V Shapes Moulders Ltd v. Pacific Dunlop Garments Ltd
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HCA 493/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 493 OF 2008
BETWEEN
Before : Deputy High Court Judge Au-Yeung in Court Dates of Hearing : 28th – 31st March, 1st and 6th April 2011 Date of Handing Down Judgment: 8th June 2011 ------------------------ JUDGMENT ------------------------ 1.The Plaintiff’s claim is for damages for non-payment of goods supplied to the Defendant in the total sum of $2,051,254.78, which is not disputed. The contest is on the Defendant’s counterclaim for damages arising out of defective quality of the goods and delay in delivery. UNDISPUTED AND INDISPUTABLE FACTS 2.The Plaintiff manufactured and sold foam cups of brassieres, and moulded shell fabrics supplied by the Defendant. 3.Moulding was a process by which the material would be formed into the requested shape through pressure and heating by 2 heated mould heads from the top and the bottom. The temperature of the 2 mould heads should be the same. It was the responsibility of the moulder to decide the temperature and dwell time. 4.The shape of the cup shell was important to a bra product because it was part and parcel of its design and it had to fit in with the other components. Samples of the moulded goods and plastic heads (which set out dimensions of the cup shells of each size) had to be approved by the Defendant. The moulded fabric cups or foam cups should fit the plastic heads perfectly. Provided the tolerance was not exceeded, the product could be accepted. 5.The manufacturing had to go through 3 stages. In Stage 1, a development sample would be made by the Plaintiff and sent to the Defendant for confirmation of the size and shape. After the sample was approved, the Defendant would place the orders. In Stage 2, a shipment sample would be produced using the fabrics supplied by the Defendant. After the shipment sample was confirmed by the Plaintiff and the Defendant, the goods would be produced in bulk. In Stage 3, the Defendant’s QCs would conduct random check on the goods at the Plaintiff’s factory in Zhongshan. Once the QCs were satisfied with the quality of the goods, they would give approval to the Plaintiff to deliver them to the garment factory of the Defendant. The mould shell fabrics and foam cups would then be further processed by the Defendant into end-products. The Defendant’s customer was Courtaulds UK Limited (“CUK”), who in turn sold to the end buyer M&S. 6.The Plaintiff and Defendant have had dealings since about 2006. There had never been any quality or payment disputes. THE DISPUTE 7.Tabulated below are the complaints of the Defendant and the responses of the Plaintiff:
8.Of these complaints, the foam cup problem concerned a latent defect which surfaced only after delivery to M&S. It allegedly violated the trade practice that foams should stay white for at least 20 weeks after production (“the trade practice”). 9.The Defendant counterclaims for breach of implied terms under the Sale of Goods Ordinance, Cap.26 (“SOGO”) in that the goods (i) did not correspond with samples/description; (ii) were not of merchantable quality; and (iii) were not reasonably fit for the purpose for which the Defendant required the goods. 10.The Defendant eventually had to engage other contractors to remedy the situation. The problems had caused delay in delivery to CUK. Despite mitigation, the Defendant had suffered loss. 11.The Plaintiff contends that it had given warning about the possible yellowing of moulded fabrics within 2 – 3 days after it received the cut pieces of fabrics for bulk production from the Defendant. The Plaintiff suggested that the problem was with dyeing of the fabrics. Despite the warning, the Defendant instructed the Plaintiff to proceed to bulk production, which the latter did. 12.As for the foam cups, the Plaintiff denied the existence of the trade practice. It suggested that unfavourable storage conditions, exposure to light and oxidation might have caused the foam cups to turn yellow quickly. 13.Notwithstanding any alleged defects, the Defendant’s QCs had approved the goods and accepted delivery without objection. The Plaintiff asserts that it was not liable for the Defendant’s loss. The alleged defects were excuses not to settle the outstanding payment. The Defendant had also failed to take reasonable steps to mitigate. 14.I shall make some general observations first before analyzing the problems for each Style and the issue of mitigation. SOME GENERAL OBSERSVATIONS 15.The plaintiff has called its ex-director Mr Eric Wong as witness. Two other witnesses have not turned up at the trial and so I will disregard their witness statements. 16.The Defendant has called 3 witnesses: Mr Lester Wong its Procurement Manager (DW1), Mr Schofield Sourcing Manager of CUK (DW2), and the Defendant’s Materials Manager Mr Chalkley (DW3). 17.On certain aspects which will be highlighted in the analyses of various issues below, the evidence of Mr Eric Wong was not reliable. In contrast, Mr Lester Wong was more forthcoming and not shaken even though subject to intensive cross-examination. His evidence was consistent with logic and the contemporaneous documents. The evidence of Mr Schofield and Mr Chalkley was not severely challenged. I find the Defendant’s witnesses to be truthful and reliable and I accept their evidence. Where there is conflict with Mr Eric Wong’s evidence, I prefer the evidence of the Defendant’s witnesses. 18.There is no expert evidence adduced on the cause of the yellowing problem of the fabrics and foam cups, so I can only decide on the evidence of the witnesses as to facts. The burden of proof rests on the Defendant. 19.There are real exhibits tendered by the Defendant, being approved samples and allegedly defective goods produced by the Plaintiff. The Plaintiff has not dealt with them in terms of inspection or in its witness statements. Mr Eric Wong, understandably, said that he could not confirm that they were the contemporaneous samples or products. Judging from the tag attached to Exhibit D1 and Mr Lester Wong’s description of each of the Exhibits, I am satisfied that they were what Mr Lester Wong described them to be as set out below. 