Wing Tat Haberdashery Co Ltd v. Elegance Development & Industrial Co Ltd

DCCJ 775/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 775 OF 2007

________________________

Coram: Her Honour Judge H.C. Wong in Court

Dates of Hearing: 13-15 July 2010, 3 August 2010 and 13 September 2010

Date of Handing Down Judgment: 16 November 2010

_______________

J U D G M E N T

_______________

1.The Plaintiff claimed against the Defendant for the sum of $357,366.94, the price of goods sold and delivered by the Plaintiff to the Defendant in 2005 and 2006 on orders placed by the Defendant.

2.The goods ordered and manufactured by the Plaintiff were colour dyed tapes.  The Defence claimed that the Plaintiff was in breach of the contract, having failed to deliver the tapes within time and to produce tapes in conformity with the samples and reasonably fit for the required purpose.  The Defendant counterclaimed for loss and damage suffered in the sum of $411,579.60.

3.After the Plaintiff’s witness gave evidence, the Plaintiff’s claim was adjusted to the sum of $338,477.74 as stated in the Plaintiff’s Statement of Account of 30 September 2008 (p. 174 of bundle C).

The Plaintiff’s Case

4.The Plaintiff and the Defendant have previous business dealings before the subject 2005 and 2006 transactions.  The present claim involved purchase orders placed by the Defendant in early December 2005 for colour dyed tapes in various colours including white, blue, brown, green and khaki.  In each purchase order, the Defendant had specified the description of the tapes ordered including the size, colour, quantity and price.  The Plaintiff agreed to produce samples for the Defendant’s approval before bulk production. 

5.The Plaintiff did not dispute that the usual practice for colour verification involved placing the tapes on a light box.  In the absence of any specified requirement from customers, the Plaintiff would use the light source D65, a commonly used standard illuminant defined by the International Commission on Illumination.  D65 corresponds roughly to the midday sun in Western and Northern Europe, it is also called daylight illuminant.

6.It is the Plaintiff’s case that the Defendant did not specify any light test requirement in respect of the colour reference.  Consequently, the Plaintiff produced the orders by reference to the normal standard of D65.

7.After the Defendant approved the samples of colour tapes ordered, the Plaintiff went into bulk production.  In or about late February or early March 2006, at a meeting at the Defendant’s office, the Defendant’s Eliza Wong (“Eliza”) informed the Plaintiff’s Jacky Chan (“Jacky”) for the first time the colours of the tapes delivered did not pass the two lights test.  Jacky claimed he reminded Eliza at that meeting the two lights test was not specified in the purchase orders.  However, in order to maintain good business relationship with the Defendant, the Plaintiff accommodated the Defendant’s requests to re-dye the tapes.  Jacky claimed it was common knowledge in the trade and known to all parties that the colours of re-dyed tapes would be uneven and there would likely be problems of colour bleeding.  The chance of colour bleeding would increase with the number of times the tapes were dyed.  It is the Plaintiff’s case when the Defendant requested the tapes to be re-dyed two to three times, the problem of colour bleeding and unevenness would be inevitable.  Jacky claimed that had the Defendant informed him the tapes would be required to pass the two lights test, including the cool white fluorescent light and the A light, the Plaintiff would never have accepted the Defendant’s purchase orders for the tapes.

The Defence Case

8.The Defendant (“Elegance”) is a sourcing and purchasing agent of garment component parts and accessories.  The purchase orders placed with the Plaintiff (“Wing Tat”) in 2005 and 2006 by the Defendant were orders from a company called Product City Co. Ltd. which in turn had received orders from Direct Sources (Far East) Ltd. (“Direct Sources”).  Elegance was instructed to deliver the tapes to Leading Garments, a manufacturer of garments which had received purchase orders for garments from Direct Sources, the Hong Kong agent for sourcing fabrics, accessories and other components of garments for the American garment company Abercrombie & Fitch Garments Inc (“A & F”).

9.In support of the Defence case, Elegance adduced evidence from Miss Peony Fung Sze Ki, the sales manager of Product City (“Peony”) and Mr. Kwok Fook Yau Mike, a manager at Elegance (“Mike”).  It was their evidence that Elegance and Product City have offices on the same floor at So Tao Centre in Kwai Sau Road, Kwai Chung, New Territories.  The staff of the two companies worked closely together.

