N BELLA N CANYON LEATHER INVENTORY". In this Inventory, the defendant added up the quantities of Laurel and Bella leather which it had in its stock in various colours, added the Canyon leather which had been ordered but not yet delivered, subtracted the estimated quantities which would be required to fulfil existing purchase orders as itemized, and arrived at a final "Balance on Hand" which represented the combined total of the three leathers which would be available after fulfilling all existing purchase orders. 19. By fax dated 20 November 1997, the defendant sent the plaintiff an up-dated "LAUREL N BELLA N CANYON LEATHER INVENTORY" which, by a similar process, arrived at an up-dated balance on hand which was the combined total of the three leathers which would be available after fulfilling the existing purchase orders. 20. Importantly, in its covering fax, the defendant asked :
21. By his reply dated 24 November 1997, Mr Spector asked the defendant to make a sample handbag out of each of Canyon and Laurel leather, so that he could look at them and make a decision on the defendant's request. 22. Also by fax dated 24 November 1997, the defendant informed Mr Spector that in relation to PO Nos 2471 and 2478 (neither which are the subject of these proceedings), both of which were ordered to be made in Canyon leather, that there was a delay in the delivery of the Canyon leather from the leather suppliers and, in addition, there was a further complication that because the new Canyon leather would have a different grain, the defendant had to order a new vinyl with a matching grain embossed on it, which would only be ready at the end of December, so that the earliest that the goods which were the subject of these two purchase orders could be delivered, would be 19 January 1998. 23. Mr Spector replied that it was "very important" that the defendant delivered the orders on 30 December 1997. 24. By faxes dated 25 and 26 November 1997, the defendant suggested two possible alternative solutions to the problem : either requiring LBI to airfreight the bags to the plaintiff, or, since there was a shortage of Canyon leather in the butterscotch and mushroom colours, the defendant suggested using white Laurel leather of which there was sufficient in stock, and re-spraying it in those two colours. 25. It is common ground that Mr Spector did give permission, in relation to PO Nos 2471 and 2478, which had originally been ordered to be made in Canyon leather, to use Laurel leather and re-spray it, as suggested by the defendant. 26. In his fax of 16 December 1997, Mr Spector referred to "many problems" in relation to LBI, and stated :
27. On the following day, the defendant faxed an up-to-date "LAUREL N BELLA N CANYON LEATHER INVENTORY" dated 17 December 1997 which commenced with a "BALANCE ON HAND" in various colours, which gives no indication of the types of leather encompassed by it. This Inventory, as with the previous one sent by the defendant, goes on from the opening Balance on Hand to deduct the estimated quantities which would be used to fulfil all existing orders as itemized, again without indicating the type of leather which would be used; it then added in the Canyon leather orders which had not yet been delivered, arriving at a Balance on Hand (Column 13), which was a combined figure of the opening Balance on Hand and the Canyon leather ordered but not yet delivered; and then under that combined Balance on Hand, the Inventory went on to itemize all the P/Os which are in question in these proceedings, which were then pending manufacture, listing the precise quantity of leather which the defendant estimated would be used in order to fulfil such purchase orders, and thus arriving at a final BALANCE ON HAND after providing for all such existing purchase orders. 28. The defendant's case is that this Inventory reflected an agreement which had already been reached with Mr Spector that, in so far as there was insufficient Canyon leather available to fulfil these orders, the defendant would be at liberty to use Laurel leather instead. Mr Li testified that the opening Balance on Hand clearly referred to Laurel leather, and would immediately have been understood by Mr Spector in that light, firstly, because the references in the Inventory to "RESPRAY WHITE", against which a specific quantity of leather was deducted under the "WHITE" column and added under the "BUTTERSCOTCH" column, was a clear reference to the correspondence in which the defendant had suggested adopting this same expedient in relation to PO Nos 2471 and 2478 in order to overcome the shortage of Canyon leather, which Mr Spector had agreed to; and secondly, because the opening Balance on Hand in any event tallied with the closing Balance on Hand in the previous combined LAUREL N BELLA INVENTORY sent by the defendant as part of its regular communications with the plaintiff. 