SCHMIDT & CO. (HONG KONG) LTD. v. DAVID H. WOO t/a PHASE INDUSTRIES

Action No. 10966/94

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Rogers, J.A. :

1. In this action, Schmidt & Co. (Hong Kong) Ltd claims a sum of US$178,000 plus interest and costs from Mr. David H. Woo, who trades under the name Phase Industries. The claim arises out of a contract dated 10th July 1992 that contract was made between Schmidt & Co. (Hong Kong) Ltd and Phase Industries.

2. The contract related to the supply of Sillner Machines. There was to be one set of a model BGM8 Embossed Tape Forming Machine, one set of a model CG4/02 Chip Taping Machine prepared for Lumonics Laser Mark System 940 and one set of a model system 940 Lumonics Laser Mark System. The contract was short. It provided that the goods should be delivered in Hangzhou C & F by air freight and it is noted that the goods were under German export control and therefore subject to licence approval. The delivery was to be,

"on or before the 30th November 1992 from the factory and an Importer Statement on End-User and End-Use, but subject to final confirmation from factory and upon receipt of a Letter of Credit."

3. The terms of the Letter of Credit as provided in the contract were that payment should be "by irrevocable Letter of Credit at sight in our favour which must reach us within 30 days upon the date of signing contract." The terms of the Letter of Credit were to allow partial delivery and the air waybill would be accepted as evidence that the goods had been delivered. It was also stated in the contract that there should not be any other terms preventing Schmidt & Co. (Hong Kong) Ltd from drawing the full amount of the Letter of Credit immediately after acceptance of the goods by the end-user.

4. As it happened, the Letter of Credit, when it arrived, contained, inter alia, the following requirements for documents to be provided that there should be a "quality certificate countersigned by the Hangzhou Sanmaster Electronics Co. Ltd., Linan, Hangzhou, P.R. China and Phase Industries certifying that the shipped goods have been properly installed and operate well."

5. As it transpired in the evidence called in this case, both the Plaintiff and the Defendant seem to have been in the position that they knew relatively little about these machines and their construction. Both the Plaintiff and the Defendant appear to have been traders. Mr. Koo who was called on behalf of the Plaintiff described his company as being only a trader and acting as "a bridge".

6. The machine in question was designed to put very small computer chips onto a long sheet of plastic film. I have been shown a similar type of film with computer chips inserted on it. The tape looks similar in dimensions and construction to an 8 mm cine tape.

7. The drawings for the items which were going to be used in this particular machine have been referred to as SOT-23 30-UP. They were made by Kras Aisa Ltd.

8. Although the contractual documents do not specifically refer to these drawings, it seems, accepted on both sides that the Sillner Machine CG4/02 was to be made to take the parts which were shown in this drawing. I should say at the outset that looking at the drawings they show extremely small parts. The overall length of the plastic part is 0.115 inches. The overall width is 0.051 inches. The tolerances which are given for both these measurements are plus or minus 2 thousandths of an inch. Those tolerances are tight and this could be gleaned, for example, from the fact that an ordinary micrometer is only capable of measuring to an accuracy of 1 thousandth of an inch. Clearly, to conduct measurements on items of this size would require very much more sophisticated mechanisms than even the standard micrometer gauge.

9. The machine, as indicated in the contract, was made by a company in Germany, Sillner Maschinen GMBH. A Mr. Fidorra, who works now as a quality controller in that company and has been with that company since 1971, gave evidence. It seems that he had a great deal to do with these machines when they were supplied to the Plaintiff. He said he tested the CG4/02 in Germany, on samples which had been provided to the German company by Kras Asia Ltd. He says that the machine worked perfectly well in Germany and then the machines were shipped to Hangzhou but when the CG4/02 was installed there, there was a difficulty. He says that as regards the Laser Mark 944 machine, that was accepted as working correctly. He says that Kras Asia Ltd and its representative, Mr. Mento Lam, indicated at the time that they were prepared to regard that machine as working well. It could not work automatically because the CG4 machine itself was not functioning properly.