10.It is Peony’s evidence that on or about 7 December 2005, she instructed Eliza, the assistant manager of Elegance, to order colour tapes from Wing Tat in white, muse brown, brook blue, pack olive and alamance khaki (“the colour dyed tapes”). The purchase orders specified the purchases were per approved samples.  In the period between mid-December 2005 and mid-January 2006, Jacky brought samples of various colour dyed tapes for Elegance’s approval.  All colour samples were approved on 22 January 2006 and delivery of the purchase orders were agreed to be:

(a) PO-E/E-01647E - 23 January 2006;

(b) PO-E/E-01636E and PO-E/E-01637E - one colour by 8 January 2006, two other colours by 15 January 2006 and the rest by 23 January 2006.

11.It is Peony’s evidence that through previous course of dealings and oral instructions given to Jacky, Wing Tat knew the colour dyed tapes would be used as accessories to be sewn on the belts of the garments, therefore, they should be reasonably fit for the purpose for use on garments of Elegance’s client and that the colour dyed tapes should have an average standard of colour-fastness. Furthermore, Elegance claimed it should be given a reasonable opportunity of comparing the bulk goods with the samples, that each colour dyed tape supplied by the Plaintiff should conform with the corresponding sample and free from defects that would render it unmerchantable.

12.The Defence claimed when the muse brown tapes were delivered on 24 January 2006, they were forwarded to Leading Garments after a cursory inspection of the shipment sample.  When the muse brown tapes were inspected by Leading Garments, they were found to have serious colour bleeding and the colour was not homogeneous, they failed to correspond with the approved samples.  It is the Defence case that the afore-mentioned defects were apparent on visual inspection of the bulk goods.  In view of the defective quality, Leading Garments cancelled the order for the 7/8 inch tapes at the end of February.

13.On 27 February 2006 at a meeting with Jacky and Mr. Chan Sai Hei, a manager at Wing Tat, at the office of Elegance, a test was conducted by putting a segment of the rejected tapes into two cups of tap water resulting in colour bleeding from the two tapes.  Later that day, Jacky informed Eliza by fax that the re-dyeing of the colour tapes would take 7 to 10 days.  Eliza replied by return fax demanding delivery of the re-dyed goods before 3 March.

14.When the re-dyed tapes were delivered to Elegance, they were found to be of unacceptable quality.  It is Peony’s evidence that at a meeting at her office on 8 March 2006, Jacky admitted there was deviation of colour in the re-dyed tapes.  Wing Tat then applied an extra coating in an attempt to re-inforce the colour of the tapes and delivered them to Elegance.  At a meeting in the office of Elegance on 18 March 2006, Jacky and Mr. Chan Sai Hei were shown the colour deviation in the tapes.  At that meeting, Mr. Chan Sai Hei informed Peony they were unable to remedy or manufacture new tapes to meet the standard Elegance demanded.  Elegance found that unacceptable.

15.Elegance, therefore, had to source urgently for replacement rayon tapes from two different factories, Sumirtex and Pak Lee Hong, and sent them to Wing Fung Industrial Company to be colour dyed.  Leading Garments also had to remove defective tapes already sewn onto the garments.  The cotton belts with defective tapes removed had left stitch marks on the belts, they had to be replaced by new belts on an urgent basis from a company called Mallion (HK) Company Limited.  As the above work was proceeded on an urgent basis to minimize the loss occasioned to Leading Garments, extra time and labour costs were incurred. Elegance claimed the defective colour dyed tapes were stored in Elegance’s premises for Wing Tat’s collection.  No survey report on the defective tapes had been prepared.

16.Elegance further claimed it had to compensate Leading Garments’ loss including purchase of garment quota at US$50,600 due to the delay in shipment to A&F and labour cost in the sum of US$5,200 to remove the defective tapes from the garments.

17.It is Elegance’s case that if not for the defective colour dyed tapes that did not correspond with the approved samples, it would not have suffered loss and damage amounting to HK$411,579.60. 

