UNITED BUILDING MATERIAL (HONG KONG) LTD v. E MAN CONSTRUCTION CO LTD

HCCT 109/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 109 OF 1999

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J U D G M E N T

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I. Introduction

1.  E Man is a wholly owned subsidiary of Henderson Land Development Company Limited, a property developer.  By a bulk purchase contract dated 1 December 1997 United agreed to supply and E Man to buy 500,000 sq. m. of "Atlantic" brand glazed mosaic tiles at $31 per sq m.  The tiles were for use in various Henderson projects, including residential developments at Fan Ling and Queen's Road West.

2.  Pursuant to the contract, United delivered tiles to E Man on various dates between December 1997 and August 1999.  United says that some $3,000,000 plus remains outstanding for tiles which have been so delivered.  By this action United claims that unpaid amount.

3.  However, some of the green and brown mosaic tiles supplied by United became discoloured when, following installation at the Fan Ling and Queen's Road developments, they were washed with a commonly used cleaning agent known as KF-28.

4.  E Man therefore says that, in breach of the Contract, United delivered mosaic tiles which were not of merchantable quality.  E Man also alleges that the discoloured tiles failed to comply with the Japanese Industrial Standard (JIS) A 5209 which was expressly specified in the Contract.

5.  E Man counterclaims for the cost of hacking off and replacing the discoloured tiles from the facades of its Fan Ling and Queen's Road developments.

6.  The rectification process took time.  E Man further seeks the prolongation costs and lost profit attributable to resultant delays experienced on the Fan Ling and Queen's Road projects.

7.  E Man says that the amounts due on its counterclaim exceed the unpaid amounts claimed by United.

8.  United denies that it had any obligation under JIS A 5209 or the contract to deliver tiles which would not discolour upon being washed with KF-28.

9.  United says that E Man only has itself to blame for using an acidic solvent to clean glazed tiles.  United contends that acidic solutions (whether or not diluted) should not be used to clean glazed mosaic tiles.

10.  The issues before this Court are as follows:-

(a)	Did United have any obligation under the contract to deliver tiles which would not discolour upon the application of cleaning agents like KF-28?
(b)	Was United in breach of its obligations?
(c)	If United was in breach, what (if any) damages is E Man entitled to claim?
(d)	If E Man is entitled to damages, how (if at all) are United's claims for unpaid invoice amounts affected?

11.  United initially suggested that the contract constituted a sale by sample and that, sample colour tiles having been accepted by E Man, United was absolved from delivering tiles which were not colour fast.  But United abandoned that argument at the time of closing submission.

II. Discussion

A. Issue 1: United's obligation under the contract

12.  The contract stipulated that colour was "[t]o be specified and confirmed by the buyer at least four months before the deliveries of goods for each individual site".

13.  The contract further provided as follows in a "Remarks" section:-

"	1.	All goods supplied shall complied with the requirement of JIS A 5209 standard.
	2.	Production sample is to be submitted by seller for buyer's approval prior to effect shipment.
	3.	All goods delivered are to be confirmed to respective approved shipping sample, any deviation from the said sample will not be accepted by buyer.
	4.	In the event of non-delivery or short delivery of contracted cargoes within the specified period, the seller shall be responsible to indemnify the buyer all subsequent losses and damages arising therefrom.
	5.	All goods supplied are to be of first choice quality."

14.  On chemical resistance, the JIS A 5209 (1994 edition) standard for ceramic tiles specified by the contract provides as follows (in English translation):-