20.Exhibit D1 was a sample of the colour of the outer shell fabric of Style 3131 & 3132 accepted by the Defendant. It clearly showed a date of 28/8/07 written by a member of the Defendant’s production development team. The left and right cups were not of the same colour because the left cup was put underneath the right cup which was more exposed and therefore more yellow. The tag on it read “OK for yellowing problem. Production keep going. Ask merchandising team to send this to Courtaulds for future approval”. 21.Exhibit D2 was a fragment of modal fabric for the outer shell of Style 3131 & 3132 that was not moulded. 22.Exhibit D3 was from bulk production of Style 3131 & 3132 and it showed the contrast between the yellowish moulded part and the white unmoulded part. 23.Exhibit D4 was a set of samples produced by the Plaintiff at 180-182ºC re-submitted for the Defendant’s approval in October 2007. It was obvious that the colour was much whiter than Exhibit D3. 24.Exhibit D5 showed foam cups for Style 3134 with colour problem returned by M&S. Colour of the foam cups should have been white to match the other parts of the end product. It was quite yellow as described by Mr Schofield, in comparison to the lace and elastic band. 25.Exhibit D6 was an item of Style 6732 which Mr Lester Wong described as being “marginally acceptable”. The lower end of this body suit was yellowish. The moulded cups in the upper part were a bit yellow but was within the tolerance range. The lace at the lower end was whiter than the whole body suit. The fabrics of the whole body suit was slightly on the yellow side. The apex for the foam cups and the outer shell (both done by the Plaintiff) should align. 26.Exhibit D7 was an approved sample of foam cups for Style 6732 that had remained quite white. They had been kept inside air tight plastic bags to slow down the process of yellowing. (This could be compared to Exhibit for Style 3134 and 6732 which showed a different degree of yellowness.) 27.Exhibit D8 was a Style 6732 item rejected for the colour problem. Mr Schofield said there was definitely a colour change. The upper part near the bust was yellower. Compared to the inside, there was substantial discolouration because of heat application of the mould heads. 28.In considering the weight to be attached to these Exhibits, I am conscious of the fact that it has been about 3 ½ years since they came into existence and so the colour might have changed. White fabric took longer time to turn yellow than foam cups. The lighting in the court room was yellow and might affect the judgment on the colour. Nevertheless the Exhibits are still useful in showing the visual difference between what the well-trained eyes of the witnesses would regard as white and what was unacceptable yellow; and how the yellowish moulded part that did not match the other unmoulded parts could affect the outlook of an end-product. Mr Lester Wong agreed that a bit of yellowing would be acceptable provided it matched with other parts of the end product. ANALYSES OF EACH STYLE OF GOODS STYLE 3131 & 3132 29.There was a dispute as to the type of fabrics involved. Mr Eric Wong claimed it was cotton whereas Mr Lester Wong said it was modal fabric. I accept Mr Lester Wong’s version. This was borne out by the tag in Exhibit D2 which clearly stated that it was 95% modal and 5% spandex. 30.Modal fabric is a smooth and soft cellulose fibre resistant to shrinkage and fading. It absorbs colour more evening. The drawback is that it is sensitive to heat. If not treated properly it will turn yellow easily. 31.The initial problem with Style 3131 & 3132 was yellowing of the mould shell fabrics. After delivery to M&S, yellowing of the foam cups surfaced. The issues are:
What Was the Cause of the Yellowing of the Mould Shell Fabrics? 32.Two causes have been advanced: dyeing (according to the Plaintiff) and excessive temperature and dwell time (according to the Defendant). 33.The Plaintiff has not adduced any evidence to show that dyeing was the cause save that its emails mentioned about quality of the fabrics and variation of colour. 34.Mr Lester Wong agreed that at one stage he also thought that there might be a problem with the fabrics. He mentioned the supplier Hyosung in the email dated 27 August 2007. He corrected himself in Court by saying that Hyosung was a Korean supplier whilst modal fabrics was supplied by HK Textile Co. Therefore what he thought was problematic fabric might not be related to Style 3131 & 3132. 35.In his oral testimony, Mr Lester Wong denied that dyeing was the cause. He said that modal fabrics did not need white dye. Rather, it required bleaching to turn greyish white into white. Modal fabrics absorbed colour more evenly. All the fabrics had been tested by laboratories accredited by M&S and approved. If the fabrics had varying yellowness, the Plaintiff had not seen fit to make samples from different lots of modal fabrics. 36.I note that it has never been the complaint of the Defendant or CUK that there were varying shades in the fabrics. The complaint had always been yellowing in the moulded part. Samples were produced from the same fabrics for bulk production. It could not be the case that samples were white but bulk products were not. Tensuel, the replacement moulder, did the job properly with the same cut pieces delivered by the Defendant and there was no yellowing problem with the fabrics. I accept the evidence of Mr Lester Wong and reject dyeing as the cause. 37.To ascertain the cause of the yellowing problem, a visit was made on 17 August 2007 by the Defendant and CUK to the Plaintiff’s factory in Zhongshan (“the Factory Visit”). It was attended by, amongst others, Mr Schofield of CUK, Mr Chalkley of the Defendant, and the Plaintiff’s merchandisers whom CUK communicated with, line supervisors, factory manager – people who dealt with operation on a daily basis. At that time, Style 3131 & 3132 and Style 2749 were under production. 38.It was discovered that the Plaintiff gave no instructions to the moulding workers as to the temperature of the mould heads and the dwell time to apply on the modal fabrics. The supervisor appeared to be guessing the settings. There was no record of what the specified setting should be. The Plaintiff’s records of the temperatures of both the male and female heads of each moulding equipment applied in the production was scanty and inadequate. There was no record to confirm if the left and right mould heads were consistent (within 2°C). During the inspection, the temperature for moulding cup shells of Style 3131/3132 were all in the region of 192-197ºC, which was too high for modal fabrics. The part of the outer shell moulded by the Plaintiff was very yellow compared to the unmoulded part. Moreover, the moulding machines were running at different temperatures with different dwell times. 39.All the defence witnesses testified that Mr Eric Wong was not there when being asked for. Therefore, when Mr Chalkley returned to his office, he sent an email to Mr Eric Wong to discuss this issue. Mr Chalkley complained that there was no standard available to check shade and appearance. He asked Mr Eric Wong,