The Issues

18.The main issue is whether the colour dyed tapes delivered by Wing Tat to Elegance were defective and whether Wing Tat was in breach of the agreement.  To determine the above, the following questions have to be answered:

(a) Did the colour dyed tapes conform with the approved samples and were they free from defects before they were re-dyed?

(b) Were the colour dyed tapes re-dyed at the Defendant’s request because they failed the two lights test?

(c) Did the Plaintiff warn the Defendant of the consequences of uneven colour and colour bleeding if the tapes were re-dyed before it was performed?

(d) The quantum of damages and the Defendant’s counterclaim.

(a) Did the colour dyed tapes conform with the approved samples and were they free from defects before they were re-dyed?

19.Jacky, the sales representative of Wing Tat, was the staff responsible for the purchase orders from Elegance.  He admitted that most of the dealings, discussions and negotiations were conducted between him and Eliza on behalf of Elegance.  It was his evidence that there was no reference to the two lights test in the purchase orders.  In fact, throughout Wing Tat’s previous dealings with Elegance, Elegance had never required the two lights test.  He further claimed that had Wing Tat been informed by Elegance before production that the colour dyed tapes had to pass the two lights test, Wing Tat would not have accepted the purchase orders.  He was only informed by Eliza of Elegance in late February or early March 2006 after delivery of the tapes ordered in January that the colours of the tapes did not pass the two lights test, namely, the cool white fluorescent (“CWF”) and the A light.  He was surprised by the information because the two lights test was never part of the agreement and Wing Tat did not even possess an A light at its Hong Kong office or factory in China.  He claimed that in all their business dealings since June 2004, the CWF and A light had never been used, because they were not required under any of the previous purchase orders nor were they stated in the subject purchase orders.

20.It was Jacky’s evidence that before the tapes were re-dyed, 90% of the bulk goods conformed with the approved samples, he claimed there were no colour differences, no colour bleeding, colour variations or unevenness in the tapes.  He further claimed he had no recollection of the incident on 20 February 2006 when Elegance’s Mike (Mr. Kwok Fook Yau) went with Jacky to Wing Tat’s factory in Dongguan to inspect the bulk production and the colour differences in the bulk production.  He was further cross-examined on the admission by Wing Tat’s colour technician at the factory that there was great colour variations between the samples and the bulk production at the alleged factory visit.  Jacky again claimed he had no recollection of it.  On the other hand, he admitted Wing Tat had agreed readily to re-dye the tapes in late February 2006. 

21.On the dip test conducted by Eliza at the meeting on 27 February consisting of putting the tapes into two cups of water, bleeding of colour dye from each segment of the returned tapes was found after 10 minutes, Jacky admitted he sent a fax later that day to Elegance confirming Wing Tat would reinforce the colour in the tapes.  The re-dyed tapes involved only two colours on this occasion, pack olive and muse brown, with delivery between 7 to 10 days from the time of receipt of the returned tapes (see page 129 of bundle C).  Eliza replied after receipt of the fax requesting delivery on 3 March at the latest.

22.When the reinstated goods were delivered to Elegance, Elegance found they were unacceptable.  At the meeting on 8 March 2006, Jacky admitted there was deviation of colour on the tapes and agreed to apply an extra coating to the tapes to make them colourfast before delivery to Leading Garments. Unfortunately, the bulk production after re-dyeing was found to be defective and unacceptable on 17 March 2006.  A meeting was held on 18 March 2006 with Jacky and his superior Mr. Chan Sai Hei at the office of Elegance to find a solution to the problem.  At the end of the meeting, Peony claimed that Wing Tat was not able to offer a remedy or agree to produce a new lot to meet the standard of the samples approved.  Mr. Chan Sai Hei then suggested Elegance to purchase colour tapes from another source.  At the end of March 2006, Peony claimed Jacky admitted to her that he could not remedy the situation.