29. Mr Reyes submits - and cross-examined Mr Li to the same effect - that nothing could have been simpler than for the defendant to have squarely asked Mr Spector if it could go ahead and use Laurel instead of Canyon to fulfil the purchase orders in question (as indeed it had done previously in relation to PO Nos 2471 and 2478), instead of relying on the indirect reasoning aforesaid as evidencing Mr Spector's agreement to its doing so. 30. This point would be a persuasive one if taken in isolation from the history of the parties' previous dealings, which I have summarized above. The matter is, however, entirely different when looked at in context. The regular exchange of these Leather Inventories was a vital and continuous medium of communication between the parties. Mr Spector made it his business to know the full facts, at any given time, in relation to the quantities of leather which the defendant had used in fulfilling previous orders; the quantities which it still had in stock; and the quantities which it would need in order to fulfil existing and anticipated orders, so that he could take the necessary steps to ensure that there would be no shortage of leather to fulfil existing and anticipated orders in time to meet the delivery deadlines of his customers. It is abundantly clear from the correspondence that he was, at all times, master of the relevant facts and, it is at least highly probable, in my view, that he immediately understood the opening Balance on Hand in the Inventory of 17 December 1997 to refer to the stocks of Laurel leather on hand, and it would similarly have been immediately clear to him from the defendant's combining of the available stocks of Laurel leather with the anticipated deliveries of Canyon leather, and the provision for fulfilling the disputed purchase orders from such combined total of Laurel and Canyon leather available, that the Inventory clearly reflected the defendant's intention to use Laurel leather to supplement the anticipated shortages of Canyon leather available in order to fulfil the disputed orders. There is no doubt in my mind, having regard to Mr Spector's assertive monitoring of the "leather-flow" situation at any given time, that if he was not in agreement with such an intention, he would immediately have said so upon receipt of the Inventory dated 17 December 1997. 31. It should also be borne in mind that there were, at around this time, problems with deliveries of leather from LBI to the defendant, and Mr Spector knew that the further Canyon leather which had been ordered from LBI (PO/110-97 and PO/111-97) would not be delivered on schedule; in the event it was only delivered in February 1998. This factor was no doubt influential in persuading him to allow the defendant to go ahead and use Laurel leather to supplement the Canyon leather to fulfil the purchase orders in question, so that the delivery deadlines set by his own clients in the United States could be met. 32. I do bear in mind that there is nowhere in the correspondence an express agreement by Mr Spector to such effect; at the same time there was similarly no express agreement reflected in the correspondence in relation to the earlier PO Nos 2471 and 2478, in respect of which the plaintiff accepts that Mr Spector did in fact agree to allow the defendant to use Laurel to supplement the shortage of Canyon leather. 33. Furthermore, the plaintiff has failed to prove on a balance of probabilities that any more handbags than the 2,075 admitted by the defendant were made using Laurel instead of Canyon leather. The defendant's Factory Material Consumption Records and Production Orders support the defendant's contention that only 2,075 bags were thus made using Laurel instead of Canyon leather. I note that Mr Li could not personally testify to the reliability of these records, since he did not himself compile them, nevertheless, these are records which were kept by the defendant in the normal course of its business, and no good reason has been advanced as to why they should not be accepted as reliable. 