40.In reply on the same day, Mr Eric Wong wrote to Mr Chalkley and Mr Lester Wong:
41.However, the Plaintiff did not deny what had happened during the Factory Visit. It had not denied the temperature of 192-197ºC and lack of records on temperature in the contemporaneous correspondence. It was only in his oral testimony that Mr Eric Wong said that the moulding machines were in the process of “reducing temperature”. I find this explanation to be unconvincing for the following reasons:
42.I find the Defendant’s version to be more probable. Mr Eric Wong’s oral evidence supports the Defendant’s version that the Plaintiff simply guessed the temperatures and lacked records. 43.Owing to the difficulty of switching to another moulder, the Defendant continued its orders with the Plaintiff. At around the time of the Factory Visit, the Defendant received the first batch of white cup shells, many of which had yellow problem. When Mr Lester Wong informed Mr Eric Wong, the latter again blamed it on the quality of the fabrics. The Defendant used extra labour to sort out those goods that were “marginally acceptable to M&S” and applied them in the production of bras for M&S’ approval. M&S did not give its approval because of the yellowing problem. 44.The yellowing problem continued from late August to early September 2007. As admitted by the Plaintiff, on around 7 September 2007, one of the Defendant’s QC reports stated that the mould cups of 108 pieces were too yellow and not acceptable. Production was suspended. The Defendant purchased new modal fabrics for the Plaintiff to mould at no further charge. 45.In early October 2007, CUK informed the Defendant that the goods needed to be inspected thoroughly as M&S complained about the colour problem of the cup shells. CUK and M&S also gave pressure on the Defendant to resume production soonest possible. 46.On around 9 October 2007, the Defendant decided to resume production of this Style. Extra manpower was deployed to identify the Plaintiff’s goods which might meet the lowest acceptable standard for production. New rack samples of the finished products were to be sent to M&S for approval. It was decided that the production of cup shells should be entrusted to new moulders in place of the Plaintiff. 47.Despite the aforesaid measures, there were still 1,780 pairs out of 17,022 pairs of cup shells produced by the Plaintiff which could not be used for the Defendant’s production. The Defendant bought modal fabrics a second time for the Plaintiff to re-mould. 48.On about 13 October 2007, the Defendant learnt that other competitors were moulding similar materials at 180ºC/80 seconds. Therefore Mr Chalkley affirmatively in writing urged Mr Eric Wong to apply the same moulding temperature and dwell time and to submit new samples for consideration. 49.In reply, Mr Eric Wong told him that the Plaintiff’s moulding for the previous order was 182ºC in 60 seconds. He did not believe that 2ºC was so significant as to make the fabrics yellow and that the Plaintiff was 20 seconds less on dwell time. The Plaintiff had done a test that morning and found that the mould fabric using the Plaintiff’s own specification was not so yellow as the Defendant’s. In addition, the quality of that lot of fabrics was much whiter than the last lot. Thus the colour after moulding was better. 50.To prove that it was not at fault, the Plaintiff sent some finished goods moulded at182ºC for 60 seconds and 180ºC for 80 seconds to the defendant for comparison on 13 October 2007. The Defendant accepted the outcome and approved 8 white samples. Comparing the cup shells which the Plaintiff produced before early October and the new samples, the degree of yellowness differed significantly. Such a big difference in yellowness, in the Defendant’s view, could not have resulted just from a difference of 2ºC applied in moulding. Nevertheless, the goods produced up till mid-October 2007 still suffered from the yellowing problem. In the end, the Defendant switched to another moulder called Tensuel who produced goods to the Defendant’s satisfaction. 51.The Defendant’s case is that the appropriate temperature was 180-182ºC. Over-heating by about 15ºC had caused the modal fabrics to be scorched. It was the practice of moulders to increase the speed of processing by increasing the temperature. That was how the Plaintiff, allegedly to cater for the high volume of work, was sacrificing quality. Moreover, the temperature of the mould heads had to be checked every 2 hours. The machine reading might not be correct and even the best machines could have mistakes. The difference could be up to +/- 10ºC for older machines. 52.In weighing each party’s version, I bear in mind that there was only one Factory Visit in August when the cause of the yellowing of the mould shell fabrics was identified. There was no other evidence of the temperature and dwell time employed by the Plaintiff afterwards except its averment in its email dated 13 October stating that it moulded at 182°C/60 seconds. 53.Having rejected dyeing as the cause, the objective evidence showed a failure to correspond with samples. The Plaintiff was capable of producing, not only once but twice, approved white samples, before and after the yellowing problem was discovered. Yellow items were rejected and replacement items were moulded. I find that the cause of the problem was a technical one that the Plaintiff was contractually bound to solve. What temperature and dwell time to use should be decided by the Plaintiff. Even if the Defendant had out of good intentions assisted in finding out the problem, and instructing the Plaintiff to proceed at a specific temperature, that would not have reduced the Plaintiff’s obligation. I find that on balance of probabilities, the Plaintiff had moulded at excessive temperature. Did the Defendant Know of the Yellowing Problem but Still Instructed the Plaintiff to Continue with Production? 54.Indisputably, the Plaintiff had warned the Defendant of the yellowing problem in emails. In Exhibit D1, the tag shows that the Defendant should have been aware of the yellowing problem at the time the sample was approved. After the Factory Visit, instructions were nevertheless given by the Defendant to continue production of substantial quantities. CUK’s email to Mr Lester Wong and Mr Chalkley dated 9 October 2007 was particularly telling:
Facing great pressure to meet the tight schedule, CUK and the Defendant were taking upon the risk of the Plaintiff not meeting their standards. They worked under the hope that M&S would accept the Plaintiff’s goods even though some might be “marginally acceptable”. Mr Chalkley admitted that the Defendant relied on the Plaintiff in the production of Style 3131 & 3132 “in the hope that the colour defect problem of the Style 3131 & 3132 white cup shells would be improved after the Defendant had identified the problem with the Plaintiff.” 55.I accept that the Defendant was placed in a difficult position since the Factory Visit. It was impossible to find replacement moulders within a short time. Time was needed to locate and negotiate with other moulders, and for the new moulders to develop samples and plastic heads for approval. They could not immediately produce to the Defendant’s orders because of prior commitments. In the meantime, it would not be possible for the Defendant to cease or suspend production thereby affecting its relationship with CUK/M&S and damaging its goodwill. 56.However, receipt of the warning, risking the Plaintiff’s inability to produce up to standard and instructions to continue with production, had not caused the Defendant to lower its own standard. The Defendant went to ascertain the cause of the problem. It discussed with the Plaintiff on the solution. Most importantly, it asked for white samples to be re-approved. As Mr Chalkley said in his witness statement, the approved samples set the maximum degree of yellowness acceptable to the Defendant and its end buyer. The Plaintiff was contractually bound to produce in accordance with the approved white samples using the same materials. The Defendant was not barred from asserting its claim against the Plaintiff. Was There Breach of Implied Terms under SOGO? 57.The goods produced by the Plaintiff did not correspond with the approved samples. They were not merchantable and not fit for the Defendant’s purpose of applying them to produce end-products. The yellow moulded parts simply could not match with the non-moulded parts. There was breach of implied terms under sections 16(2), 16(3) and 17(2) of SOGO. Had the Defendant Accepted the Plaintiff’s Goods? 58.The Plaintiff avers that the Defendant had accepted the goods and so the former was exempted from liability. Sections 37(1), (2) of SOGO provides:
59.Acceptance had come in the form of (i) inspection and approval by the Defendant’s QCs; (ii) processing the goods; and (iii) delivery to CUK. Inspection and Approval by the Defendant’s QCs 60.There had been ample time for inspection as the Plaintiff’s goods did not go directly to CUK but had gone through the Defendant’s hands. At the Plaintiff’s factory, the Defendant’s QCs had random inspection of about 10-20% of the goods. Only after the QCs had given approval reports would there be delivery to the Defendant. The Defendant also had internal QCs who would do random checks on about 10% of the goods received. The Defendant usually took 45 days for production, incorporating the Plaintiff’s goods. If problems were discovered before sewing, the Defendant could still reject and require the Plaintiff to mould afresh. Truly some goods had been rejected by QCs, e.g. 108 pieces for Style 3131 & 3132, otherwise there would not have been re-moulding or suspension of production. 61.Mr Lester Wong explained that it did not have the resources to check every item and its business with the Plaintiff was based on trust. Workers did things manually and would not care whether the contracts between the parties were fulfilled or not. Moreover, there were many production lines in the Defendant’s factory and speed was of paramount importance in the sewing unit. 62.Mr Lester Wong also claimed that QCs’ acceptance would not exempt the Plaintiff’s responsibility. QCs had the authority to report to the Defendant the defects. It was up to the management to decide if the defects were fatal (in the sense of not being acceptable to the customer). The management would weigh the issue and see if the Defendant would suffer, whether the goodwill would be affected and the compensation to bear. He agreed that after considering all aspects and losses, the Defendant had decided to accept the goods but he claimed that it had told the Plaintiff that all losses would be borne by them. 63.The evidence does not show any written record of acceptance by the Defendant under protest. Nor was this mentioned in any of the witness statements or any emails to the Plaintiff. There was no evidence that the Defendant had reserved their rights when accepting the goods. There was no evidence that the decision of the management, if different from that of the QCs, was conveyed to the Plaintiff. Acceptance of the goods appeared to be unconditional. Acts Inconsistent with Ownership 64.For the bulk of the goods that it had not rejected, the Defendant admittedly processed them into bras. Such acts were clearly inconsistent with the ownership of the Plaintiff. Delivery to CUK 65.The Defendant did not reject the bulk of the mould shell fabrics but sent the bras made from them to CUK. Before doing so, the Defendant’s QCs had random checked the goods and confirmed that they met the standard required by CUK. 66.For goods with yellowing of the mould shell fabrics, I find that the Defendant had accepted the goods within the meaning of section 37(1) of SOGO. I do not accept that the problem was latent. The QCs had been able to identify the unacceptable items by visual inspection before delivery to CUK. There was no objective evidence that the mould shell fabrics turned yellower after export. 