NIPPON KANZAI CENTRE CO LTD v. HO BIU KEE CONSTRUCTION ENGINEERING CO LTD

HCA 1678/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1678 OF 2003

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J U D G M E N T

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The Claim and the Counterclaim

1.  In this action, the Plaintiff claims against the Defendant for the sum of HK$1,880,497.14 being the price for construction materials supplied and delivered to the Defendant during the period between October 2001 to December 2001 in four construction projects at Ko Chiu Road Phase 3, Ngau Tau Kok, Yau Tong and Cheung Chau under four separate contracts.  The goods in question were described as “Sekisui `Eslon’” pipes and fittings.

2.  The Defendant was a sub-contractor for the supply and installation of water pipes and fittings in each of the sites mentioned above.  The Defendant has originally pleaded a defence to this claim, in which the Defendant made a wholly unparticularised allegation that the goods were not ‘Eslon’ pipes and fittings, were not of merchantable quality and were not reasonably fit for their purpose.  Soon after the trial commenced, Mr Tsang on behalf of the Defendant made it clear that the Defendant’s complaint was not in respect of the goods which were the subject of the plaintiff’s claim herein; but of goods which had previously been delivered by the Plaintiff to the Defendant under the same contracts four contracts for the same four projects.  The Defendant has not pleaded a set-off and Mr Tsang accepted that the Defendant has really no defence to the Plaintiff’s claim.  I accordingly give judgment to the Plaintiff in the sum claimed with interest from the date of the writ until judgment at prime +1%.  This leaves the counterclaim.

3.  The counterclaim as originally pleaded merely repeated the defence, and thus suffered from the same defect that it was woefully lacking in particulars.  At the commencement of the trial, Mr Tsang furnished, at the request of the Court and without objection from the Plaintiff, some particulars of the Defendant’s allegation.  These read as follows:

“The fittings supplied by the Plaintiff were not reasonably fit for their purpose in that the nipples supplied to the four projects in or before November 2000 failed to comply with the Hong Kong Housing Authority (“HKHA”) requirements.  It was the HKHA requirement that all fittings must have clear approved body marking to facilitate quality control.  Some of the nipples supplied by the Plaintiff were having unidentified body markings whereas some of the nipples supplied by the Plaintiff were without body markings.  All the problematic nipples installed by the Defendant were required by the main contractors to be replaced.”

4.  A nipple is a short section of a pipe with a screw thread at each end for coupling.  It is worth noting at this stage that the nipples which the Defendant alleges to be non-complaint are of two categories.  The first are those with unidentified body markings i.e. that the nipples did have marking on them, but the markings are those other than the mark of Sekisui.  The other are those with no body markings at all.

5.  The defendant’s case is that replacement of the nipples without clear markings resulted in loss or damage to the Defendant in the sum of $940,424.  This sum comprised a sum of $817,760 said to have been paid by the Defendant to its sub-sub-contractor for labour charges in replacing the nipples.  The Defendant added 15% on top as its handling fees.  A claim that the Plaintiff was obliged to refund interim payments previously made by the Defendant to the Plaintiff to the order of some $10 million was abandoned early on at the trial.

The contracts

6.  The contracts between the Plaintiff and the Defendant produced to the Court were in simple and general terms.  In July 1999, the parties signed a sales contract for the supply of “Sekisui “Eslon” LP uPVC Lined Steel Pipe & Fittings” for a total contract sum of $2,500,000.  This contract relates to the project at Ko Chiu Road Phase 3.  The “Remark” stipulates that price was according to the price list issued on 16 July 1996 with 46% discount.  As the evidence shows, the sales contract was entered into for the purpose of fixing the price of the goods to be delivered from time to time.  It was pursuant to the sales contract that the Defendant would, from time to time, place purchase orders with the Plaintiff for the supply of the pipes and fittings, whereupon the plaintiff would deliver the goods and invoice the Defendant accordingly.  Similar contracts or letters of intent were entered into between the parties in respect of the other 3 projects in question, with varying discounts.  The Defendant’s witness, Mr Wong Kin, deposed in his evidence to the existence of a much fuller agreement between the parties in which the specification of the length or sizes and brand of the pipes were set out.  No such agreement has been produced.