34. In any event, the onus lies upon the plaintiff to establish, upon a balance of probabilities, its case in this, as in all other respects. Mr Spector's evidence does not take the matter any further since he was not personally involved in the inspections of the goods which led the plaintiff to allege that all the handbags in the disputed purchase orders had been manufactured in Laurel rather than Canyon leather, or in any event from poor quality leather. 35. Neither Messrs Kalt or Finkelstein, Executive Sales Manager and President of LBI respectively, gave evidence. The plaintiff has apparently been unable to locate Mr Kalt. Mr Finkelstein was due to give his evidence by video link from St Louis, however, he eventually refused to travel from New York to St Louis for the purposes of doing so. Their witness statements are in evidence, however, I derived very little assistance from them. Mr Kalt deposed that he was present at a joint inspection at the St Louis warehouse of the plaintiff in April 1998, which was organized by Mr Spector and involved Mr Spector, his Warehouse Manager, Messrs Leung and Li of the defendant and Mr Kalt. Various handbags which had been delivered by the defendant were examined, and according to Mr Kalt's witness statement, he advised Messrs Leung and Li that the leather which had been used to make the Canyon leather bags was not LBI's Canyon leather, and generally, that the leather in the bags inspected appeared to have been "cut very hard", meaning that leather which should have been rejected after it was cut, had been incorporated into the bags. (Messrs Leung and Li both at the time rejected these observations out of hand.) Mr Kalt took back some of the handbags to Mr Finkelstein to inspect, and Mr Finkelstein also stated in his witness statement that the leather which had been used to make the Canyon leather bags, was not LBI's Canyon leather. 36. Since neither Messrs Kalt nor Finkelstein were available for cross-examination, their bald observations as aforesaid were not able to be explored or tested by defence counsel, and I place no weight upon their evidence in these circumstances. It should also be noted that they were not in the position of being impartial witnesses, since LBI, as the nominated supplier of leather to the defendant from which all the handbags for the plaintiff had been allegedly made, clearly had a stake in the outcome of the inspections as far as the quality and grading of the leather was concerned. I note also Mr Li's evidence that, at the joint inspection, neither he nor Mr Leung were able to detect any defects in the bags inspected, and found them all to be of merchantable quality. The expert evidence 37. The plaintiff relies to a very large extent upon the evidence of its expert witnesses to establish the defects in the handbags of which the plaintiff complains, both to prove the fact and extent of the alleged switch from Canyon to Laurel leather, and to prove that the bags contained the further defects alleged. (See, inter alia, the plaintiff's Reply to the defendant's Request for Further and Better Particulars of the Statement of Claim.) 38. The full extent of the expert qualifications claimed by Mr Sidney Shear are as follows :
Since he was not available for cross-examination, it was not possible for the defendant's counsel to explore the true significance of these qualifications, such as how long before his inspection he had worked at the tannery and the handbag factory, the identities and reputations of both establishments, the types of leather produced by the tannery and used by the handbag company for manufacturing purposes, what sort of work he had been involved in at the tannery, and the like. 39. He inspected four cartons at random from each of five of the disputed purchase orders, and has given a fairly detailed description of his findings, including a finding that the leather which had been used to make the handbags for the Canyon purchase orders, in his view, matched the leather which had been used to manufacture the Laurel purchase orders, and did not match the Canyon leather.
