Longsmart Corporation Ltd v. Seatoman Holdings Ltd
|
DCCJ 270/2011 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO 270 OF 2011 ----------------------------
----------------------------
---------------------------- JUDGMENT ---------------------------- 1.The plaintiff, Longsmart Corporation Limited (“Longsmart”), a garment manufacturer, claims against the defendant, Seatoman Holdings Limited (“Seatoman”), a garment trader, for the sum of US$19,886.82. The sum claimed is the outstanding balance for services rendered on manufacturing garments ordered by the defendant under invoice numbers: LS-10/11-26 to LS-10/11-34 in the total sum of US$34,756.71 (“the invoiced total sum”) of which the defendant settled only US$16,088.94 on 27 October 2010. Together with the deduction of US$1,219.05 shipping costs, the sum outstanding remains at US$19,886.82 (“the outstanding sum”). 2.The defendant denies it is liable to pay the said outstanding sum because it claims the plaintiff had failed to meet the agreed delivery date of 15 August 2010 for over 20 days when the garments were delivered between 8 September and 27 September 2010. The defendant counterclaims against the plaintiff for damages suffered due to the consequential delay in delivery to its customers consisting of the customers’ deduction of US$10,278.06 and air freight charges and expenses of US$30,772.92. The plaintiff’s case 3.The plaintiff’s witness Madam Yu Lai Nar, Elisa (“Madam Yu”) was a shareholder and director of the plaintiff, Longsmart, until her retirement in June 2011. She was in charge of the operation of the plaintiff, while her husband Mr Leung Sui Chuen (“Mr Leung”) was in charge of the operation of Longsmart’s garment factory Wo Fung Garment Factory in Dongguan (“the factory”). 4.Longsmart had been doing business with Seatoman since 2007. Because of their previous good working relationship, when Seatoman asked Longsmart for assistance with garment productions, Madam Yu would accommodate Seatoman’s requests. 5.In early April 2010, Mr Jeb Fong Hon Bun (“Mr Fung”), who was the merchandising manager of Seatoman, contacted Madam Yu and informed her Seatoman would be placing certain garment orders with Longsmart for its overseas customers on a ‘false FOB’ basis i.e. Seatoman would supply the fabrics it would source in Mainland China and deliver them to Longsmart for the garments to be manufactured. The parties agreed on the price, and Seatoman sent seven purchase orders Nos SH-10-3120 to SH-10-3126 to Longsmart (“the 7 POs”) on 13 April 2010. The garments ordered were fleece knitted jackets in three styles known as ‘Levington’, ‘Columbia’ and ‘Hysteric’ (“the garments”). 6.Madam Yu said she had refused to sign the 7 POs and returned them to Seatoman because the delivery of the finished garments depended on the date of delivery of the fabrics and trimmings. As it would take the factory two months to manufacture the garments after delivery of the fabrics to the factory, she was careful and would not commit to a shipping date when the date of delivery of fabrics was uncertain. If she signed and returned the 7 POs to Seatoman, they would be the official acceptance of the terms and become binding on Longsmart. She said it was well understood by Seatoman that early delivery of fabrics and trimmings would ensure early shipment of the garments. She also claimed that Mr Fong well knew and understood Longsmart had refused to sign and return the 7 POs to confirm its acceptance. 7.She admitted, however, that Longsmart had informed the factory to allocate production lines for the 7 POs in April 2010. When she discovered Seatoman failed to deliver the fabrics and materials to the factory in Dongguan on or about 10 May 2010, she instructed her staff to contact Seatoman’s Dongguan office to chase up the fabric delivery. On 12 May 2010, Longsmart sent an email to Seatoman informing it that if the fabrics and materials were not delivered to the factory by 14 May 2010, Seatoman would lose its turn and the production lines allocated to the 7 POs would be used by other orders. On 13 May 2010, Madam Yu sent an email reminder to Seatoman stating again that she would not guarantee the shipment of the garment due to the delay in delivery of materials. 8.It was not until 16 May 2010 that Seatoman’s fabrics and materials began to arrive at the factory, Mr Leung informed Madam Yu that Seatoman’s requested completion date of 10 June 2010 could no longer be met due to the late delivery of fabrics. Madam Yu then told Seatoman’s Dongguan office staff Perry, Longsmart would not be manufacturing the garments for Seatoman because of the late fabric delivery. 