7.  The Plaintiff admits that at the time when the contracts were made, the Plaintiff was aware that the goods were required for HKHA projects.

PVC lined steel pipes

8.  At the material time, the Plaintiff was the distributor of Sekisui pipes.  Mr Tomomasa Nakamura (“Mr Nakamura”), the Plaintiff’s general manager, explained that Sekisui did not manufacture the steel pipes.  Instead, they purchased steel (known as “G.I.” or galvanized iron) pipes from other manufacturers; and they themselves produced a uPVC (i.e. unplasticized polyvinyl chloride) pipe of a smaller diameter which would then be fitted inside the steel pipes to provide a lining.  The lining avoids contact between the galvanized iron and water to prevent corrosion. 

The Problem with the Nipples

9.  The Defendant’s case is that the nipples supplied by the Plaintiff must have clear markings to show they were of Sekisui make.  Its case is that unless they were so marked, the HKHA would require the nipples to be replaced.  Mr Wong Kin, who was employed as the Defendant’s Works Manager at the time, testified that the mark should either show “Eslon” or a logo comprised of three “S”s either in a straight line or a staggered configuration. 

10.  The complaint with regard to the markings on the nipples appears to have first surfaced at the Ko Chiu Road Estate Phase 3 site.  On 20 October 2000, the clerk of works of the Housing Department issued a Site Direction (serial no. 112) to the main contractor (“Chatwin”) identifying 3 problems: (i) some trade marks were different from catalogue (ii) different font of lettering imprinted on pipes and (iii) surface finish of pipes was visually different.  Items (ii) and (iii) relate to the pipes and not the nipples and are not the subject of complaint in the counterclaim.  I need say no more about them.

11.  The Plaintiff wrote on 26 October 2000 to the Defendant to explain why some of the nipples were without body marks.  The explanation was that the nipples were produced from Eslon uPVC lined steel pipes of 5.5m in length.  Mr Nakamura explained in evidence that whilst the pipes would each bear a mark “Eslon uPVC Lined Steel Pipe”, since the nipples were only a few inches long and were cut from the 5.5m pipes, one would not normally find markings on the nipples.

12.  On 4 November 2000, the Defendant sent a memo to the Plaintiff, referring to the Site Direction, and required the Plaintiff to clarify  (1) country of origin of the fittings (2) deviation in trademark and (3) different surface finishes of pipes.  The Defendant intimated in the memo that it would in due course hold the Plaintiff liable for the consequences including abortive work for replacement of the cast in nipples and liquidated damages.

13.  A later Site Direction (serial no. 119) dated 15 November 2000 entitled “Doubtful Material Delivery, uPVC lined pipes” sought clarification on whether the unidentified body marking on the nipples will be replaced.  The record of survey attached to that Site Direction identified 15 nipples which were found to have unidentified body markings. 

14.  Chatwin wrote to the defendant on 17 November 2000 requiring the Defendant to suspend installation of the water supply pipes and suggested immediate replacement of the unidentified pipe nipples with those which were clearly marked so that loss in time and money could be saved. 

15.  According to Mr Wong Kin, the Defendant proceeded to inspect the nipples installed in each of the four projects, and instructed its sub-sub-contractors to replace all nipples which either had no markings or had unidentified body markings.  His evidence is that there were far more than 15 nipples which were found to be non-compliant.  He estimated the total number of nipples replaced to be in the order of four to five hundred.

16.  Mr Nakamura did not agree.  First, he stated in evidence that the HKHA did not raise any complaint in respect of nipples which did not have any body markings.  The complaint only related to those nipples with unidentified markings.  He explained that these came about either because the steel pipes from which the nipples were cut had the markings of the GI pipe manufacturer or because pipes printed with the Eslon logo in Japanese destined for the Japanese domestic market had been used.  Secondly, he said the 15 nipples were replaced on 1 December 2000, at the same time when 12 sample nipples were removed from the system for testing.  He disagreed that the defendant or its contractor had replaced anything more than the 15 nipples identified in the Site Direction. 