40. Mr Shear was also unavailable for cross-examination, so it was not possible for defence counsel to test or explore these opinions, for example, the obscure final sentence in the passage quoted above; or to inquire whether Mr Shear had ever had any previous experience of either Canyon or Laurel leather, and, more importantly, to explore the extent of the differences between these two types of leather, and the ease or difficulty of telling them apart from each other. 41. In this connection, I note the evidence of Mr Li, who states that he has been involved in the manufacture of leather and related businesses for over 23 years :
42. Mr Spector agreed that the costs of the two were on average the same; however he testified that after embossing Laurel leather has a smooth grain, whereas Canyon has a heavier grain. Which of them is in demand at any particular time is purely a question of fashion. 43. Mr Shear compared the leather in all the handbags which he inspected against "samples or approval skins" but did not indicate what precisely these samples consisted of nor where he had obtained them, nor have such samples been made available for the purposes of these proceedings. 44. Mr Shear also found that a large number of the handbags which he inspected either did not match the standard (although otherwise passable), did not pass due to grading, or were simply of very bad quality. Again, however, since he was not available for cross-examination, it was not possible for these very contentious findings to be tested and explored. Similarly, in relation to his findings as to spewing in relation to the bags in PO Nos 2359 and 2360. 45. For the aforesaid reasons, very little weight can fairly be placed upon Mr Shear's evidence, in my view. 46. The plaintiff also relied upon the expert evidence of Mr Dan Sigler, who gave evidence by live video link from St Louis, Missouri. His witness statement indicates that he is the President of Rayco Inc., a one-man business which contracts its services out to the leather industry, and is responsible for matching the grains on leather and vinyl, and for spraying colour onto vinyl and leather so as to ensure an exact match. Mr Sigler examined the handbags in four cartons which were selected at random from each of the purchase orders in question. He rated each of the bags inspected simply by reference to a "passed" or "failed", without giving any details of the basis upon which he had failed bags, or what defects or shortcomings he had found in them. When asked about this, he stated simply that it had been based upon whether he considered the bags to be saleable, and whether they matched the sample skins and swatches. He stated in his witness statement, inter alia :
47. When pressed in cross-examination, Mr Sigler was unable to recall whether he had been given sample handbags or sample skins for the purposes of his inspection. In his case also, the samples which he did use - crucial to the results of his examination - were not shown to the court or made available for these proceedings. 48. Mr Sigler conceded that he had never been involved in the manufacturing or development of leather, and could not claim any formal expertise in the grading of leather quality. He had no knowledge about the differences between different types of leather such as Canyon and Laurel. His expertise lay in spraying colour onto vinyl and leather and ensuring that they matched each other. He could only comment on the cosmetic aspect of the leather, whether the product was, in his view, "saleable", and in relation to the feel of leather, "whether it is too dry, too rough or too stiff, I think I can comment". He did not clearly state the methods which he used to conduct his inspection. He conceded that he had never previously made an examination with a view to producing a report, and that this was his first full inspection of handbags. 49. Mr Sigler did not impress me as being properly qualified to comment upon the quality of the leather used in the manufacture of the bags in question. Even in relation to the vinyl and leather colour match, which he stated had been done very poorly, he did not indicate how many of the bags he had failed on this account - as already observed, he gave no details of the basis for his pass/fail rankings. In relation to seven purchase orders which were shipped directly from the defendant to the retail customers in the United States, and which he was unable to conduct any inspection of, he commented :
I was surprised to find such a statement from an expert witness. 50. In the end result, I placed very little weight on the evidence of Mr Sigler. 51. Finally, Mr Waldo Kallenberger is the Assistant Director of the Leather Industries Research Laboratory of the University of Cincinnati, who has a Master's degree in Analytical Chemistry, with a specialist PHD subject in leather research chemistry. There can be no doubt about his qualifications to comment upon the quality of leather. The examination which he conducted was, however, of a very limited ambit. Mr Spector provided him with three black handbags which had been manufactured by the defendant, one bag which had been ordered to be made in Laurel leather and, which Mr Spector was satisifed, was in fact made in Laurel, one which had been ordered in Canyon leather and which, Mr Spector thought, was in fact made of Canyon leather, and one bag which had been ordered to be made in Canyon but which he thought was made of Laurel leather ("the questioned bag"). Having diced the leather from each bag into small chunks and subjected them to vigorous chemical analysis, Mr Kallenberger found that the questioned bag was made from a similar leather to the Laurel bag, while the Canyon bag was made from a different leather, which had a "greater thickness and coarser fiber structure, which were covered by heavier finish and softened with more unsaturated type softening oils". 52. The net effect of Mr Kallenberger's evidence is that one black handbag from the disputed PO No 2485 was made from a similar leather to the "Laurel" handbag which had been submitted to him, namely, at its highest, that the questioned bag was made from Laurel leather. Since the bags in PO No 2485 had all been ordered in Canyon leather, this contradicts Mr Li's evidence that the only handbags which were made with Laurel instead of Canyon leather, were in butterscotch and bone colours. The finding, however, is statistically so insignificant (one bag out of a total of 3,600) that it is of no real assistance in resolving the issue of whether any more bags than the 2,075 admitted by the defendant were manufactured in Laurel rather than Canyon leather. 53. On all the evidence, I summarize my findings as follows :
54. The plaintiff has failed to establish on a balance of probabilities that any more bags than the 2,075, admitted by the defendant, were manufactured in Laurel instead of Canyon. In relation to the 2,075 bags, I am satisfied on the evidence that Mr Spector did consent to the defendant manufacturing these bags in Laurel instead of Canyon.
