KAI NGAI PRINTING & PAPER PRODUCTS CO. LTD. v. KONG KWAN CHUN t/a GRACE PRINTING EQUIPMENT CO.

DCCJ8576/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 8576 OF 2000

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Judgment

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The Plaintiff herein is a printing concern. The Defendant herein is a dealer in printing machinery. In early 2000, the Plaintiff wanted to purchase a second hand four colour printing machine for installation in China. Through someone's introduction the Plaintiff came to know a person surnamed Lee ("Mr. Lee") who gave the directors of the Plaintiff a name card bearing the logo and name of the Defendant. In due course, Mr. Lee brought one Jimmy Lau ("Mr. Lau") to meet the directors of the Plaintiff. According to the directors of the Plaintiff, Mr. Lee appeared to them to be an employee of the Defendant and Mr. Lau the boss of Mr. Lee.

2. After negotiations, the Plaintiff and the Defendant entered into a written contract ("The March Contract") in the following terms:-

"CONTRACT

NO: J003070

DATE : 07-3-2000

Buyer:	KAI NGAI PRINTING AND PAPER PRODUCTS LIMITED
Address:	Room 501, Good Luck Industrial Centre, 808 Lai Chi Kok Road, Kowloon, Hong Kong.

Telephone: 27434160 (3 lines)

Fax No. : 2785 5158

Seller:

GRACE PRINTING EQUIPMENT COMPANY

It has been agreed between the parties that the seller shall supply to the buyer the following machine.

One Second hand Roland 604-3B four-colour printing Machine

Printing Size:	1020mm x 720 mm
Year:	1992
Serial No.:	652-21642B
Machine inclusive of:	Version II Computerized remote Control ink container, alcohol printing system, remote control printing unit, Weko powder-injecting machine, recording system, Edlemann cold water system, electrical-driven margin cutter, thick paper printing equipment, decurring system, speed plate clapping system, electroplated roller, air blaster, recycled paper feeder, recycled paper holder, scanner, standard equipment.

Other Terms and Conditions :-

1. Price:		HK$2,680,000.00, CIF Customer's factory in Guangdong Province, China, including installation and fine turning and maintenance for half a year.
2. Loading:		Despatch from Europe before 15th April 2000
3. Payment:	----	Deposit of HK$100,000.00 upon signing of Contract. (If machine is found to be unsatisfactory after inspection, this sum is to be refunded).
	----	Immediate payment of HK$500,000.00 after the inspection. Immediate payment of HK$1,780,000.00 after the arrival of the machine in Hong Kong.
	----	After the installation and fine turning, HK$300,000.00 has to be paid immediately.

4. When the machine is ready for delivery, the Buyer should take delivery immediately. In the event of any delay, the charges shall be borne by the Buyer.

5. The Buyer shall arrange the import custom procedure into China. The Seller shall not be responsible for that.

6. This machine is in Portugal. The Seller shall allow two persons to come for inspection but the inspecting staff should arrive at the factory for inspection before 23rd March.

___________________________________________________________

Confirmed and accepted by :	(Sellers)
(Buyers)	Grace Printing Equipment Co.
(Signed and chopped)	(Signed and chopped)
(Signed : illegible)	(Signed : illegible)

3. Pursuant to Clause 3 of the March Contract, the Plaintiff paid the initial deposit of $100,000 to the Defendant. There was delay in arranging inspection of the machine under Clause 6 and the inspection party did not see the machine until 30 March 2000. The inspection party included one Lei Kok Khing ("Mr. Lei") a director of the Plaintiff, and one Cheung Chung Sze ("Mr. Cheung") then a technician/machine operator of the Plaintiff, and Mr. Lau.

4. According to the Plaintiff's pleaded case:-

" The Defendant has through its Lau Yin Yue, Jimmy been immediately informed by Lei Kok Khing of the Plaintiff during and after the inspection that the Plaintiff found the machine to be unsatisfactory and not acceptable.