Analysis

23.It is not disputed that of the five colour tapes ordered, there was colour variance in three colours:- muse brown, brook blue and pack olive.  The white and alamance khaki tapes had conformed with the approved samples, they satisfied the two lights test and the lap dip samples of the bulk goods.  These were accepted by Leading Garments and the ultimate purchaser A & F.  The purchase orders specified the tapes were per approved sample quality, these were produced by Wing Tat between mid-December 2005 and mid-January 2006.  It indicated Wing Tat was capable of producing colour dyed tapes that met the requirements of Elegance.

24.Mr Chan, Counsel for Wing Tat, submitted Elegance has failed to produce a survey report on the goods manufactured by Wing Tat before they were re-dyed to show they did not conform with the samples approved.  He submitted Elegance has failed to prove its case against Wing Tat.

25.It is unfortunate that no loss adjuster or survey report was commissioned by either party before the goods were re-dyed.  On the other hand, the readiness of Wing Tat in agreeing to re-dye three of the four colour tapes even though Elegance did not obtain a survey report on the bulk goods showed that Wing Tat had accepted there was something wrong with the bulk goods or Wing Tat would not have agreed to re-dye the tapes at no extra charge to Elegance.  Jacky claimed Wing Tat had agreed to do so to appease Elegance, but if the colour tapes in question were free from defects, Wing Tat would not have agreed to re-dye them.  Furthermore, if it meant the re-dyed tapes would have further problems of colour bleeding and colour unevenness after re-dye, Wing Tat should have alerted Elegance to the potential problems.

(b) Were the colour dyed tapes re-dyed at the Defendant’s request because they failed the two lights test?

26.It is not disputed the re-dye of the tapes was done at Elegance’s request.  Wing Tat had agreed to do so in the hope Elegance would be satisfied with the goods.  According to Peony, Elegance had been ordering from Wing Tat since 2004, therefore Wing Tat should know the colour dyed tapes ordered in December 2005 would be checked against the CWF and the A light.  Elegance claimed, therefore, it was not necessary for the purchase orders to specify the requirements of the two lights test.  In contrast, Elegance’s purchase orders with Wing Fung Industrial Company for replacement colour dyed tapes did specify the requirement of the CWF and A light tests.  Jacky disagreed there was such a requirement at the time when the purchase orders were placed or he would have refused to take up the orders. 

Analysis

27.As the purchase orders placed by Elegance to Wing Tat failed to specify the two lights test, it was not an expressed term of the contract.  I am satisfied Elegance did not inform Wing Tat the colour dyed tapes have to pass the two lights test when the orders were placed.  Even though Eliza or Peony might have used the said two lights to check the colour dyed tapes samples and the shipment samples, and perhaps the two lights test might even have been performed in front of Jacky, that does not render the two lights test a term of the contract between the parties.  Even though Wing Tat agreed to re-dye the tapes to satisfy Elegance, the consideration for the promise is past.  On this basis, I find the two lights test requirement did not form part of the contract terms and is not binding on Wing Tat.  On the other hand, Wing Tat had accepted some of the tapes should be re-dyed to meet its customer’s requirement, this indicated the colour variance must be apparent to Wing Tat.

(c) Did the Plaintiff warn the Defendant of the consequences of uneven colour and colour bleeding if the tapes were re-dyed before it was performed?

Analysis

28.It is possible Jacky might have warned Eliza and Peony of the possible consequences when they requested some of the tapes to be re-dyed to conform with the approved samples.  Jacky claimed it was common knowledge that the colours would be less stable the more times the tapes were dyed.  Wing Tat had agreed to do so because both parties were trying to resolve the complaint raised by Elegance’s customer and Elegance had taken delivery of the bulk goods after checking the shipment samples and forwarded the bulk goods to Leading Garments.  However, Elegance claimed it was not afforded a sufficient opportunity to examine the bulk goods. 

29.Under S. 36(2) of the Sale of Goods Ordinance, a buyer has a right to examine the goods for the purpose of ascertaining whether they are in conformity with the sample.  S. 37 of the Ordinance provides:-

“37. Acceptance of goods

(1) Subject to subsection (2), the buyer is deemed to have accepted the goods -

(a) when he intimates to the seller that he has accepted them; or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.

(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them for the purpose –

(a) of ascertaining whether they are in conformity with the contract; and

(b) in the case of a contract for sale by sample, of comparing the bulk with the sample.”