55. The plaintiff has failed to establish that any of the disputed handbags which were delivered by the defendant were made with poor quality leather or vinyl.
56. The plaintiff has failed to establish that any of the disputed handbags delivered by the defendant were spewing with white powder (the only direct evidence in relation to spewing came from Mr Shear, whose evidence cannot be relied upon to prove the plaintiff's case, for the reasons given above).
57. The plaintiff has failed to establish that any of the disputed handbags delivered by the defendant in the disputed purchase orders were understuffed or flat (there was no direct evidence to establish that any of the bags were delivered understuffed or flat).
58. The only direct evidence of tarnished hardware in any of the bags delivered under any of the disputed purchase orders was that of Mr Shear in relation to PO Nos 2505, 2505A and 2511. For the reasons already given, this evidence cannot, in my view, be relied upon to prove the plaintiff's case. Credit adjustments 59. Part of the plaintiff's claim is for reimbursement of the credit adjustments which were unilaterally made by some of its customers when they returned goods to it. None of these customers who returned goods to the plaintiff have given evidence in this case. Of the documents which were made by those customers when they returned the goods, a large proportion of them do not make any reference to the fact that the returned goods were defective in any way, and of those that do, very few of them specified the nature of the alleged defect. The plaintiff's case in this respect consisted of the hearsay evidence of Mr Spector to the effect that these customers told him that they were returning the goods because they were defective, and the limited information in the relevant documents (which is also hearsay). This is obviously unsatisfactory, particularly in relation to such "fashion" goods as the handbags in question, which could have been returned to the plaintiff for any number of different reasons. The plaintiff has failed to establish that the defendant is liable to it for the returns and adjustment credits made by these customers. Defendant's counterclaim 60. The defendant's counterclaim falls into two parts. In relation to the first part concerning Toni (Apollo) Limited, Mr Li gave evidence that in early 1995 on one of his trips to Hong Kong, Mr Spector informed them that the major department stores in the United States, like "Sears", had changed their buying patterns to "DIRECT BUY", namely direct from the manufacturers, in order to cut out the costs of having to pay the profits of a middleman, like the plaintiff. In order to secure such orders, Mr Spector suggested that the plaintiff would set up a company in Hong Kong, ostensibly as a Hong Kong/China based manufacturer, so as to receive such orders direct from the department stores in the USA, and that the new company would use the defendant's office as its office in order to further the impression that it was a Hong Kong/China based manufacturer. The defendant would manufacture the orders thus received, and would receive its normal FOB price for the bags thus produced, and the plaintiff would retain its normal share of the profit. 61. Andrew Leung agreed to the proposal, and in further meetings between the parties, the details of the arrangement were hammered out. The new company would use the same address as the defendant; the defendant would assign one of its staff to handle and coordinate shipping arrangements and communications, and would issue full shipping documents under the letterhead of the new company and submit full sets of such shipping documents to the banks for payment under letters of credit to the new company. 62. Once purchase orders had been issued by the department stores in the USA to the new company, the defendant would send these to the plaintiff. The plaintiff would then issue a corresponding purchase order to the defendant to manufacture the handbags at a lower FOB price than that reflected in the department store's purchase order, the difference between the two prices being the plaintiff's profit. The new company would open its own bank account in Hong Kong, which would be controlled by the plaintiff, and payments received from the department stores under letters of credit would be deposited in such account and the plaintiff would arrange for the defendant to be paid its FOB prices for manufacturing the bags by transfer out of such letters of credit. 