C. ART LTD v. MASS ELECTRICAL CO LTD

DCCJ 4105/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4105 OF 2010

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JUDGMENT

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1.  The plaintiff is a trading company whereas the defendant is a manufacturer of “Cappucino King”, which is the name for milk frothers and milk warmers (“the products”) manufactured by the defendant. Its claim against the defendant is for damages arising from defects of the products it purchased from the defendant, whereas the defendant denies that the product were defective, and counterclaims against the plaintiff for the expenses it incurred in relation to the handling of the defective products.

2.  By a purchase order No 81996-01 (Revise 1) dated 18.6.2008 (“Contract A”) the plaintiff agreed to buy 30,000 pieces of the products from the defendant at a total purchase price of US$447,180.  By another purchase order No 82840-01 (Revise 1) dated 13.3.2009 (“Contract B”) the plaintiff purchased from the defendant 8,280 pieces of the products for a total price of US$115,920.  The product were to be sent to the plaintiff’s customer known as GL International mbH (“GL”) in Germany.

3.  There was a term in both Contract A and Contract B that the product shall be of merchantable quality and shall be reasonably fit for usage as milk frothers and milk warmers.  There was also a term in both contracts that the defendant shall be responsible for replacing all faulty products in a full saleable condition and that all related costs will be borne by the defendant as vendor. There was also a term under Contract B that all defective products will be handled in accordance with a “Returns Agreement”, which was a written agreement dated 4.3.2009, and was signed by the plaintiff and the defendant.  It covered the product “Milk Frother & Milk Warmer model number MAW-39A”.

4.  On 26.8.2008, the defendant manufactured 8,272 pieces of the products under Contract A, and the plaintiff delivered the same to Germany.  On 19.9.2008, the defendant manufactured 8,272 pieces of the products under Contract A and the plaintiff delivered the same to Germany.

5.  In October 2008, GL started to complain that the products were defective, and consumers were returning defective products to GL.  GL sent 4 samples of the defective products to the plaintiff for examination.  The 4 samples were examined by the plaintiff and the defendant at the defendant’s factory in Mainland China.  The result showed that milk leaked from the milk jug into the motor compartment, leading to rusting at the motor shaft and the motor, resulting in motor failure.  The defendant suggested two solutions to resolve the problem, namely, to add a silicone ring between the motor and the rubber grommet, and to use better quality stainless steel to manufacture the motor shaft.  In January 2009, the defendant manufactured 8,272 pieces of the products under Contract A and the plaintiff delivered the said products to Germany.  The defendant has already made the two improvements in some products in this shipment.

6.  All the products said under Contract B were to be sent to GL.  This contract contained 2 additional terms “stainless steel motor shaft”, and “between the motor and the rubber grommet silicone ring added”.  In April 2009, a total of $8,280 pieces of the Contract B products were manufactured by the defendant, and the same were delivered by the plaintiff to Germany.  In the same month, defective products were returned by consumers to GL.  GL cancelled the delivery of the remaining 5,184 pieces of the products under Contract A.  At the defendant’s request, GL sent 100 samples of the defective product to Hong Kong for examination. These samples were examined by the plaintiff and the defendant in the defendant’s factory in Mainland China.  The major cause of the problem were (i) milk leakage from the milk jug into the motor compartment, resulting in rusting at the motor shaft and the motor and eventually motor failure, and (ii) damage to the printed circuit board.  The plaintiff opined that the problems of the returned samples were attributed to manufacturing flaw, and therefore the defendant should be held liable.  But the defendant opined that 14% of the samples were free from defect, whereas 85% of the samples appeared to have been improperly used by consumers.

7.  In November 2009, defective products were returned by consumers to GL.  On 11.11.2009 GL delivered samples of the defective products to Hanse Control in Hamburg, Germany for testing.

(a)  In the report (dated 17.11.2009) it was stated that as the rubber grommet was not sufficient, so that liquid entered from the milk jug into the motor compartment, and increasingly polluted until finally the motor shaft was arrested.

(b)  In the report (dated 23.11.2009) it was stated that the electrical components “complied to the requirements”.

(c)  In the report (dated 10.12.2009) it was stated that the products did not comply with the long lasting test.