17.  According to Mr Nakamura, the 12 samples tested did not have any body markings.  These were all found to perform satisfactorily upon testing.  Mr Nakamura also testified that after the 12 samples were tested and found to be satisfactory, the HKHA made it known that nipples with unidentified body markings would not be acceptable.  He said that since then the Plaintiff had not been found to have supplied any more nipples with unidentified marking.  Prior to December 2000, the HKHA had not issued any direction or requirement that nipples with unidentified markings would not be acceptable.

18.  In June 2001, the HKHA suspended the Plaintiff from the HKHA List of Proprietary Names for uPVC Lined Galvanised Steel Pipes and Fittings.  The suspension letter cited two reasons.  One of the reasons related to the cutting of the brand name from carton boxes for nipples.  The other was the supply of nipples with unidentified body markings to Shatin Area 31A and Ko Chiu Road Phase 3 projects.  (The reference in the letter was to Phase 2, but the parties agreed this was a clerical error and the correct reference is to Phase 3.)  It was said that “differences in packaging and body markings would render Housing Department’s control difficult.”

19.  In respect of the Ngau Tau Kok project, the defendant relied on a memo from the main contractor (China State Construction Engineering Corporation) addressed to the defendant dated 20 August 2001.  That memo referred to a Site Direction from the Housing Department, complaining about the fittings supplied by the defendant to be not in complaint with the requirements.  Mr Nakamura explained (and I accept) that these related to other kinds of fittings and had nothing to do with pipe nipples. 

20.  The Defendant accepts that no requests have been made by the Housing Authority to replace nipples installed in the Yau Tong or Cheung Chau sites.

21.  Between February to May 2002, which was well over a year after the Defendant allegedly carried out the replacement works, the Defendant sent debit notes to the Plaintiff, one in respect of each of the four projects.  By these notes, the Defendant claimed from the Plaintiff the following amounts as having been incurred in the replacement of nipples :

Date	Project	No. of man-days	Unit price	Total
4/2/02	Ngau Tau Kok	340	760	$258,400
27/2/02	Ko Chiu Road	485	760	$368,600
13/4/02	Cheung Chau	166	760	$126,160
24/5/02	Yau Tong	85	760	$64,600

The total man-days came to 1,076.  In each of the debit notes, the Defendant added on a 15% handling charge.  The total amount came to $940,424.

Fitness for purpose

22.  In his closing submissions, Mr Tsang abandoned the allegation that the nipples were unmerchantable, and concentrated solely on the allegation of fitness for purpose. 

23.  Section 16(3) of the Sale of Goods Ordinance, Cap. 26 provides:

“Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.”

24.  There is no dispute that the Plaintiff did sell nipples in the ordinary course of its business.  It is also common ground that at the time when the contracts were entered into, the Defendant made known to the Plaintiff that the nipples were required for HKHA projects.  There is no suggestion that Defendant did not rely, or that it was unreasonable for the Defendant to rely, on the Plaintiff’s skill or judgment in ensuring that the nipples would be reasonably fit for the purpose of being used in HKHA projects.  Indeed, the evidence shows that it was the Plaintiff who had applied to the HKHA to obtain approval of Sekisui products for use in HKHA projects, such that the Plaintiff would have been in a better position than the Defendant to have been aware of HKHA’s requirements.  In the circumstances, there was no real dispute that it was an implied condition of the contracts that the nipples supplied by the Plaintiff should be reasonably fit for use in HKHA projects.

The issues

25.  In order to succeed in its counterclaim, the Defendant has to prove, the burden being on it, that at least some of the nipples delivered by the Plaintiff were unfit for the purpose of being used in HKHA projects.  If the Defendant can do so, the question then arises as to how many of the nipples delivered were unfit and what loss or damage the Defendant proves it has suffered.