9.In mid-June 2010, she received a telephone call from Mr Fong offering the price of US$34,756.71 to Longsmart to manufacture the garments. He further informed Madam Yu that the shipping terms would be amended to CMT (cut, make and trim) and the price would be adjusted accordingly. The shipping terms CMT means that Seatoman would supply all materials, fabrics and trimmings to Longsmart for the production of the garments. The shipping date was postponed to 25 September 2010. 10.Madam Yu said she told Mr Fong she would not accept the orders but Mr Fong told her Seatoman could not find any factory in China to manufacture the 7 POs. To assist Mr Fong, she agreed she would find a Mainland factory for Seatoman to take up the orders. She later found and introduced to Seatoman a factory called ‘Hang San Wai’ （恆聖威）which Seatoman accepted. She said she had out of previous good relationship also arranged for Mr Leung to go with Seatoman’s office staff to discuss the orders with Hang San Wai at the latter’s factory (“Hang San Wai”). At Mr Fong’s request, Madam Yu agreed to settle the accounts with Hang San Wai on the garments ordered on Seatoman’s behalf because Hang San Wai refused to give credit to a new customer like Seatoman. 11.Further at Seatoman’s request, Longsmart agreed to arrange the transport of the completed garments to a warehouse Seatoman designated in Hong Kong on Seatoman’s promise to reimburse Longsmart the transport charges, it amounted to US$1,219.05. Madam Yu denied that Longsmart had ever received any revised POs with the new shipping terms. Longsmart had relied on the emails exchanged and telephone confirmation of the revised price in the production of the garments. 12.Madam Yu maintained that the date of delivery and other terms claimed by Seatoman stated in the original 7 POs do not apply because Longsmart had never accepted them. She had also told Seatoman that due to the late delivery of materials and fabrics, Longsmart was not able to manufacture the garments for Seatoman. She further claimed that Seatoman well knew and accepted her position because it was Seatoman’s fabric supplier that failed to deliver the fabrics on time for the garment production. She had only agreed to assist Seatoman to find a local factory to manufacture the garments because Mr Fong had pleaded with her. Later, as some of the fabrics were only delivered to the factory on 22 June 2010, she told Mr Fong that it would not be possible to meet the shipping date of 25 September 2010. Mr Fong urged Madam Yu to try her best and Seatoman would be airfreighting the garments to its customers in any event. 13.It is Longsmart’s contention that it had agreed out of friendship and good will to supervise Hang San Wai’s production for Seatoman, that was why, when Longsmart discovered Hang San Wai’s production was late, it agreed to help Seatoman out by taking over part of the orders to its factory to produce and eventually did deliver all the garments to Seatoman’s designated warehouse in Hong Kong in several shipments, namely, on 7, 18 and 25 September 2010. 14.It is therefore Longsmart’s case that Seatoman should pay the balance outstanding at US$19,886.83 with the transport charges of US$1,219.05. It further denies it is liable to compensate Seatoman on its counterclaim. The defence case 15.It is the evidence of the defendant’s former merchandising manager, Mr Fong, that he had first discussed with Madam Yu after the Chinese New Year in 2010 the orders of one of its overseas customers DVS Shoe Company Inc DBA Matix Clothing Company (“the Matix orders”). The discussion resulted in Longsmart accepting Seatoman’s prices on the Matix orders based on ‘false FOB’ terms, i.e. Seatoman would supply the fabrics the cost of which would be deducted from the final invoices of Longsmart. Mr Fong further claimed that Madam Yu had agreed to the delivery date of 19 June 2010. He told her the detail terms of the Matix orders would be stated in the purchase orders to be sent to Longsmart shortly. The 7 POs were later sent to Longsmart on 13 April 2010. 16.Mr Fong alleged that the shipment date of the garments under the purchase orders SH-10-3120-3121 and 3125 was 10 June 2010, for SH-10-3124 was 25 June 2010, for the SH-10-3122 and 3123 was 9 July 2010. 17.It was an expressed term of the agreement stated in the said 7 POs that delay in delivery of the garments for over 20 days would result in:-