"	4.	Quality	The Quality of tiles and unit tiles shall be as follows.
		4.1	(7)	Chemical resistance  The chemical resistance for tiles shall be subject to an agreement between the parties concerned with delivery.
	....
	7.	Test method
		7.13	Chemical resistance test  After adequately washing the test specimen using, if necessary, neutral detergent or the like, dry it in an air dryer of 105°C or higher for about 3 h, and cool to ordinary temperature in a dessicator.  Next, immerse the test specimen in about 3% hydrochloric acid solution15 and in about 3% sodium hydroxide solution16, both kept at ordinary temperature, for about 8 h, and after washing with water, investigate if surface unusualness have taken place.
			In this case, rest the test specimen against the wall of a beaker so as to let immerse about half of it into the solution.
			The test specimen prepared by cutting a tile into 6 cm or over in length and 2 cm or over in width may be used instead.
			Notes
			(15)	Use the solution prepared by diluting one volume of guaranteed grade hydrochloric acid specified in JIS K 8180 with 10 volumes of water.
			(16)	Use the solution prepared by dissolving about 3 g of guaranteed grade sodium hydroxide specified in JIS K 8576 in 100 g of water.
	8.	Inspection	The inspection on tiles shall be as follows:
			(1)	For the determination of acceptance, the tiles shall be inspected on shape, dimensions, appearance and quality.
			(2)	The lot size for respective inspections shall be determined according to the specification of JIS Z 9001.  The sampling number and acceptance number in sampling inspection shall be as given in Table 11.
				Table 11.  Sample size and acceptance number
				Item   Sample size (n) Acceptance number (c) ....   .... .... Chemical resistance Acid resistance 3 --   Alkali resistance 3 -- ....   .... ....
				Remarks:  For the sampling inspection of quality assurance in the factory, the method specified in the appropriate Japanese Industrial Standard may be used other than the above."

15.  The "Atlantic" brand is one used by United for its tiles.  The tiles are made to United's order by a factory in China.  Before the contract was concluded United provided E Man with a catalogue for its "Atlantic" brand of tiles.

16.  That catalogue stated (among other things) as follows (in English translation):-

"	Work Methods
	The effect after laying the ceramic tiles is to a large extent affected by the work method.  Therefore, particular attention shall be paid to the work method.
	Laying Method
	I.	Method for laying external wall mosaic ceramic tiles
		1.	Preparation work
			i.	Prepare the foundation layer.
			ii.	Scrub the wall with wooden ceramic knife.
		2.	Work
			i.	General laying method for mosaic ceramic tiles: evenly spreading 3-5 mm sand cement mixture on the wall, then laying the tiles on the wall and pressing them firmly against the wall.
			ii.	Improved laying method for mosaic ceramic tiles: by using a special cover evenly spreading 3-5 mm of sand cement mixture on it, then remove special cover.  Tiles will be laid to the walls directly.
	II.	Method for dealing with stains
		1.	After the ceramic tiles are laid as far as possible within 12 hours, they shall be washed with a wet towel to clear away the cement left on the surface of the tiles.
		2.	Under normal usage, it can be cleaned with clean water if there is dirt/stain.  If it still does not work, 3-5% diluted hydrochloric acid, acetone, etc. may be used."

17.  The foregoing translation is of the text of a catalogue which dates from around 2000.  Ms. Lai Kan Chuk, who was a director of the United at the material time, said in evidence that copies of the catalogue which United used in 1997 were no longer available.  But Ms. Lai said that, as far as she could remember, United's 1997 catalogue contained a similar passage to that just quoted.

18.  It will be apparent that, read by itself, JIS A 5209 does not specify a particular level of chemical resistance for a given ceramic tile.  Paragraph 4.1(7) of the standard leaves the level of resistance to be agreed by the parties.

19.  Thus, although a test (immersion of a sample in a 3% HCl (hydrochloric acid) solution) is described, Table 11 of the standard does not say how the test results are to be interpreted. Nothing (for instance) is said about the number of samples which have to pass the chemical resistance test or what degree of discolouration will constitute failure in a given tile.

20.  Nonetheless, JIS A 5209 must not be read in isolation.  On the contrary, read as a whole (especially in its factual matrix), the contract plainly imposed an obligation on United to provide tiles which did not discolour upon application of a mild acidic cleaning solution.