63. The new company was duly incorporated in 1995 under the name "Toni (Apollo) Limited", with precisely the same address, telephone and fax numbers as the defendant, which were duly reflected on its letterheads, and the arrangements which had been worked out as aforesaid were then set in motion. The arrangement worked smoothly as had been envisaged, and Mr Spector played his full part, duly arranging for money to be transferred from Toni (Apollo) Limited's account with the bank to the defendant to pay for the handbags which it had manufactured. Mr Li has drawn up tables, namely Annexes A and B to his witness statement, detailing some 24 purchase orders which he alleges were effected in this manner. Furthermore, some 47 commercial invoices were sent by the defendant to the plaintiff between 25 February 1997 and 15 June 1998, for payment for leather handbags, which contained the endorsement : "by order and for account and risk of M/S Apollo Handbag Company, Inc. 11755 Dunlap Industrial Blvd, Maryland Heights, MO 63043"; and against Payment the endorsement : "By transfer from Toni (Apollo) Limited A/C". It seems clear from these invoices that the defendant was indeed looking to the plaintiff for payment of these invoices. 64. Mr Spector's response is that the invoices in question have nothing to do with the plaintiff : they relate to orders of another company, namely Toni (Apollo) Limited, which is a separate legal personality from the plaintiff. Toni (Apollo) Limited is 99.9% owned by another company incorporated in the United States, one Apollo Trading Co. Inc., and 0.1% owned by Mr Spector. He testified that there are no ties between the plaintiff and Toni (Apollo) Limited; Toni (Apollo) Limited is not the plaintiff's agent, and any orders placed by Toni (Apollo) Limited to the defendant were paid for by Toni (Apollo) Limited from letters of credit issued to it by its customers for the bags which they had ordered to be made. 65. While there are certainly some substantial indications in the evidence that the parties did conclude an agreement along the lines deposed to by Mr Li, the defendant has finally not discharged the onus upon it of satisfying me on the balance of probabilities that Toni (Apollo) Limited was no more than an agent of the plaintiff's. While it seems clear that the defendant was on many occasions paid for handbags which it had produced by a transfer from Toni (Apollo) Limited of some of its drawing entitlement under letters of credit which had been opened in its favour by the customers in question, the evidence does not establish the plaintiff's role as an integral part of these transactions. 66. The second part of the defendant's counterclaim relates to the non-payment by the plaintiff of certain invoices which the plaintiff admits related to handbags which had been manufactured on its order under various of the disputed purchase orders which are the subject of its Statement of Claim. The plaintiff's defence is simply that it is entitled to set off the amount of such invoices against the sums owed to it by the defendant as pleaded in its Statement of Claim. 67. Since the plaintiff has failed to establish its claims, its purported right to set off the amount of such invoices against such claims has fallen away, and it is therefore liable to pay the defendant the total amount of such invoices, namely US$59,642.81. 68. In the event, I order as follows :
69. In relation to costs, although the defendant has failed to establish the major portion of its counterclaim in the sum of US$119,543, it has succeeded on the balance of its counterclaim; furthermore, the overwhelming proportion of the trial has been concerned with the issues raised by the plaintiff's claims against the defendant, which the plaintiff has failed to establish. In these circumstances, it is in my view just that the plaintiff should pay the defendant's costs of these proceedings, including the costs reserved in the interlocutory applications, and I make an order nisi to that effect.
Representation: Mr A.T. Reyes, instructed by Messrs Stevenson, Wong & Co., for the Plaintiff Mr M.C. Chiu, instructed by Messrs Ho & Wong, for the Defendant |