18.Mr Fong disagreed that Seatoman’s agreement with Longsmart was subject to prompt delivery of fabrics and materials to Longsmart’s factory or that Longsmart’s acceptance of the agreement was conditional or that the shipping date stated on the 7 POs were not applicable. 19.Mr Fong admitted that after the fabrics were delivered to Longsmart’s factory in Dongguan on 16 May 2010, some of the fabrics were found to be stained. He admitted that Seatoman had to amend the garment patterns in order that the unstained part of the fabrics could be used to manufacture the garments. The amended patterns were delivered to Longsmart on 24 May 2010. 20.Due to the delayed delivery of the fabrics and the amendment to the patterns, Seatoman agreed to Longsmart’s request to postpone the shipment of the garments to 15 July 2010. 21.Mr Fong said he was told by Madam Yu on 4 June 2010 that Longsmart would not be able to meet the shipment date of 15 July 2010 because:-
22.Mr Fong admitted Madam Yu had suggested to him that Seatoman should find other factories to take up the purchase orders, but the suggestion was immediately rejected by Seatoman. Madam Yu then offered to contract out part of the purchase orders to another factory and told Mr Fong the expected shipment date would be 15 August 2010. Mr Fong claimed he told Madam Yu that postponing the delivery date may mean the garments would have to be sent by airfreight to Seatoman’s customers. He accepted Madam Yu’s proposal to contract out part of the purchase orders provided Longsmart could ensure the quality of the garments and delivery by the agreed postponed shipping date. 23.When Madam Yu told him Longsmart would not bear the airfreight charges, Mr Fong explained to her that so long as the garments were shipped by 15 August 2010, Longsmart would not be required to pay the airfreight charges. On the other hand, if the delay of delivery was over 11 days, Longsmart would be responsible for 100% of the airfreight charges as stated in the purchase orders. 24.Mr Fong claimed he delivered the 7 revised purchase orders to Longsmart on 22 June 2010; they bore the revised shipping date of the garments of 15 August 2010 with the exception of PO No SH-10-3122 the shipping date of which was postponed to 9 July 2010. The shipping terms were also amended to CMT and unit prices were adjusted accordingly. 25.In or about mid-July 2010, Madam Yu requested Mr Fong to agree to a postponement of the shipping date for PO No SH-10-3122 to 15 August 2010 because the garments could not be manufactured on time. Mr Fong agreed to the proposal. 26.Mr Fong contended that Longsmart could only deliver the garments ordered in September 2010, therefore, the delivery of all the garments orders exceeded 20 days of the agreed date of 15 August 2010. As a result, Seatoman had to airfreight all the garments to its customers. 27.It is Seatoman’s case that the dates of delivery by Longsmart and the airfreight charges incurred were as follows:-
28.Seatoman paid to Longsmart the sum of US$16,088.94 in part settlement of Longsmart’s invoiced amount and full settlement of the transport/shipment costs of US$1,219.05. 29.Seatoman maintained that Longsmart is liable to indemnify it for the airfreight charges incurred with a 20% discount on Longsmart’s invoice charges due to the delay of delivery of over 20 days from 15 August 2010. Furthermore, its overseas customers deducted 10% from the price of its invoices (except PO No SH-10-09-032) because of the late delivery. The deductions were as follows:-
30.Mr Fong disagreed that in Seatoman’s past dealings with Longsmart, all its purchase orders have to be signed and stamped by Seatoman and Longsmart before they became binding. He claimed signing the purchase orders was not a set practice of the two companies. He also said the effectiveness of the purchase orders was not affected even if signatures were absent in defence of the plaintiff’s allegation that the revised 22 June 2010 purchase orders were not binding because they were not signed by Seatoman or Longsmart. The issues 31.Miss Ho, counsel for the defence, raised the following issues in dispute:-