8.  In April 2010, 6,487 pieces of the defective products were returned by the ultimate consumers to GL.

9.  In May 2010, GL returned a quantity of the defective products from Germany to Hong Kong.  They were received by the defendant.  They consisted of (a) 1,512 pieces of the products in full packing, and (b) a large quantity of products already opened up and not in full packing, but there was no counting of the number of products; instead, the defective products were weighed and calculated to be 4,763 (6275 – 1512) pieces. 

10.  GL wrote to the Plaintiff, stating that it needed the defective products to be replaced and sent to Germany latest by the end of July 2010.  By 10.9.2010, GL had not obtained the replacement of the defective products; it refused to accept future delivery and decided to debit the plaintiff’s account for all loss and damages.  By 4.11.2010 the plaintiff accepted the defendant’s repudiation of Contract A and Contract B.

11.  On 13.10.2011 GL returned a further 484 pieces of the defective products to the plaintiff.

12.  Regarding the 100 samples of Goods sent to the defendant in about May 2009, the defendant’s defence is that:-

(a)     It was only responsible for replacing products when there was manufacturing fault or flaw, but not the malfunction of the products being caused by improper use. The products were not water-proof and they could not be placed into water.

(b)     The products under the two purchase orders were inspected by the plaintiff who confirmed that the products were in order and it gave approval to proceed with the shipment to GL.

(c)    GL did not specify or give any warning in its instructions or manuals, for the end user consumers, accompanied with the products that the products were not water-proof and the whole products could not be placed into water.

(d)     Except the 14% of the samples of the alleged defective products found to be without malfunction, the alleged defects were caused by the malfunction in the motor or the printed circuit board. Such malfunction was caused by water and/or milk which in turn damaged the motor or the printed circuit board.  The defendant believes that the water and/or milk damage was resulted from improper use of the products such as placing the products with residual milk into water, say, for washing in violation of the defendant’s advice that the products were not water-proof and that the whole of the products could not be placed into water, rendering water and/or milk leaking into the products causing damage to and water and/or milk stains on the motor or the printed circuit board.  Thus, the alleged defects were not manufacturing faults or flaws.

13.  In respect of these defences, this Court will analyse them point by point.

13.1  The absence of manufacturing flaw

13.1.1  The structure of the products is that there is a hole about 9 mm in diameter at the bottom of the milk jug, which allows a motor shaft (about 1-2 mm in diameter) of the motor to pass through the hole from the motor compartment into the milk jug.  A rubber grommet was fixed to the top of the motor and immediately underneath the hole at the bottom of the milk jug.  Its function is to stop the milk from leaking into the motor compartment.  But it is inevitable that milk would leak from the milk jug into the motor compartment.  If the motor and motor shaft, being made of metal, cannot resist erosion of the metal, caused by the combined chemical action of the water element in the milk and the air, then there will be oxidization of the metal in motor shaft.  This will form rusting of the metal in the motor shaft. The oxidization of the metal will cause the metal to expand.  As a result the motor cannot run.  The milk which leaks into the motor compartment will also cause damage to the printed circuit board.  Eventually the whole product cannot function.

13.1.2 Some samples of the returned product showed rusting around the motor shaft, at the bottom of the rubber grommet, and around the small hole there. Milk must have leaked through the small hole of the rubber grommet, resulting in the formation of rust around the motor shaft.  Even though the motor shaft was made of stainless steel, the stainless steel is susceptible to rusting.  This must be due to the fact that there are different grades of stainless steel.  Rusting would occur in low quality stainless steel.  This explains why some samples of the returned products showed rusting as described above.  If the stainless steel could have resisted rusting, then the rusting described above would not have been formed.

13.1.3 The defendant’s directors, Mr Kin Leung and Mr Leung Wai Keung, were involved in the design of the product.  They agree that milk would leak through the hole into the motor compartment.  They said that a rubber grommet was inserted through the motor shaft, and it rested on top of the motor.  It was big enough and strong enough to fill up all the space in the hole so that milk would not leak into the motor compartment.