30.In the present case, the evidence clearly showed Elegance did have an opportunity to compare the bulk goods with the approved sample.  It admitted to have checked the shipment sample, but claimed it did not inspect the rest of the bulk goods.  However, there was no evidence showing Wing Tat failed to afford Elegance an opportunity to check the bulk goods.  The evidence indicated Elegance had accepted the goods delivered by Wing Tat and forwarded the goods to Leading Garments.  The fact that Leading Garments had sewn some of the tapes on to the garments, further showed it had accepted and dealt with the bulk goods under s. 37(1)(b).  I find s. 37(1)(b) to be unhelpful to the Defence.

31.I am satisfied Jacky and his manager Mr. Chan were persuaded by Elegance to re-dye the colour dyed tapes in order to meet the requirements of Elegance’s customer, while at the same time, it is known to Elegance that re-dyeing of the tapes may result in colour bleeding and uneven colour appearing on the re-dyed tapes.  It was an attempt on the part of Wing Tat to improve the colour of the tapes with possible negative effects known to Elegance.  Jacky and Mr. Chan were clearly trying to solve the problem when they proposed the use of polyester tapes, this was rejected by Elegance’s customer, as can be seen from the emails exchanged between Elegance, Leading Garments and other parties concerned. 

32.The authorities cited by Mr. Chan on survey reports or the lack of an independent expert report on the defects of the goods, Chapman International Trading Limited v. Grand Treasure Apparel Limited HCA 933/2003 or the Mak Ping Kui v. Millioniee Ltd. HCA 940/1998, are distinguishable to the present case, the circumstances in those two cases are very different and each case must be decided on its own facts.  In the present case, Wing Tat had agreed to re-dye the tapes.  By the same token, Wing Tat could have obtained a survey report if it disagreed the tapes were defective before they were re-dyed.  I find the argument unhelpful.

33.On the other hand, a survey report on the quantity of defective tapes would be of assistance at the trial.  Evidence adduced by Elegance failed to specify the percentage of defective and replaced colour tapes.  Elegance admitted some of the 1/4 tapes in muse brown, brook blue and pack olive colour were defective.  There was evidence adduced on the labour cost for dyeing replacement tapes in brook blue was 19,008 yards and 30,528 yards in muse brown.  The same yardages appeared in its claim for the cost of raw tapes.  In the absence of independent evidence, I accept these figures represented the quantity of defective tapes. Compared to the total orders for the 1/4 muse brown tapes of 70,524 yards, 49,212 yards of brook blue and 128,340 yards in pack olive; 19,008 yards in brook blue represented 38.62% of 49,120 yards and 30,528 yards is 43.28% of 70,524 yards of muse brown tapes.  Of all the brook blue tapes ordered during the period of 71,430 yards, 19,008 yards represented 26.6% (19,008 ÷ 71,430) of the total brook blue 5/8, 7/8 and 1/4 tapes ordered and 31.8% of the 5/8 and 1/4 tapes ordered.  Of the total muse brown tapes ordered, 30,528 yards represented 28.70% (30,528 ÷ 106,374) of the muse brown 5/8, 7/8 and 1/4 tapes ordered and 33.6% of the 5/8 and 1/4 tapes ordered.  Elegance claimed 33,000 yards of the 128,340 yards of the pack olive tapes had to be replaced, it represented 25.71% of the total 1/4 tapes ordered.  These figures from Elegance indicated that on average 27% of all 1/4 and 5/8 tapes needed to be replaced.  Based on Elegance’s counterclaim, only 49,536 yards (19,008 + 30,528) were purchased as replacement, it represented 16.1% of the total tapes ordered from Wing Tat.  I shall base my assessment on the aforesaid figures extracted from evidence and documents produced at the trial.

34.I am satisfied Elegance had been warned and knew there would be problems with the re-dyed tapes from colour bleeding and unevenness if re-dyed repeatedly.  Yet, Elegance accepted the re-dyed tapes and sent them to Leading Garments for garment manufacturing.  The figures produced showed a majority of 83.9% of the tapes could be used and were used in the garments manufactured by Leading Garments.  The white and alamance khaki colour tapes were fully accepted by Elegance’s customer, only some 16.1% of the total, in 3 colours, from Wing Tat had to be replaced.