Discussion (i) Whether all the terms in the purchase orders issued on 13 April 2010 as revised on 22 June 2010 formed part of the agreement between Seatoman and Longsmart with respect to Longsmart’s supply of garments to Seatoman? (a) The binding effect of the 7 purchase orders and the 7 revised purchase orders 32.It is Longsmart’s claim that the 13 April 2010 POs were never signed and returned by Longsmart, therefore, the terms on the POs are not binding on Longsmart. As to the alleged revised 7 purchase order (“the revised POs”) of 22 June 2010, they were never sent to Longsmart. Besides, these revised POs were not even signed by Seatoman; Longsmart claimed they were only generated after the parties’ dispute began. 33.Madam Yu pointed out that the shipping terms of the 7 POs were ‘false FOB Hong Kong’, different from previous purchase orders from Seatoman of ‘FOB Hong Kong’. At the time, she had warned Mr Fong the fabrics must be delivered on time for the factory production. She had refused to sign the 7 POs after she received the 7 POs on 13 April 2010 because she did not know if the fabrics would be delivered to the factory on time to meet the shipping dates. She asserted that based on previous practice, all purchase orders placed with Longsmart have to be signed to be effective and binding. She further claimed Longsmart had never received the revised POs; furthermore, none of the revised POs produced by Seatoman in this action were signed by either Seatoman or Longsmart. She produced over 96 purchase orders placed by Seatoman on Longsmart between 2007 and 2010 signed by both parties in support of her evidence. 34.Mr Fong, on the other hand, claimed that purchase orders need not be signed to be effective. He produced a number of past purchase orders Seatoman had placed with Longsmart that did not bear Longsmart’s signatures. 35.Madam Yu’s reply to the unsigned purchase orders produced by Seatoman was, all but 12 of these were signed and returned to Seatoman. Of the 12 that were not signed, one was not signed because Longsmart did not agree with the prices, after negotiations, Longsmart orally agreed to manufacture the order for Seatoman. Of the remaining eleven, 10 were issued on 6 August 2010 and the last one on 31 August 2010. Again she had disagreed with Seatoman’s prices on the purchase orders as they were different from the prices orally agreed by the parties. On Seatoman’s admission of the errors in the purchase orders, Longsmart eventually agreed to produce the garments for Seatoman. 36.After careful consideration of the 97 purchaser orders placed by Seatoman between 2007 to 2010, I notice that it was stated as a requirement, particularly in the earlier purchase orders, that the purchase orders have to be signed with the company chop of Longsmart and returned to Seatoman within one week of the contract date to confirm acceptance of the contract. This shows the importance Seatoman placed on the signing of the purchase orders. It is an important procedure for both parties because under the remarks column of the purchase orders, a penalty on the manufacturer was imposed in the event delivery of the garments was delayed. 37.On the aforesaid basis, I reject Mr Fong’s claim that the POs did not need to be signed by the parties. I accept Madam Yu’s explanation that she did not sign the 13 April 2010 purchase orders because she was not sure if Longsmart could meet the delivery deadline on ‘false FOB’ shipping terms. All of Longsmart’s previous dealings with Seatoman were on ‘FOB Hong Kong’ basis where the factory was responsible for providing the fabrics and other materials, therefore the production from fabrics to garments was within its control. Nevertheless, Longsmart did make arrangements with the factory for the production of Seatoman’s 7 purchase orders in mid-April 2010; this indicated Madam Yu did orally agree to manufacture the garments for Seatoman. That was why when the fabrics failed to arrive at the factory in the early part of May, there were numerous emails exchanged between the staff of the factory and Seatoman’s Dongguan office chasing after the fabrics for production to commence. These emails specifically informed Seatoman the factory would not accept the delivery of fabrics after 14 May 2010 and Seatoman’s orders would lose their turn in the factory’s production lines. 38.It is clear the delay in delivery of the fabrics was caused by the fabric manufacturer from whom Seatoman ordered the fabrics. For an unknown reason, the fabric supplier was only making delivery to the factory on 16 May 2010 according to the supplier’s notice of delivery (p 202 of bundle B). On top of the delay, it was discovered in June that some of the fabrics were stained and defective; as a result, Seatoman had to revise the garment patterns in order to maximize the use of the fabrics. Furthermore, some of the fabrics were not delivered until 22 June 2010. To make matters worse, it was discovered there were insufficient accessories (woven tapes) for one of the orders to complete production in September 2010 (see emails exchanged at p 8 to 19 of bundle B). (b) The terms of agreement between the parties 39.On the basis the 7 POs were revised orally by Seatoman’s Mr Fong due to the delay in delivery of fabrics to be supplied by Seatoman, the terms of the 7 POs can no longer be binding on Longsmart even if the terms in the original 7 POs had been accepted by Longsmart in April 2004 as claimed by Seatoman. 