67.The Defendant had therefore lost the right of rejection but was not prevented from seeking damages from the Plaintiff for loss incurred before the acceptance. What Was the Cause of the yellowing of Foam Cups? 68.Mr Poon submitted that there was no evidence that the foam was supplied by the Plaintiff. With respect, this was because of its admission in the Amended Reply and the witness statements of Mr Eric Wong that it was the plaintiff who sourced and supplied the foam. 69.It was common ground that the foam cups were component parts to be manufactured into final products for retail sales. Foam cups would turn yellow in time. Samples as to quality and colour had been approved by the Defendant. There was no agreement as to the standard of whiteness of the foam. Neither the Defendant nor CUK detected any problem with the foam cups until M&S alerted them to it after receiving delivery of the end-products. 70.Mr Eric Wong’s evidence, which was not contradicted, was that stay-white foam cups were expensive. Non-stay-white ones would turn yellow in time, depending on quality and price. It depended on whether anti-yellow ingredients were used in the manufacturing of the foam. There was no standard whiteness or yellowness of foam. There were only standards set by customers. Whether the whiteness or degree of yellowness was acceptable would depend on whether it matched other parts of the end products. As agreed by Mr Lester Wong, visual inspection could not determine for how long the foam would stay white, or whether they were of a high or low price. He also agreed that so long as the foam could match other parts of the products, that would be alright. 71.The Plaintiff suggested that temperature, light, oxidation and storage condition could be the cause of the yellowness in the foam cups. The Plaintiff suggested that since M&S placed the goods at the rack of their retail outlets in around October 2007 and then the goods started to turn yellow quickly, it could be related to the in-house heater. There was, however, no objective proof. 72.Neither could the Defendant prove the cause. All it could say was that it had handled the foam cups with care in accordance with its internal instructions on handling foams of light colour; that it had assembled the foam cups with other components but did not in any way process them. There was no suggestion that it mishandled the foam cups, that the packing was problematic or that there was damage in transit. 73.The Defendant could only rely on a trade practice. Mr Lester Wong’s evidence (supported by that of Mr Chalkley) was that it was an accepted trade practice for female underwear that the white foam cups of bras should only start to turn yellow slowly after at least 20 weeks of production, made up of:
74.Contrast this with Mr Chalkley’s version: 6 weeks’ for production, 4 weeks’ shipment, 4 weeks in UK, 4 weeks from CUK’s warehouse to M&S; minimum 20 weeks, ideally 6 months. Foam should stay white at the point of sale, i.e. when displayed on the retailer’s shelves. 75.The Plaintiff denied the existence of the trade practice. 76.Even if I were to overlook the difference between the versions of Mr Lester Wong and Mr Chalkley, the Defendant can hardly establish its case. The trade practice was never pleaded. There was no prior discussion on the standard for foam cups. On what basis could it be said that the Plaintiff would have known and accepted such a trade practice? When the General Manager of the Defendant (Anita) received complaint from CUK, her first response was whether the foam chosen was non-stay-white. She made no mention of the trade practice, probably because she was not clear about it. But why would Mr Lester Wong’s emails miss it altogether? There was no evidence on discussion of the production period (at the Plaintiff and Defendant’s factory respectively) and the time needed to deliver from the Defendant’s factory to UK. Foam cups varied in components and hence the price. Moreover, once the foam cups left the Plaintiff’s factory, there were so many variables beyond its control that the Plaintiff could not have tacitly agreed to the trade practice. The fact that the Plaintiff knew that the end-buyer was M&S (a famous brand in Europe of the medium and upper market) could not imply knowledge that the Plaintiff should not be expected to have. 77.I am not satisfied that there was a trade practice or that the Plaintiff should be aware of it. An officious bystander would neither say that “of course the foam must stay white for 20 weeks”; nor would he readily accept the computation of the 20 weeks. The Defendant has failed to establish liability on the part of the Plaintiff on the foam cup issue. What Was the Loss of the Defendant and Were the Steps Taken by It in Mitigation Reasonable? 78.Mr Poon submits that there was no direct evidence from M&S on the exact reasons for their rejection of certain goods and whether such rejection actually related to the goods manufactured by the plaintiff. The Defendant should but failed to produce some documents from M&S to support its claim. 79.With respect, the direct customer of the Defendant was CUK, not M&S. CUK has given evidence through Mr Schofield on why the Plaintiff’s goods were rejected and on CUK’s claim against the Defendant arising from M&S’ rejection of the goods. Mr Poon’s cross-examination of Mr Schofield has not challenged the genuineness of CUK or M&S’ claim. 80.All the goods of this Style had to be inspected by CUK. The Plaintiff delivered 51,000 bras and 23,473 were returned. As they were late, so the air-freight costs fell on the Defendant. 81.The heads of counterclaim for Style 3131 & 3132 are:
82.With regard to item (i), labour was required to sort out acceptable from non-acceptable goods. This item is recoverable. 83.With regard to item (ii), the Defendant expended a further sum of HK$2,516.06 for additional modal fabrics to produce 1,780 pairs of outer shells to replace the rejected ones. The Plaintiff is liable as it arose out of its defective production. 84.With regard to (iii), up to late October 2007, CUK rejected a total of 4,103 bras (not mould shell fabrics) at the Defendant’s factory that would not stand a chance of being accepted by M&S. 85.On discovering any alleged defects, the buyer has the duty to see that the defective goods are not sent to his customers or sub-buyer to avoid further or consequential losses which he could have avoided by taking precautionary steps.