Nipples without any marking

26.  As noted above, it is the Defendant’s case that the HKHA required that all nipples must have clear approved body markings to facilitate quality control.  For the reasons I shall adumbrate below, I find the Defendant to have failed to prove this allegation as stated in such general term.  In particular, I find that the HKHA did not reject nipples which had no marking on them.

27.  I accept the evidence of Mr Nakamura as to how the pipes and nipples are made.  I accept his evidence that the mark of Sekisui – “Eslon uPVC Lined Steel Pipe” – would be imprinted on one end of the pipe and that such mark would vary between 25 cm to 40 cm in length, depending on the size of the pipe.  Since the nipples are much smaller in size (up to about 15 cm), it is impossible to find the whole of the Sekisui mark on a nipple.  Instead, the probabilities are that a nipple would not bear any mark on its body.  I find that Mr Wong either did not have a clear understanding or did not have a good recollection of how the Sekisui mark appeared either on a pipe or on a nipple.  He was unable to say whether the mark which he believed to have been imprinted on the nipple was the same as that on the pipe, or whether it was a reduced version.  It is also significant to note that his evidence was that of the nipples allegedly replaced, over 90% had an unidentified marking.  This evidence was given at a very late stage of the trial, after Mr Wong was recalled.  Seen in the light of his evidence that he did not personally check whether the nipples used to replace them did have the Sekisui mark, I have the distinct impression that Mr Wong was trying to downplay the significance of the problems over nipples without any body marking because he probably realized, after Mr Nakamura’s evidence, that he was on very unsure ground with regard to the allegation that the HKHA rejected such nipples.

28.  The Defendant failed to adduce evidence of any written rule or requirement issued by the HKHA that all fittings such as nipples must have clear body markings.  One would have expected that if there was indeed such a rule or requirement, it would have been in writing and it should not be too difficult for the Defendant to adduce such evidence.

29.  All that the Defendant was able to point to are the Site Directions from the Housing and the fact that the Plaintiff was later suspended from the List of Suppliers.  Neither of these suggests that the HKHA took exception to nipples without any markings, as opposed to nipples with unidentified markings.  I believe it likely that the HKHA did, at about the time when the nipples with unidentified markings were discovered, raise a query over the source and quality of those without any markings, and it was for that reason that the Plaintiff had to provide some explanation on that subject and also why 12 samples were taken for laboratory testing.  However, I accept the evidence of Mr Nakamura that the HKHA did, after the test results were known, accept the nipples without marking; and only indicated some time in December 2000 that no nipples with unidentified markings should be accepted.

Nipples with unidentified markings

30.  The Defendant is on stronger grounds with regard to nipples with unidentified markings.  The fact that the supply of nipples with unidentified body markings was one of the reasons why HKHA suspended the Plaintiff from the List of Suppliers for 6 months does show that HKHA regarded this as serious.  It is perhaps not difficult to understand why.  It is one thing for the nipples to have no body marking.  For those nipples, the HKHA can, as Mr Nakamura testified, rely on the delivery orders and carton boxes to identify their source of supply and have the necessary degree of confidence that the goods would correspond in quality to those previously approved.  It is a different matter if the nipples were to bear unidentified markings.  There would potentially be confusion, and the staff of the HKHA carrying out inspection on the site would be unsure whether the materials actually used were of the same quality as that which the HKHA had previously approved.  Mr Shum had to accept that the HKHA was reasonable in taking the attitude it did with regard to nipples with unidentified markings.

31.  This does not mean that there was a HKHA requirement at the time when the Plaintiff and the Defendant entered into their respective contracts that the nipples must not bear unidentified body markings.  As stated above, I accept Mr Nakamura’s evidence that the matter only surfaced in October 2000 and the HKHA did not make clear its requirement on the subject until December 2000.

32.  The question thus arises as to whether the nipples with unidentified body markings can be said to be unfit for the purpose of being used in HKHA projects where there was no explicit requirement at the time when the contracts were made, but where later events show the HKHA would not approve.