40.I agree with Longsmart’s claim that the terms stated on the 7 revised POs are not binding on the basis that they were not signed by either party. The email exchanges between the parties in the second half of May 2010 and early June clearly showed that there were discussions on the phone and/or meetings between the parties leading to the revision of shipping terms from ‘false FOB Hong Kong’ to ‘CMT’, followed by consequential adjustment of prices of the orders. Therefore, the parties have reached a new agreement. 41.I accept Madam Yu’s evidence that it was a practice of the parties to sign on the purchase order as confirmation of acceptance of the terms and conditions stated therein. On the basis that the 7 revised POs were not signed by any of the parties, the penalties under the remarks column of the POs are not binding on Longsmart even if they were issued and delivered to Longsmart’s office as alleged by Seatoman. However, based on the evidence of the previous unsigned POs produced by Mr Fong and Madam Yu’s explanation that they were unsigned because of disagreements over prices on the POs, and the fact that there was no evidence that revised POs were issued in the past, an inference can be drawn that Seatoman was not in the habit of issuing revised POs. It is a logical deduction that the revised POs were never sent to Longsmart. 42.Miss Ho, counsel for the defence, submitted that Longsmart had accepted Seatoman’s terms when it agreed to manufacture the garments ordered by Seatoman, therefore, it is bound by the terms of the contract by conduct. Though I accept Longsmart had agreed to be responsible for the manufacture of the garments, I do not agree with Miss Ho’s argument, based on the specific background of previous practice of the parties, when the 7 POs or revised POs were not signed by Longsmart to indicate acceptance of the terms, the penalty clauses under the remarks column cannot be binding on Longsmart. 43.There is a distinct difference between an oral agreement with no specified expressed terms of penalty in case of delay and a signed written agreement with an agreed penalty clause. Unless in the verbal or email communications between the parties, the penalty terms were specifically incorporated and accepted, they cannot be binding on Longsmart. As stated by the authors of Chitty on Contract vol 1 para 2-031 at p 190:-
44.I accept Madam Yu’s evidence that she had informed Mr Fong when the fabric delivery was delayed; she had refused to manufacture the garments for Seatoman. Her refusal to sign the 7 POs is a clear gesture of rejection of the penalty clause. I am satisfied the agreement to manufacture the garments was conditional on the early delivery of the fabrics; otherwise, it is unreasonable to expect the factory to manufacture the garments in time to meet the shipping dates. (ii) Whether the date of delivery of the garments was 15 August 2010 and whether Longsmart was in breach of the agreement in delivering the garments late? 45.It was the evidence of Madam Yu and Mr Leung, the manager of the factory, that only part of the fabrics supplied by Seatoman were delivered on 16 May 2010, Longsmart had by then already informed Seatoman it would not be manufacturing the garments under the 7 POs for Seatoman because the factory had other commitments to fulfill. It was clear to Seatoman the original shipping dates of the 7 POs of 10 June 2010, 25 June 2010 and 9 July 2010 were unrealistic. This is particularly so when the remaining fabrics were not delivered to the factory until the latter part of June 2010. 46.Madam Yu said that after she refused to manufacture the garments for Seatoman in mid-May, Seatoman made a fresh offer to Longsmart in mid-June 2010 for the garments to be manufactured on CMT terms and all fabrics, materials and trimmings would be supplied by Seatoman. She claimed that she had only agreed to find a factory willing to manufacture the garments for Seatoman. Because of their past business relationship, she agreed to help Seatoman to follow up the purchase orders, but she had made it clear that Longsmart would not be responsible for the airfreight charges which she said Mr Fong had told her Seatoman would have to resort to in any event. 