86.Instead of rejecting defective mould shell fabric, the Defendant had accepted the goods by processing them into bras. The Plaintiff is not liable for this head of damages. 87.With regard to (iv), the inability of the Plaintiff to produce goods up to standard had caused suspension in production. There was prolonged delay by the time the bras were ready for delivery to CUK. From the table of comparison of the contractual and actual delivery dates set out in Mr Lester Wong’s witness statement, the delay was from 2 days to over a month but mostly 2 – 4 weeks. 88.Mr Poon submits that there had never been any firm agreement on any delivery deadlines. That would not have been practical when the parties took time to agree on shipment samples, etc. With respect, that was never the case of the Plaintiff and it is not open to counsel to make this submission. The contracts for each Style had indisputably been formed. The dates for delivery had been laid down in the respective purchase orders and were not varied. 89.One may argue that the Defendant should have sought alternative moulders to replace the Plaintiff earlier. That was in fact what the Defendant intended after the Factory Visit. However, as stated before, disengaging the Plaintiff took time. I am satisfied that whilst trying to work out solutions with the Plaintiff, the Defendant had reasonably taken steps to seek assistance from Tensuel. 90.Mr Poon submits that the Defendant has not provided documentary evidence to show the specifications, paper patterns and fabric materials allegedly provided to Tensuel, and the temperature and dwell time applied by Tensuel. I cannot see why the Defendant needed to change the specifications or paper patterns given their insistence that the Plaintiff should have complied with those in the first place. Nor can I see why the Defendant would waste the cut pieces retrieved from the Plaintiff and gave new cut pieces to Tensuel instead. In any case, the Defendant’s evidence on those aspects had not been challenged in cross-examination. Further, since Tensuel had worked up to standard, I do not see why the Defendant needed to probe into what temperature and dwell time they used. 91.As the delay arose out of the faulty moulding on the part of the Plaintiff, and the Defendant had taken reasonable steps to engage another moulder, the consequential air freight costs are recoverable from the Plaintiff. 92.Delivery of goods by air to make up the loss of time was, in principle, an acceptable step in mitigation, even if it might seem disproportionate when compared to the unit price for moulding (about HK$0.07 to HK$0.08 per piece) and the foam cups (about HK$6.60 to HK$8.00 per piece). 93.With regard to (v), the Plaintiff is not responsible for the colour problem of foam cups and this item is not recoverable. 94.Even if I am wrong, I am not satisfied that the Defendant had taken reasonable steps regarding resale of the rejected end-products. Only a small quantity of end-products were re-sold. What has happened to the rest and what was their value? 95.It is true that the end-products were not in the hands of the Defendant but CUK or M&S. There is no evidence that the Defendant had its own outlets in UK to re-sell the rejected goods. It would be costly for those goods to be shipped back to the Defendant for disposal. A buyer in the position of the Defendant is thus not expected to personally take steps to re-sell but may leave it to his end-buyer to do so. However, it should not simply accept whatever unreasonable terms of compensation imposed by its end-buyer. I consider it the duty of the Defendant to ascertain if CUK had taken reasonable steps to mitigate and ask for proof, just as when it faced a legal claim from CUK. Provided the Defendant acted reasonably (e.g. based on the documentary proof from CUK) and in good faith (e.g. not in collusion with CUK to cheat the Plaintiff), the fact that it had settled with CUK would not prevent the Defendant from being indemnified by the Plaintiff if the Court finds against the Plaintiff on liability. 96.There is no evidence that the Defendant had done much in relation to the disposal of the defective goods. I accept that removing the labels of M&S from the end-products before re-sale would entail costs and manpower. There is no evidence that the Defendant had even attempted to ask CUK what it had done with the balance of the rejected goods or explored alternatives for its disposal. I am not satisfied that the Defendant had taken reasonable steps in mitigation insofar as the re-sale was concerned. STYLE 3134 97.The problem was with foam cups only. According to Mr Lester Wong’s witness statement, foam cups were delivered by the Plaintiff to the Defendant in end May/July. The finished bras that had incorporated the foam cups were delivered by the Defendant to CUK from 10 August to 28 September 2007. In October CUK informed the Defendant that a considerable amount of foam cup shells started to turn yellow and some even in less than 2 weeks’ time after being placed at the rack of M&S’ retail outlets. So the foam in the bras turned yellow in less than 20 weeks. Out of 31,009 pieces, 20,654 pieces were rejected by M&S. CUK removed the labels attached to the returned goods and managed to sell only 5,636 pieces to no-frill retailers. The loss suffered by CUK which it claimed from the Defendant as a result was GBP95,023.00. 98.For the same reasons given in relation to Style 3131 & 3132 on yellowness of foam cups, the Plaintiff is not responsible for the loss. STYLE 6732 99.This Style concerned female underwear body suits and the Plaintiff was to produce the cup shells. The cup shells consisted of 2 layers – an inner layer made of foam and a thinner outer shell made of, amongst others, modal fabric. The foam inner shell was not a newly developed product for the Plaintiff but the outer shell was. The cup shells must be able to fit perfectly with the plastic heads of the corresponding size and shape. 100.The bulk products were such that the depth of the apex point was about 5 mm deeper than the Defendant’s requirement and could not fit the plastic heads (“the apex problem”). The Defendant was unable to align the apex of the foam cup and the outer shell. The problem would cause the fabric cups to collapse or foam bubbles would form on the moulded cup surface. The Defendant had to amend its instructions. 101.6,904 out of 10,431 pairs were returned to the Plaintiff for re-processing with new fabrics purchased by the Defendant. The Plaintiff informed the Defendant shortly afterwards that they could not rectify the apex problem since it was too serious and, more importantly, the outer shells would turn yellow after such process. 