21.  From the contract itself, it is evident that colour was an important consideration for the parties.  Thus, for instance, E Man expressly required that a particular colour had to be approved before the delivery of tiles of such colour in bulk.  Even then, the colour tiles to be delivered had to be "first choice quality", presumably meaning that they had to be the best of any batches of a given coloured tile produced by United's factory.

22.  In those circumstances, United could not fulfil its obligation under the contract by supplying tiles which would readily discolour upon a normal application of a common cleaning agent.  Tiles with colours which easily faded would negate the importance which the parties attached to colour.

23.  Under the Sale of Goods Ordinance (Cap.26) (SOGO) s. 16(2) the contract was subject to an implied condition that the goods supplied were of "merchantable quality".

24.  SOGO s.2(5) provides that goods are of "merchantable quality" if they are:-

"	(a)	as fit for the purpose or purposes for which goods of that kind are commonly bought;
	(b)	of such standard of appearance and finish;
	(c)	as free from defects (including minor defects);
	(d)	as safe; and,
	(e)	as durable,
	as it is reasonable to expect having regard to any description applied to the, the price (if relevant) and all the other relevant circumstances".

25.  In determining whether the tiles supplied by United were of merchantable quality, it must be a relevant circumstance that United's own catalogue states that "Atlantic" glazed ceramic tiles can be cleaned with 3%-5% HCl or acetone solution.  The catalogue having been provided to E Man by United, it would have been reasonable for E Man to assume that United was supplying (and E Man buying) glazed tiles which would not discolour upon being washed with a 3%-5% HCl solution or equivalent.

26.  If some brown or green tiles became discoloured upon being cleaned with such a chemical solution, those tiles could not be regarded as of merchantable quality.  Those tiles could not meet the implied condition of "merchantable quality" in SOGO s.16.

27.  The importance of tile colour under the contract is reinforced by another circumstance. 

28.  It was known to the parties at the time of contracting that the tiles were to be used for the external walls of a development.  This is in fact a common use for glazed tiles in Hong Kong.

29.  As external wall tiles, a buyer in E Man's position would reasonably expect that the tiles retained their colour when subjected to normal cleaning or at least cleaning in accordance with the tile catalogue.

30.  If tiles easily became discoloured upon cleaning, the appearance of the building on which the tiles were mounted would be marred.  Far from enhancing a building's aesthetics, the discoloured tiles would detract from its visual appeal.  The parties could hardly have had such a result in contemplation when agreeing to sell and buy the ceramic tiles in this case.

31.  E Man's evidence (which I accept) is that sub-contractors at Fan Ling and Queen's Road West applied KF-28 diluted at a ratio of 1 part KF-28 to 4 parts water. 

32.  According to E Man's expert Dr. Peter Yu (whose evidence I also accept) such a 20% dilution of KF-28 is less acidic than a 3% HCl solution.

33.  It follows from the foregoing discussion that E Man could reasonably expect that tiles complying with the contract would not discolour when washed with the diluted KF-28.

34.  United have suggested that Henderson's sub-contractors used undiluted KF-28 to clean the relevant tiles.  In support of this suggestion, United has relied on the witness statements of Mr. Leung Wai Keung and Mr. Yip Lam Yiu.

35.  However, that evidence is hearsay and (in my view) unconvincing. 

36.  Mr. Leung (who passed away before trial) simply records in his statement what he had allegedly been told by Mr. Yiu Siu Kee (E Man's Assistant Purchasing Manager).

37.  On the other hand, Mr. Yip claime in his statement to have himself seen a worker using undiluted KF-28 at Fan Ling.  But United has lost track of Mr. Yip over the intervening years and he did not appear before me to be cross-examined on his statement.

38.  United further suggested that KF-28 may have varying degrees of acidity, possibly through poor quality control.  In support of such contention, United relies on differing test results on the acidity of KF-28 at different times.

39.  A Materialab test in May 1999 using an unspecified "in house method" reported a result of 24% total acidity.  Another Materialab test in April 2001 using an unexplained "titrimetric method" yielded a result of 18.2% total acidity.  On the other hand, Dr. Peter Yu's own tests in November 2005 using a standard method of analysis laid down by the Association of Official Analytical Chemists found that pure KF-28 was equivalent to around 6.52% (weight/volume) HCL solution.