10. The question in this case was why the CG4 machine was not functioning properly. Now it seems that, on examination, the very small parts which were intended to be packaged by this machine were not up to specification. Mr. Fidorra has told me that when they were looked at, it was seen that they had bent leads, they had flashes, in other words, extensions on the sides of the various parts. There were also extensions of the plastic caused by what were referred to in the evidence as "gate remains". In perhaps less technical language, that refers to the remains of plastic material at the injection point where the plastics has been injected to form the article itself: sometimes a little piece of plastics remains and in many plastics items this does not matter, but in items as small as these, with the tolerances as tight as these, clearly, even small amounts of plastics remaining at the injection point may cause problems. Mr. Fidorra has referred to photographs in the court bundle, which were exhibited. In showing these photographs, he explained, they were taken by using the parts which had been taken back from Hangzhou to Germany. Photographs were taken of projections of those parts. He says that other people in his company measured the parts and found that a substantial number of them were not in accordance with the drawings which Kras Asia had produced.

11. It is quite understandable that those measurements had to be taken in Germany and not on site in Hangzhou because, as I have indicated, even a comparatively sophisticated standard measuring instrument would be incapable of measuring items of this size; highly sophisticated instruments would clearly be needed to measure them. Mr. Fidorra says that the resultant effect of having defective items means that they caused the machine to jam. This is a matter which I can readily understand.

12. Mr. Woo, on behalf of the Defendant, says however that there should have been no reason why parts which were not defective could not have been used to test the machine and if the machine so tested were found to work he, on his part, and he is quite sure his customer, would have been more than happy to accept the machine and pay for it.

13. However, this does not seem to me to be a valid point. I am not satisfied that the parts which were not defective and came within specification could be sorted out by the machine without the machine continuously stopping.

14. Mr. Woo also sought to rely upon a letter from Mr. Mento Lam who still works for Kras Asia. However, that letter in itself does not constitute evidence. Even if it did, it does not seem to me to go far enough to satisfy me that it was the machine that was defective and not the parts. For example, towards the end , it says :

"From the same statement, their main point is that the components have flashes. But pls clarify how big were these flashes?"

15. It seems to me that Mr. Lam has perhaps missed the point that it was not just the flashes, but also the failure of the parts to comply with the specifications that caused problems. Then, Mr. Lam's letter goes on :

"To the best of my memory about the machine CG4, most jamming took place at the transition of components from horizontal moving track to second vertical track. I observed that many units, after being moved horizontally in quite a high speed, and then came to sudden stop, could not keep upright position for entering second vertical track."

16. Two points need to be made here. First of all, it is to my mind not precise evidence because Mr. Lam is saying things like "to the best of my memory". The second, and perhaps the important, point is that it begs the question as to even if the difficulty was moving from the horizontal moving track to the vertical track, why a difficulty was being caused?

17. However, when I asked Mr. Woo as to whether he would be calling Mr. Lam. I was told that he could not do so because Mr. Lam had indicated that it would cause difficulties for him with his company. In view of the involvement of Kras Asia Ltd, this is perhaps not surprising.

18. In my view, the Plaintiff has established that it supplied what was required under the contract and I accept Mr. Fidorra's evidence. I accept that the machine did work properly with the proper items and I accept that when the machine did not work, the items that were being fed to it were defective. In those circumstances, it seems to me that the Plaintiff is entitled to its claim under the contract.

19. In relation to the Letter of Credit, that contained the clause to which I have already referred. Whether or not the Plaintiff should have insisted on obtaining a Letter of Credit which did not contain that clause is now a matter of history. Nevertheless, perhaps for the sake of peace at the time, and to avoid any difficulty it could cause to the relations, the Plaintiff did not seek to obtain a Letter of Credit without that; it was aware that the clause was in the Letter of Credit and remained silent. It seems indeed from Mr. Woo's evidence that the Plaintiff even asked for the Letter of Credit to be renewed or extended. In those circumstances, the Letter of Credit contained the clause to which I have referred and it was applicable. Since there was no certificate as required, either from the end-user in Hangzhou or from the Defendant, the terms of the Letter of Credit were not met. Therefore, no claim, it seems to me, arises out of that.

20. In the circumstances, I see no alternative but to give judgment for the Plaintiff for the amount claimed.

21. In the light of my holding, the counterclaim will also fall to be dismissed. Indeed, I would say that there has been no evidence which would support it at the moment although had it been relevant perhaps that would have been forthcoming.