33.  Mr Tsang submitted that the duty of a seller extends not only to what the seller actually knew, but that the seller has a duty to find out the relevant requirements, if the purpose was made known to him.  He cited the judgment of Lord Wright in Cammell Laird and Co. Ltd v The Manganese Bronze and Brass Co., Ltd [1934] AC 402 to support his proposition.  There, the defendants were the manufacturer of ship propellers.  They contracted with the plaintiffs (who were shipbuilders) to supply propellers for two vessels to be built “to the entire satisfaction of the owners’ representative” and the plaintiffs.  Each ship was to be classed A1 at Lloyd’s.  Dimensions of the propellers were stated in the contract.  The propeller fitted to one of the vessels produced so much noise at trial that the vessel could not be classed as A1.  Only a second replacement was found satisfactory.  Each of the propellers manufactured complied with the dimensions stipulated in the contract.  The question was who should bear the costs of the replacements.  The House of Lords held in favour of the plaintiffs on the ground that the defendants had failed to comply with the condition that the propeller should be to the entire satisfaction of the owners’ representative.  The plaintiffs also relied on section 14(1) of the Sale of Goods Act, 1893 which was in similar though not identical terms as section 16(3) of our Ordinance.  (Under section 14(1) of the 1893 Act, reliance had to be shown, whereas under section 16(3) of the Ordinance, reliance need not be shown but may be rebutted.)  The question which arose was whether the plaintiffs did sufficiently make known to the defendants the purpose for which the goods were required “so as to show that he relied on the seller’s skill and judgment”.  Lord Wright, with whom Lord Tomlin and Lord Warrington of Clyffe agreed, held that the plaintiffs also succeeded in establishing breach of the term implied under section 14(1).  In the context of a claim for breach of implied term as to fitness for purpose, Lord Wright observed (at p. 422):

“In my opinion the contract now being considered was a contract, not for a propeller in gross, but a propeller as appurtenant to a vessel then being built by the appellants identified by the number they as builders had given to it; the respondents either knew all that was material to them as propeller makers to know about the vessel and her engines, or could have ascertained by inquiry.”

34.  In my view, Lord Wright’s judgment does provide support for Mr Tsang’s proposition.  It also seems to me right in principle that a buyer who has made known to the seller that the goods are required for use at HKHA projects should be able to rely on the seller in finding out, where necessary, whether a particular feature of the goods would be acceptable to the HKHA.  Mr Shum did not dispute that the non-functional aspects of quality can affect acceptability.  Nor did he submit that the attitude of the HKHA was either abnormal or idiosyncratic (see Slater v Finning Ltd [1997] AC 473 per Lord Keith of Kinkel at p. 483C-D).  Rather, he argued that the Plaintiff could not reasonably be expected to find out what was in the mind of the HKHA.

35.  I would reject that argument.  I am satisfied that the Plaintiff knew that the HKHA adopted tight quality control over the materials used on its sites.  I also find that it would not have been difficult for the Plaintiff to find out that the HKHA would object to nipples with unidentified markings being used at the sites.  Although the supply of nipples with unidentified markings was, on the evidence, accidental, this cannot excuse the Plaintiff.  The duty, once established, is strict: see Kendall (Henry) & Sons v Lillico (William) & Sons [1969] 2 AC 31 at p. 84A-C per Lord Reid.

36.  Accordingly, I find that the Plaintiff was in breach of its implied contractual duty to ensure that the goods would be reasonably fit for use at HKHA sites insofar as the Plaintiff supplied nipples with unidentified markings to the Defendant. 

Quantity of nipples replaced

37.  The Site Direction issued by the HKHA on 15 November 2000 only showed 15 nipples with unidentified body marking.  It is evident from that Site Direction that a survey was done in Block F of Ko Chiu Road Project Phase 3.  In its letter dated 18 November 2000 to the Defendant, Chatwin referred to a site meeting held on 17 November where it appeared to have been agreed that the Defendant would replace the 15 non-approved nipples immediately.  No mention was made of the need to replace nipples elsewhere.