40.  I cannot accept on the basis of the material before me that the acid content of KF-28 varies widely from sample to sample.

41.  It seems to me that Dr. Yu's results are likely to be the most accurate and valid.  In contrast to Dr. Yu's procedure, there has been no description of the actual methodology used by Materialab in 1999 and 2001 to attain its figures.  As Dr. Yu pointed out in his evidence, one simply does not know (for example) what titration procedure was followed by Materialab.  Thus, one cannot assess the reliability of Materialab's results.

42.  Even if Materialab's results are valid, a 24% acidic solution diluted in the proportion of 1 part KF-28 to 4 parts water would equate to a 4.8% HCl solution.  An 18.2% solution would, similarly diluted, equate to a 3.64% HCl solution.  In both cases, the acidic content would be well within the 3%-5% HCl solution range specified in United's catalogue.

43.  Professor Tam (United's expert) belatedly raised the possible variance in KF-28 in the course of his oral evidence.  But Professor Tam did not himself conduct any chemical analysis to test such hypothesis by (for example) taking random samples of KF-28 and measuring acidic levels of each.  Consequently, Professor Tam's proposal strikes me as mere speculation which is not backed by hard empirical evidence.

44.  Mr. James Cheng (appearing for United) argues that he word "Irritant" on the labels of KF-28 containers means that KF-28 must be equivalent to a 10%-25% acid solution.  For this submission, Mr. Cheng relies on the Factories and Industrial Undertakings (Dangerous Substances) Regulations (Cap.59 sub leg.).  That regulation requires an "Irritant" label to be placed on chemicals of an acidic concentration equivalent to 10%-25% HCl.

45.  But it does not follow as a matter of logic that, because the manufacturers of KF-28 have chosen to label their substance as an "Irritant", KF-28 is equivalent to 10%-25% HCl.  Thus, for instance, nothing prevents a manufacturer, out of an abundance of caution (say), from labelling his product as an "Irritant" even when it has a lower acid concentration than that specified by the regulation.

46.  In summary, United had an obligation under the contract to provide tiles of merchantable quality.  That obligation required United to provide tiles which would not become discoloured upon cleaning with a 3%-5% HCL solution or a cleaning agent of equivalent acidity.  The diluted KF-28 applied to the green and brown tiles supplied by United under the contract had a lower acid content than a 3%-5% HCl solution.

47.  Before leaving this issue, I should note 2 facts relating to the application of KF-28 to the tiles supplied by United.

48.  First, Mr. Wong Sai Hang (E Man's Purchasing Manager) and Mr. Eric Tse (a plasterer sub-contractor at the Fan Ling site) said that test panels of United tiles were set up and diluted KF-28 was applied to them to see whether KF-28 would have an adverse effect. 

49.  As no discolouration was noticed, it was thought that diluted KF-28 could be used on all the tiles used for the Fan Ling and Queen's Road projects.  The tendency of some green and brown tiles to become visibly discoloured on application of diluted KF-28 was only discovered later.

50.  Second, in December 1998, after it had been discovered that some tiles became discoloured, a further order of tiles was ordered from United because of a shortage of tile stock at the Fan Ling site.  Mr. Wong said (and I accept) that Henderson conducted in-house tests of the chemical resistance of the top-up stock of tiles delivered.  Only tiles that passed those tests were then used.

B. Issue 2: United's breach

51.  Some green tiles in Blocks 2, 3, 4, 6, 9, 10 and 11 of the Fan Ling site and some brown tiles of the single block Queen's Road West site became discoloured upon application of KF-28.  This fact was not seriously disputed by United.