47.By July 2010, it was clear Hang San Wai would not be able to produce all the garments in time, as a result, Longsmart agreed to manufacture some of the garments at the factory consisting of 3,000 pieces of ‘Colombia’, as well as inspecting and packing the ‘Hysteric’ jackets in September 2010. Madam Yu agreed to help because Hang San Wai was not an export factory, Seatoman’s orders could not be exported without the help of Longsmart’s factory. Furthermore, because of their good past business relationship, Longsmart agreed to pay Hang San Wai’s charges on Seatoman’s behalf on Seatoman’s promise of reimbursement to Longsmart. 48.Taking into account the revised agreement of the parties which included not only the new and postponed shipment dates and the change of shipping terms from ‘false FOB Hong Kong’ to ‘CMT’, but also contracting out the purchase orders to Hang San Wai, it is clear the parties were no longer relying on the original agreement under the 7 POs of 13 April 2010. The new terms agreed were the result of negotiations in May and June 2010 and subsequent agreed postponement of shipping dates based on Longsmart’s counter-offer. As a result, the terms and penalty in Seatoman’s 13 April 2010 purchase orders and the revised purchase orders would not apply (see also paragraphs 41 to 43 above). 49.Paragraph 2-032 of Chitty on Contracts vol 1 31st ed p 190-191 stated:-
50.Clearly, the agreement between the parties on the manufacture of the garments described in the 7 POs had been re-negotiated and the terms were completely revised. As Longsmart had informed Seatoman in June that the production of the garments would take 3 months, it was known to Seatoman that it was unlikely the garments could be shipped by 15 August 2010. I find there was no confirmed acceptance of the revised POs with the new shipping dates from Longsmart. On the other hand, there was clear documentary evidence that the agreed shipment date of the last batch of garments was 25 September 2010 which I am satisfied based on the evidence adduced, Longsmart had met. (iii) Whether Seatoman is entitled to counterclaim against Longsmart for loss arising from the delayed delivery and set it off against any alleged claim by Longsmart? 51.On the basis of the findings above, I reject the defendant’s counterclaim. The emails exchanged between the parties clearly showed there was no firm agreement or acceptance by Longsmart of the revised shipment date of 15 August 2010. There was no further documents that recorded Longsmart’s acceptance of the new shipment dates of the garments other than 25 September 2010, neither were there any emails in August and September 2010 from Seatoman to Longsmart putting Longsmart on notice of the loss arising due to late shipment by Longsmart. I accept Madam Yu had only agreed to help Seatoman out when Mr Fong asked for her assistance in getting Seatoman’s customers’ orders filled. She did the best she could under the circumstances when it was Seatoman who failed to deliver the fabrics on time in the first place. 52.I cannot find from the evidence adduced any commitment on Longsmart’s part to deliver the garments by 15 August 2010. On the shipping dates being postponed to 25 September 2010, I found Mr Fong did inform Madam Yu that the garments would be airfreight to the customers and Madam Yu had in no uncertain terms told him Longsmart would not be responsible for the airfreight charges in mid-June before she agreed to monitor the garment production at Hang San Wai for Seatoman, hence, it became a condition of the revised agreement. Conclusion 53.On the aforesaid basis, I am satisfied the plaintiff has proved its case against the defendant. I order the defendant to pay the outstanding balance sum of US$19,886.82 to the plaintiff. The defendant’s counterclaim is dismissed. Interests 54.Interest on the judgment sum at ½ judgment rate from date of writ to date of judgment, thereafter at judgment rate until full payment. Costs 55.Costs to follow the event, the plaintiff’s costs shall be borne by the defendant to be taxed if not agreed with certificate for counsel.
Mr Sammy WC Ho, instructed by YH Yeung and Associates, for the plaintiff Miss Sabrina Ho, instructed by Ng & Co, for the defendant | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Further hearings and rulings under DCCJ 270/2011