35.The law provides where the defect is not patent or obvious, the buyer is not debarred from claiming damages merely because he did not make a thorough examination of the goods delivered by the seller to see whether they complied with the contract. 

36.Once he discovered the defect, the buyer has a duty to see that the defective goods are not sent to his sub-buyer to avoid further or consequential loss which he could have avoided by taking precautionary steps.  Para. 17-059-060 of Benjamin’s Sale of Goods stated:-

“The buyer’s actual knowledge of the defect. Where the seller delivers goods which fail to meet the contractual description or standard, the buyer may not immediately discover the defect or the failure of the goods to satisfy the description. As soon as the buyer knows of the defect, he will be unable to recover damages for any further or consequential loss which he ought reasonably to have avoided by taking remedial or precautionary steps. The buyer is not justified in continuing to rely on the seller’s warranty after he knows that the goods are defective in that respect. In Lambert v Lewis, where a buyer bought a trailer coupling, the House of Lords held that the warranty that it was reasonably fit for towing trailers would continue in effect for a reasonable time after delivery, so long as it remained in the same apparent state as that in which it was delivered (apart from normal wear and tear). But as soon as the buyer learned that the handle of the locking mechanism of the coupling was missing, he could no longer rely on the seller’s warranty to excuse him from making his own examination to see if it was still safe to use.

The decision of the House of Lords in Lambert v Lewis, in para. 17-059 above, was based on the buyer’s actual knowledge that part of the locking mechanism of the coupling was missing: this knowledge put him on enquiry so that he should have conducted his own examination of the coupling to see if it was still safe to use it. The decision was thus based partly on the buyer’s actual knowledge, and partly on his imputed knowledge. Although their Lordships did not expressly consider the situation where the buyer ought, as a reasonable person, to have discovered that part of the mechanism was missing (and thus been put on enquiry), it is submitted that the fact that a reasonable buyer would have been put on enquiry should be sufficient to prevent the seller’s contractual liability for loss subsequently arising which could have been reasonably avoided by such a reasonable buyer.”

In the present case, Elegance had clearly failed to take precautionary steps before delivery to Leading Garments.

(d) Quantum of Damages and the Counterclaim

37.I find Wing Tat and Elegance to be equally responsible.  As 83.9% of the tapes were accepted by Elegance, Wing Tat should be paid for them.  Elegance therefore is liable for the sum of $283,982.82 ($338,477.74 x 83.9%).

38.I allow the Plaintiff’s claim of $283,982.82 on the basis that the Defence was able to use a large part of the goods.  As to the Defendant’s counterclaim, the claim of $411,579.60 loss should be borne by the Plaintiff and the Defendant equally because Elegance should have detected defects in the bulk goods at an early stage before delivery to Leading Garments to avoid further loss.

Conclusions

39.The Plaintiff has succeeded in its claim of $283,982.82 against the Defendant.  The Defendant shall recover 50% of its counterclaim of $411,579.60 i.e. $205,789.80.  Upon the setting off 50% of the Defendant’s counterclaim ($283,982.82 - $205,789.80 = $78,193.02), the Plaintiff is entitled to a judgment sum of $78,193.02.

Interests

40.Interests is payable at half judgment rate from the date of writ to the date of judgment, thereafter at full judgment rate.

Costs

41.Costs to follow the event.  The Defendant shall pay the Plaintiff’s costs on the claim and the Plaintiff shall pay 50% of the Defendant’s counterclaim, to be taxed if not agreed, with Certificate for Counsel.  The cost nisi order will be made absolute should there be no application within 14 days of the judgment.

Mr. Chan Chung instructed by Messrs. Chui & Lau for the Plaintiff

Mr. Kenneth Y.F. Wong leading Mr. Adrian Leung instructed by Messrs. Wong, Hui & Co. for the Defendant

(I)Please refer to CACV126/2011 for the relevant appeal(s) to the Court of Appeal. (II) Please refer to HCMP357/2011 for the relevant appeal(s) to the Court of Appeal.