52.  That discolouration should not have happened if United had adhered to its obligations under the contract. 

53.  I therefore conclude that United was in breach of the contract.

C.      Issue 3: E Man's entitlement to damages

54.  Damages cannot be recovered if they are too remote.  The test for "remoteness of damage" is stated in the well-known case of Hadley v. Baxendale (1854) 9 Exch 341 (at 354-5) (Alderson B):-

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, a the probable result of the breach of it.  Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.  On the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract."

55.  The test in Hadley v. Baxendale has 2 limbs.  A particular head of damage is recoverable:-

(1)	if it was reasonably foreseeable at the time of contracting that such damage was a natural and likely consequence of a breach; or,
(2)	if, when the contract was entered into, it was brought home to the mind of the party being sued that the particular damage was a possible consequence of a breach.

56.  In relation to the Fan Ling site, E Man claims the cost of hacking off and replacing the defective tiles.  This amounts to a total of $4,046,250.47, broken down as follows:-

(1)	Scaffolding	$1,750,692.97
(2)	Tile replacement by Eric Tse Cement Works	$318,101.14
(3)	Tile replacement by Parkrise Engineering Ltd.	$1,789,029.66
(4)	Extra rental of gondola	$59,230.00
(5)	Extra material cost	$129,196.70

57.   The parties have agreed the above quantum amounts as figures.

58.  It was necessary to incur scaffolding costs because the original scaffolding had to be taken down to enable an occupation permit inspection to take place.  If the occupation permit had been delayed, the Fan Ling project could have faced significant claims from purchasers of units there.

59.  Eric Tse was initially asked to replace discoloured tiles on 2 blocks.  But, after the scaffolding was taken down for the purposes of the occupation permit inspection, E Man invited tenders for the replacement work and eventually awarded the contract to Parkrise.

60.  In my judgment, it ought to have been reasonably foreseeable by United that a failure to deliver proper tiles would lead to defective tiles having to be replaced.  Consequently, the $4,046,250.47 replacement cost claimed by United for the Fan Ling site should fall under the first limb of the remoteness test in Hadley v. Baxendale.  That amount should be recoverable by E Man against United.

61.  I believe that it was reasonable for E Man to have incurred the cost of re-erecting scaffolding.

62.  As a result of United's breach, E Man was faced with a difficult choice.  E Man could replace tiles immediately and risk delaying the date of the occupation permit.  Alternatively, E Man could postpone the replacement exercise until after the occupation permit inspection.  The former option might lead to E Man facing damages for a delayed completion date.  Thus, I do not think that E Man can be criticised for choosing the latter option.

63.  In respect of the Queen's Road site, E Man claims replacement costs of $2,327,158.06.  Again that figure is agreed by the parties.  For similar reason as that stated in connection with the Fan Ling project, I think that the replacement sum claimed here is recoverable under the first limb of Hadley v. Baxendale.

64.  In relation to the Fan Ling site, E Man also claims prolongation costs of $1,200,000 (comprising site overheads of $810,000 and head office overheads of $390,000).  These costs are said to represent the additional overheads incurred as a result of the project taking longer due to a need to replace tiles.

65.  The main contractor of the Fan Ling project was Heng Tat Construction Limited, a Henderson group company.  E Man was a sub-contractor.

66.  I do not think that prolongation costs are recoverable under either the first or second limb of Hadley v. Baxendale. 

67.  As Ms. Lai observed in examination, United is not in the construction business.  It supplies tiles.  At the time of the contract, United could not reasonably be expected to have contemplated the possibility of a claim for prolongation costs if defective tiles were delivered.  Nor is there evidence that the possibility of prolongation costs or their possible quantum were brought home to the minds of United's staff at the time of contracting with E Man.

68.  In relation to the Queen's Road site, E Man claims liquidated damages of $3 million.  This is said to be the result of delay on the Queen's Road project.

69.  The developer of the Queen's Road project was Rich Chase Development Limited, a company within the Henderson group.  It engaged Chan Sum Construction Company as main contractor for the superstructure.  Chan Sum has not claimed liquidated damages against Rich Chase for delay on the project.  Nor has E Man paid any damages (liquidated or otherwise) to Rich Chase for delay to the Queen's Road development.