38.  Mr Nakamura was adamant that the Defendant did not replace anything more than the 15 nipples at the locations set out in the attachment to the Site Direction.  I should be cautious in accepting Mr Nakamura’s evidence in this regard for two reasons.  First, he may not have been fully aware of what the Defendant’s sub-sub-contractor did.  Secondly, it seems to me inherently improbable that if the Plaintiff did supply nipples with unidentified body markings to the Defendant, the problem was only confined to one block.  One would expect nipples with unidentified body markings to surface in other buildings where pipes fittings and nipples have already been installed.

39.  Mr Wong was equally adamant that the Defendant’s sub-sub-contractor replaced far more than the 15.  He estimated that there were some 400-500 nipples replaced.  I have at least the same degree of reservation in accepting Mr Wong’s evidence on numbers.  I have found Mr Wong’s evidence unreliable in other respects.  I also take into account the fact that he was not personally involved in the replacement exercise.  He was not present at the site meetings, nor on the occasion when 12 sample nipples were taken out for testing.  In the circumstances, I must test the asserted figures against other evidence.

40.  According to the record of survey for Block F, there were 20 floors inspected.  There were 8 flats on each floor.  Mr Wong’s evidence was that there were approximately 5 nipples used for each flat.  If that is correct, of the 20 x 8 x 5 nipples installed at Block F, the percentage of nipples with unidentified markings would be about 15 ¸ (20 x 8 x 5) x 100% = 1.875%.  Mr Wong estimated that a total of 25,000 nipples would have been used on the four sites.  Assuming the percentage of non-compliant nipples is representative of such nipples supplied, there should be approximately 469 nipples which would have been non-compliant.  This would be within Mr Wong’s estimate of 400-500 nipples. 

41.  There is, however, no evidence that in October/November 2000 when the problem first surfaced, the work of installing nipples had been completed in all four sites.  The converse seems to be the case, as evident from the fact that the Plaintiff continued to supply pipes and fittings to the Defendant in late 2001 (the subject of the Plaintiff’s claim) for each of the four projects.  The only evidence of the state of progress at the time appears to be a letter dated 3 January 2001 from Chatwin to the Defendant which only mentioned replacement of nipples in “Blocks F and G”.  There is no evidence that nipples had been installed in other blocks in this site, let alone any of the other three sites.

42.  Another serious problem with Mr Wong’s evidence is this: He sought to verify the accuracy of the four debit notes issued by the Defendant.  The total number of man-days on those four debit notes add up to 1,076.  Mr Wong asserted that all that work was in the replacement of non-compliant nipples.  The evidence was that it took about 15 to 20 minutes to replace one nipple.  Even if one assumes that there were altogether 500 nipples which had to be replaced, the amount of time required could not have taken anything near 1,076 man-days.  It should have taken less than 200 hours.  Neither side adduced evidence of how many workers would be required to undertake the replacement work, but I would be surprised if more than one or two workers need to be engaged.

43.  In the circumstances, I am unable to accept Mr Wong’s evidence that the figures set out in the debit notes correctly represent the time spent by the sub-sub-contractors on the replacement of nipples.  I find the claim of $940,424 pleaded in the counterclaim to be grossly exaggerated.

44.  On the evidence before me, I would only be prepared to find on the balance of probabilities that by January 2001, the installation of nipples had been completed in two blocks in Ko Chiu Road Phase 3, and that there were some 30 nipples which required to be replaced (15 for each block).  Taking the time required to be 20 minutes for each nipple, this would have required 600 minutes or 10 hours.  Assuming that one to two workers would be required on the job, the work could be done in approximately 2 man-days.  I take $760 to be the cost for 1 man-day, and would award the Defendant a sum of $1,520 by way of counterclaim.  I see no warrant for allowing the Defendant the 15% uplift for handling fees.

Orders

45.  I would accordingly give judgment to the Plaintiff in the sum of $1,880,497.14 with interest from 12 May 2003 to the date of judgment at prime +1%.  I order judgment in the counterclaim in favour of the Defendant against the Plaintiff for damages in the sum of $1,520. 

46.  I make an order nisi that the costs of the action be to the Plaintiff, and that there be no order as to the costs of the counterclaim.