13.1.4 The consumers in Germany began to make complaints of function failure of the products in October 2008.  Upon hearing the complaint, the defendant made improvements to solve the problem of milk leakage:-

(i)  to add some grease around the small hole of the rubber grommet.  This would reduce the friction and rubbing between the milk jug, the rubber grommet and the motor, thereby prolonging the lift span of the products;

(ii)  to add a silicone ring to the bottom of the rubber grommet, around the small hole.  The silicone ring was made of soft material similar to cloth.  It would absorb the milk which leaked through the small hole of the rubber grommet;

(iii) to use stainless steel of better quality to manufacture the motor shaft which would prevent rusting.

Despite the three improvements, rusting continued to occur around the motor shaft.  Rusting also occurred to the silicone ring.  This suggested that milk continued to leak through the small hole of the rubber grommet, causing rusting to occur around the motor shaft and the silicone ring.  All these things happened because the design of the product was inherently defective.  Accordingly the defendant must be responsible for replacing the products. 

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13.1   

13.2  Inspection of the product by the plaintiff

  The defendant avers that the plaintiff inspected all the products during the manufacturing stage and approved all the products before they were delivered to Germany.  The plaintiff’s staff inspected the outlook, appearance, packaging and the functioning of the electrical of the electrical parts of the products.  At this stage, there could not be any rusting around the motor shaft, at the bottom of the rubber grommet and around the small hole there, because rusting took time to form.  Rusting could not occur during the short period of time of inspection in the defendant’s factory.

13.3  Improper use of the product

  Concerning the defendant’s defence that the 100 sample defective products jointly inspected by the plaintiff and the defendant in June 2009, 14 pieces were found to be free of defects.  The defects in the other 86 pieces were not the result of manufacturing flaws, but were the result of improper use by ultimate consumers in Germany, namely:-

(i)  filling excessive amount of milk into the milk jug.  As a result the milk overflew to the outside of the milk jug.  The milk eventually leaked from the outside into the motor component, causing damage to the motor and other components inside;

(ii) putting the products into water for cleaning.  As a result water leaked into the motor component, causing damage to the motor and other components inside.

There is simply no evidence to show how the consumers in Germany used or cleaned the products.  The products had electrical components. When the consumer used it to warm milk, he/she had to turn on the electricity supply to warm the milk.  It is mere common sense that if an electrical appliance is put into water, it will be damaged.  It is simply inconceivable that the consumers in Germany would put the products containing electrical components into water.  The defendant’s allegation is simply absurd, and is not supported by any evidence.

13.3.1 The defendant alleged that the consumers filled too much milk into the milk jug and caused overflows:-

(i)  Mr Kin Leung referred to the photographs of two of the 100 sample products examined in June 2009.  He said that the white dots and patches inside the motor compartments as well as on the outside of the products were dried milk, which were remains of milk overflow.  He did not personally see the two defective products.  He only saw the two photographs.

(ii)  Mr WK Leung said that he had seen the two sample products.  He said that he saw a lot of dried milk powder inside the motor compartment as well as on the outside of the products.  He said that that was evidence to show that milk had overflowed to the outside of the products and then the milk leaked from the outside into the inside of the motor compartment subsequently.

The two photographs show that there were a lot of white dots inside the motor compartment, but there were not many white dots on the outside of the products.  They did not see how the consumers in Germany used the products.  There two photographs represent only 2% of the 100 samples. Assuming what they said is true, there is no evidence to show that the consumers improperly used the remaining 98% of the samples.  This defence simply cannot stand.

13.4  Warning label

  Mr Kin Leung and Mr WK Leung alleged that a warning label was inserted in the products for the purpose that they should not use the products improperly.  The warning labels were to be inserted in future products sometime after June 2009.  All the products under Contract A and Contract B were delivered to Germany prior to April 2009.  Hence the defence of the insertion of the warning label does not and cannot apply to this case.  In any event, there is no evidence to show that the consumers in Germany improperly used the products.

13.5.1 The defendant avers that:-

(a)  regarding the 6,275 pieces of defective products returned from Germany in July 2010, they have never been inspected or proved to be defective;

(b)  the 1,512 pieces of products with full packing were returned not because of any defect but because GL wanted to return the defendant’s products and to sell GL’s own products that were copied from the defendant’s products.

13.5.2 The test results of Hanse Control prove that the motor failure of the products was due to the manufacturing faults on the part of the defendant.  Hence the defendant is liable for the 6275 pieces of defective products, as well as for the 1,512 pieces of the products.  There is no evidence adduced by the defendant to show that GL copied the defendant’s products.  The defendant has not adduced evidence to show that GL returned the products in order to sell its own products.