70.  Again, in my view, this head of damage is too remote. 

71.  It would not have been in the reasonable contemplation of United at the time of contracting.  Nor was it brought home to United by E Man at the time of contracting that liquidated damages in the amount of $50,000 per day could be incurred if there was delay due to the supply of defective tiles.  On the evidence, United knew nothing of the terms of contracting between Rich Chase and Chan Sum.

72.  Further, the claim for liquidated damages is pleaded as one of compensating E Man for any claims for delay brought by Chan Sum.  Chan Sum has not brought any such claim.  The limitation period for Chan Sum bringing any claim against E Man having long since passed, there is no basis for now holding United liable to indemnify E Man against any action by Chan Sum.  Mr. James Lee (appearing for E Man) fairly conceded that limitation was an unanswerable defence to the claim for liquidated damages.

73.  Consequently, E Man is only entitled to receive damages of $6,373,408.53 (namely, $4,046,250.47 + $2,327,158.06).

74.  I note that on the penultimate day of trial United applied to re-re-re-re-amend its Reply and Defence to Counterclaim to plead a case of failure to mitigate.  The allegation was essentially that E Man unreasonably continued to mount tiles and wash them with KF-28 (whether or not diluted) even after discolouration had been discovered.

75.  I refused leave to amend.  I thought that the application came far too late in the day.  E Man would not have had a fair opportunity to adduce evidence to deal with the new point being raised.

76.  In any event, the evidence elicited by Mr. Cheng's cross-examination of Mr. Wong was contrary to the tenor of the proposed amendment.

77.  By the time discolouration was discovered, E Man had already mounted most of the tiles originally delivered.  E Man proceeded to conduct in-house tests of the new stock of tiles delivered in December 1998.  It only mounted tiles which passed those tests.

78.  Further, E Man (at United's suggestion) also tried using KF-28 diluted by 10 parts of water to wash mounted tiles.  This, however, proved to be of little avail.  Discolouration apparently still took place.

79.  The evidence as it stood at the time of the ap2lication to amend suggested to me that, at all times following dis8overy of the discolouration, E Man had acted reasonably to mitigate its loss.

D. Issue 4: Effect of E Man's damages on United's claim

80.  United claims $3,071,992.75 in unpaid invoices.  I accept that such amount remains outstanding under the contract.  I do not think that E Man seriously contended otherwise.

81.  United also seeks $130,432.50 for 3 deliveries of replacement tiles in February 1999.  The latter deliveries were said by United at the time to be "f[r]ee of charge".  United now suggests that the tiles were actually supplied on the understanding that they were to be paid for by E Man.

82.  I do not accept United's submission on the 3 deliveries of replacement tiles in February 1999.  The tiles having been expressly delivered and accepted free of charge, I do not think that United can now resile from that position.

83.  It follows that there should be a set-off between United's entitlement to $3,071,992.75 and E Man's damages of $6,373,408.53.  Such set-off leaves a net amount of $3,301,415.78 payable to E Man by United.

IV. Conclusion

84.  There will be judgment in E Man's favour for the sum of $3,301,415.70.

85.  I will now hear the parties on interest and costs.  By way of assistance, I should briefly indicate my thinking on those issues.

86.  I propose that interest run on the net sum awarded to E Man from 3 November 2004 (the date when the substance of E Man's counterclaim was first raised by way of amendment to E Man's pleading) until date of judgment at 1% over Hong Kong prime.  Thereafter, interest should run on the judgment sum at the judgment rate.

87.  On costs, although E Man has effectively prevailed on claim and counterclaim, it has not been wholly successful.  E Man's claim has been inflated by $4.2 million, significantly more than the net sum which E Man has obtained.  E Man should not have the costs associated with the abortive part of its counterclaim.  Subject to counsel's submissions, I accordingly propose to order that E Man should only have 70% of its costs of this action.  Costs are to be taxed if not agreed.