102.On 30 July 2007, a new set of samples and plastic heads re-developed by the Plaintiff were approved by the Defendant. However, the new bulk products still suffered from the apex problem. No solution could be found despite a meeting between the parties. The Defendant therefore engaged a time-consuming and labour intensive method to pin the outer and inner shells by hand so as to fix and align the apex before sewing the outer and inner shells by machine. A total of 8,780 pieces were shipped to UK. After the 1st lot was shipped out the Defendant cancelled the remaining orders. 103.The apex problem was solved before delivery to CUK. The problem of yellowing of foam cups emerged following a thorough inspection by M&S in October 2007. 104.Mr Eric Wong suggested that the problem was caused by design, shrinkage of the fabrics or inability of the Defendant to control its processing. He explained that in dyeing, there was a process to stabilize the fabric. If the time spent was not enough or the temperature was not suitable, this would cause a change in the quality of the fabric after it became the end product. This was refuted by Mr Lester Wong who said that the reference to shrinkage was to retraction of the modal fabric (回縮), not shrinkage after washing (縮水). After a piece of fabric was moulded, there had to be a cooling off period when the fabric would retract. After the cooling off period, the cup shape would be fixed and it had to fit the approved plastic heads. 105.In my view, Mr Eric Wong’s explanation was untenable. There was no retraction in the samples, or in goods of other colours except white ones. The fact was that the Plaintiff’s goods could not fit the plastic heads in the first and second round of bulk production even after the amendment. The goods failed to correspond to the sample, were unmerchantable and were not fit for the Defendant’s purpose. I accept Mr Lester Wong’s evidence that if the Plaintiff had followed specification, there would have been no need to amend. If it had followed the amendment, there would have been no need to use the labour-intensive method of sewing. The responsibility clearly lied with the Plaintiff and not the sewing section of the Defendant. 106.For the same reasons given under Style 3131 & 3132, the Defendant had accepted the Plaintiff’s goods within the meaning of section 37(1) SOGO. It lost the right of rejection of the goods but could claim for damages arising before the acceptance. Insofar as the problem was with the foam cups, the Plaintiff was not liable for the reasons given under Style 3131 & 3132. 107.The Defendant’s heads of counterclaims are:
108.With regard to item (i), the Defendant rejected defective goods and purchased extra fabric for 6,000 pairs of outer shells for the Plaintiff to mould afresh. This was recoverable. 109.With regard to (ii), in using the labour intensive method, a worker had to use 61.49 minutes to produce one piece of Style 6732 body suit, compared to 26.15 minutes under normal circumstances. I accept that the Defendant had no alternative, since it had given the Plaintiff one chance to re-mould already. The labour-intensive method was a reasonable step in mitigation in the pressure of time and it achieved the intended result. The costs are recoverable. 110.With regard to (iii), despite attempts to salvage the situation, 1,999 pairs of outer shells could not be sewn and the time and expenses incurred were wasted. The wastage was the costs for producing the body suits. This was recoverable. 111.With regard to (iv), the Defendant only delivered 8,780 body suits to the CUK, of which 2,500 were sent by air at the request of CUK because of the delay. Air-freight costs were recoverable given that the delay arose out of the defective workmanship of the Plaintiff. 112.With regard to items (v) and (vi), the Plaintiff was not liable for loss arising from yellowing of foam cups. Style 6836 and 6840 113.The bras for these 2 Styles were for a European brand and not M&S. They consisted of an inner shell made of foam covered by a thinner outer shell made of Nylon and Spandex. These 2 Styles formed 6 out of 31 sizes and only those 6 sizes had problem in bulk production. 114.“Bullet type” mould heads, as the name implies, were like a bullet. Another kind of mould head was called “human-type” or “shape” mould heads specially cast for a specific design or for moulding a particular kind of material. Less material would be required for moulding by way of a bullet-type mould head. However, this type of mould head would not be appropriate for materials which did not have good stretching capacity. For those materials, use of the bullet type mould head in the moulding process would cause serious shrinkage. 115.For Style 6836 and 6840 cup shells, use of bullet-type mould heads would save around 30% materials compared with using human-type. 116.Many of the outer shells delivered to the Defendant could not fit with the relevant plastic heads. The defective products could not be applied in the production of Style 6836 and 6840 bras. Hence the whole production process had to be stopped by the Defendant. The Plaintiff said that it was attempting to find a solution but at the same time said that the problem could only be solved by applying the human-type mould heads given that the stretch of the fabric was not good. 117.Production subsequently resumed. However, on 19 July 2007, the Plaintiff informed the Defendant that it was unable to mould the 6 sizes in issue. 118.On 20 July 2007, the Defendant engaged Sun Po to develop the cup shells of the 6 sizes on an urgent basis. The unprocessed fabrics for Style 6836 and 6840 were transferred to Sun Po. By 28 July 2007, all the samples and plastic heads of the 6 sizes were approved by the Defendant. The Defendant placed orders with Sun Po but the latter had other engagement and could not process the Defendant’s orders in one go immediately. The Defendant therefore suffered delay in the production for at least 30 – 40 days. 119.The contract was concluded on the basis of using bullet type mould heads and the Plaintiff’s sample was approved accordingly. It was no defence for the Plaintiff to say that at the pre-contract stage, Mr Eric Wong had already advised on using the human-type mould head. 120.It was also no defence for Mr Eric Wong to say that the sample section had difficulty, all the more so for the ordinary workers. It was a technical problem that the Plaintiff as the moulder had to solve. The need to process within a tight time frame was also no defence. 121.Moreover, as agreed by Mr Eric Wong in cross-examination, only 6 sizes had problem. If there was problem with the fabrics, it would have affected all sizes. Sun Po did well with the same cut pieces. As Mr Lester Wong testified, the Plaintiff was able to control the smaller sizes but not these 6 larger sizes. 122.I find that the Plaintiff had failed to manufacture the 6 sizes in accordance with the samples. Those that it had manufactured were not merchantable or fit for the Defendant’s purpose. 123.The Defendant counterclaims for:
124.With regard to Item (i) there was no evidence of what the labour, administrative and other costs were for. This item is not recoverable. 125.Delay arose out of the Plaintiff’s inability to mould in accordance with the approved mould heads. Item (ii) is recoverable. 126.Item (iii) was said to be agreed damages for delay claimed by the customer and were paid by trading set-off. The basis for this claim and the computation of damages were unclear. This item is not recoverable. STYLE 2749 127.Development samples had been approved for this Style but not the shipment samples. The issue was whether or not there had been a contract. 128.In mid August 2007, the Plaintiff informed the Defendant about 2 problems: (i) the fabrics turned yellow easily; and (ii) there were different degrees of shrinkage in the moulded fabrics and they could not fit in with the approved plastic heads (“the shrinkage problem”). The Plaintiff did not discover the shrinkage at the development stage because the cut pieces were in square cut but those for the bulk production stage were in cut shapes. The Defendant would not accept that the cause lied with the fabrics which had been tested. 129.After the Factory Visit in August 2007, the Defendant discussed with the Plaintiff and Mr Schofield of CUK to ascertain the cause of the shrinkage problem and the solution. Steaming the fabrics before moulding (at the request of the Defendant) made the shrinkage more unpredictable. The Plaintiff had no clue to the problem. They sent back 300 pairs of cups moulded by them marked with details on measurement but without steaming to the Defendant for study. 130.In the meantime, another moulder called Tensuel was engaged by the Defendant to develop cup shells. Tensuel moulded a small batch of the same fabrics which were sent to the Plaintiff for trial moulding. The result was that the shrinkage was within acceptable range. 131.The Plaintiff did not take any further action after 21 August to attempt to rectify the shrinkage problem. Its response to the discussion was “lukewarm” according to Mr Chalkley. 132.On 29 August 2007, the Plaintiff requested the Defendant to take away all the fabrics for the cup shells since the Plaintiff had no available space for them. The Plaintiff claimed that they waited for advice from the Defendant which never came. 133.On 31 August, the Defendant removed the cut pieces for bulk production from the Plaintiff’s factory and transferred them to Tensuel directly. Mr Poon queried whether or not they were the same cuts pieces that were delivered to Tensuel. I cannot see why the Defendant would have wasted those cut pieces and delivered some other ones to Tensuel instead. Tensuel developed the samples and plastic heads and fulfilled all the orders placed by the Defendant in about 1 ½ months’ time. 134.The Defendant’s case is that the Plaintiff was in breach and had caused delay of a whole month. At the request of CUK, the Defendant delivered 51,100 pieces of Style 2749 bras to CUK by air. The loss was as follows:
135.The Plaintiff alleged that no contract had been formed for Style 2749 since the shipment sample had not been approved. This was consistent with its stance in Mr Eric Wong’s email dated 18 October 2007 when it faced a claim for air freight costs:
136.Although cut pieces had been delivered to the Plaintiff, no development samples had ever been approved and so bulk production could not start. I agree with the Plaintiff that no contract had yet been formed. In any case, even if there was a contract, I am not satisfied that the Plaintiff had unequivocally refused to perform its obligation. As confirmed by Mr Schofield, the Plaintiff had set aside moulding equipment for Style 2749 and discussed in detail with Mr Schofield as to the shrinkage problem. The Plaintiff did have the intention to perform although they could not find out the cause of the problem. By 27 August, it was still discussing the problem with the Defendant by email. The Plaintiff’s request for removal of the cut pieces was not a refusal to perform but due to lack of space. When the Defendant removed the fabrics, it did not do so under protest or reservation of rights. I am not satisfied that there was a contract or unequivocal refusal to perform so as to make the Plaintiff liable for the Defendant’s loss. 137.For completeness’ sake, if I am wrong on my finding, the loss claimed for labour and air-freight costs would be recoverable.
138.Mr Szeto conceded that there was no evidence in support of the assertions in the witness statements and the counterclaim under this head is not pursued. The same should apply to the so called “general compensation to M&S” which CUK has paid and which it seeks reimbursement from the Defendant. FINDINGS AND CONCLUSION 139.The yellowing of the mould shell fabric, the apex problem, the failure to have the moulded cups fit the weaving of bras were caused by the Plaintiff’s defective work. Those goods did not correspond with samples, were unmerchantable and not fit for the Defendant’s purpose. There was delay arising out of the Plaintiff’s defective work. The Defendant had taken reasonable steps to mitigate the loss by instructing alternative moulders, rejecting part of the goods, requiring moulding of replacement items, salvaging goods by using labour-intensive method and delivery of goods by air to make up the loss of time . For items it had accepted and produced into end products, it cannot recover damages from the Plaintiff for rejection of end products. 140.The foam cups contained a latent defect but it was not established that the trade practice for foam to stay white for 20 weeks governed the contracts between the parties. 141.In respect of Style 2749, no contract was formed. In any case, it has not been shown that the Plaintiff had unequivocally refused to manufacture and hence in breach of the contract. 142.I summarize the loss of the Defendant as follows:
143.I order as follows:
COSTS 144.The claim was virtually non-contested. Most of the hearing time was directed towards the counterclaim. The Defendant has won on most of the Styles except Style 2749. I make an order nisi that 75% of the overall costs of the action be to the Defendant on the High Court scale to be taxed if not agreed. 145.I draw to the taxing master’s attention that there was much duplication in contents in the witness statements of Mr Chalkley, Mr Schofield and Mr Lester Wong Wai Hung. It would have been much better had there been just one main witness statement whilst the other 2 witnesses adopted those parts relating to them and added facts which were within their own knowledge. In addition, many of the bundles of documents have never been referred to at the trial. 146.I thank counsel for their thorough preparation and able assistance.
Mr Jackson Poon instructed by Messrs James P.Y. Lam & Co. for the Plaintiff Mr Patrick Szeto instructed by Messrs Tsang, Chan & Woo for the Defendant |
Further hearings and rulings under HCA 493/2008