13.6  Written guarantee

  The defendant avers that pursuant to a written guarantee dated 7.4.2009 in respect of products manufactured and delivered under Contract B, the defendant provided a guarantee period of only 12 months for the defective products.  But it was not signed by the Plaintiff. There is no documentary evidence to prove that the plaintiff agreed to it.  The Plaintiff’s director Mr. Ng Wai Kin said that it was unilaterally imposed by the defendant and the plaintiff had never agreed to it.  A large quantity of defective products were instructed in May 2010, but the defendant never raised the matter of guarantee to defend itself.  I find that this guarantee was unilaterally imposed on the plaintiff.  It did not apply in this case.

13.7  Inability to repair

  The defendant alleges that the plaintiff knew that the defendant could not have been able to repair the defective products within 30 days.  The Defective Returns Agreement provides that “in case of manufacture flaws, the vendor agrees to replace all returned goods in full selling condition within 30 days upon receipt”.  Its obligation is to replace them, and not to repair them.

13.8  The defendant alleges that it was not aware of the return of 484 allegedly defective products.  GL returned another 484 defective products to the plaintiff on 13.10.2011 because of quality reasons.  Mr. Kin Leung accepted under cross-examination that the 484 defective products which are now stored in the plaintiff’s warehouse in Tuen Mun were the defendant’s products.  Because there were manufacture flaw in these products, so the defendant is liable.

13.9  In respect of the 6,275 defective products returned from Germany, the defendants avers that “out of the 6,275 defective products, 1,512 pieces were returned with complete mail order box packing while the remaining 4,763 pieces were returned without any packing”. GL must have returned them because they were defective products.  So the defendant is liable for them.

The examination reports

14.  The defence counsel submits that the contents and conclusions of the 3 examination reports are not admissible because the makers of the reports were not called to give evidence during the trial.  The 3 reports were included as items No 37, 38 and 39 in the plaintiff’s hearsay notice dated 2.4.2012, but the defendant did not serve a notice under section 47 of the Evidence Ordinance for the purpose of objecting the admissibility of these 3 reports.  During the trial the defendant did not raise any objection to the admissibility of these 3 reports.  The contents of these reports have probative value.  There is simply no basis for the defendant to object to the admission of these reports.

15.  The defence counsel also submits in paragraphs 65 to 67 of her final submission that no weight is to be attached to the contents of the documents adduced by the plaintiff shortly before the trial.  All these documents were included in the plaintiff’s second supplemental hearsay notice dated 14.8.2012.  But the defendant did not serve a notice under section 47 of the evidence to object to the admissibility of these documents.

16.  At the beginning of the trial the defendant did raise the matter relating to the admissibility of these documents.  But it did not raise further objection relating to the admissibility of these documents during the trial.  Mr Kin Leung admitted that he had written some of those e-mails and that he had seen all the e-mails and reports included as part of those documents.  The defendant did not challenge the authenticity of those e-mails and reports.  The submission that no weight should be given to the contents of the documents adduced by the plaintiff cannot be correct. 

Damages

17.  In respect of the goods returned by GL on 5.7.2010, both parties agreed that the figure for the returned goods was 6,275.  So the loss suffered by the plaintiff is US$105,420 (6,275 x US$16.8).  The Returns Agreement dated 4.3.2009 provides that in respect of the return of defective products freight charges from Germany to Hong Kong will be on buyer’s (the plaintiff’s) account.  So this court will not award damages to the plaintiff for such freight charges.  The total loss suffered by the plaintiff in respect of the defective products is therefore US$113,551.2 (US$105,420 + US$8,131.2).

18.  For the above reasons the plaintiff succeeds in its claim in the amount of US$113,551.2.  I dismiss the counter-claim.

19.  I order that the defendant do pay, within 14 days from today, the sum of US$113,551.2 to the plaintiff with interest, at judgment rate, commencing from 29.11.2010 until satisfaction.

Costs

20.  I make an order nisi for costs, to be made absolute in 14 days’ time, that the defendant do pay costs of these proceedings to the plaintiff, to be taxed, if not agreed, with certificate for counsel.