7. Further and subsequent to such inspection and examination in Portugal and on or about 3rd April 2000, the Plaintiff gave a written notice to the Defendant informing the Defendant that as the machine was found to be unsatisfactory and unacceptable, the Defendant was required pursuant to clause 3 of the [March Contract] to refund the sum of HK$100,000.00 to the Plaintiff.

8. By issuance of the said notice, the Plaintiff thereby exercises its right of terminating the [March Contract] pursuant to the express terms and conditions of the [March Contract]. Such notice was countersigned by [Mr. Lee] of the Defendant for and on behalf of the Defendant, thereby confirming the Defendant's acceptance of and agreement to the terms as contained therein.

9. By reason of the matters aforesaid (and in particular, Paragraphs 5, 6, 7 and 8 hereof), the Plaintiff was entitled to treat the Agreement as terminated and demand the return of the said sum of HK$100,000.00."

5. The Plaintiff's case alludes to the following problems with the machine in Portugal:-

(1) the body of the machine was old and dirty and not kept in good condition;

(2) the running of the engine of the machine was not smooth and was noisy and was indicative of the need for repair; and

(3) the quality of the printing was not up to merchantable quality or standard acceptable to the Plaintiff. In particular, the various colours of the printing were out of position towards the latter part of the printed page.

6. The notice of termination relied upon by the Plaintiff reads:-

" Kai Ngai Printing & Paper Products Co. Ltd.

Date : 3/4/2000

To:	GRACE PRINTING EQUIPMENT COMPANY
Re:	Contract Number : J003070 DATED 07-03-2000 One Second Hand ROLAND 604-3B four-colour Printing Machine

This is to notify you that after conducting an inspection of the machine in Europe from 29th March 2000 to 31st March with your Mr. Lau Kin Yu, we found that the Machine is not up to a satisfactory standard and not acceptable.

In accordance with clause 3 of the Contract, please return the deposit of HK!00,000.00 to us as soon as possible.

(Signed)	(Chopped with the chop and signed)
LEE HOI SHING	(Signed : illegible)
Grace Printing Equipment Company	Kai Ngai Printing & Paper Products Co. Limited"

It is immediately apparent from the wording of this notice that by signing at the bottom of the document Mr. Lee did not admit any liability on behalf of the Defendant. Indeed Mr. Chan, counsel for the Plaintiff, did not really press for treating the notice of termination as anything other than a notice. So, although the question of whether Mr. Lee had capacity to bind the Defendant was at one stage a contested issue, Mr. Lee's role or action is largely irrelevant for the purposes of this action. Nonetheless, should it be necessary to decide whether Mr. Lee had authority to act for and on behalf of the Defendant in contractual matters, I have little difficulty in finding that he had not. In any case, there is a further problem with the notice of termination that I will revert to in due course.

7. After termination of the March Contract, the Plaintiff entered into another contract ("The April Contract") with another dealer to purchase a machine similar to that in the March Contract. The terms of the April Contract are as follow:-

"No. S000406

Date: 28th April 2000

This contract for the Sales and Purchase of the undermentioned goods in this day made between TOPNOTCH PRINTING EQUIPMENT COMPANY (hereinafter called "the Sellers") and Kai Ngai Printing & Paper Products Company Limited Room 501, Good Luck Industrial Centre, 808 Lai Chi Kok Road, Kowloon, Hong Kong

Tel 2743 4160

Fax 2785 5158

(hereinafter called the Buyers) upon the terms and conditions stated on the face and back hereof.

___________________________________________________________

Description of Goods

One set of Used Roland four colour printing press

Model:	R604-3B
Serial No.:	654 22390B
Year 1992

Equipped with:	RCI II	Rolandmatic 1
	chromed impression cylinder	quick action clamp
	nonstop feeder	anti-ghost roller
	WEKO powder sprayer	pneumatic side lay
Quantity:	electronic side lay	vacuum table
	remote control of registration	IR Dryer
	cooling inking	standard accessories

Price :

CIF Chine ................. HK$2,500,000.00 (the above price including installation and one month maintenance, but not including import documentation and insurance expenses from Hong Kong to Mainland China)

Shipping/Delivery:

Mid August

Payment :	Buyers to pay deposit HK$50,000.00 upon signing, HK$2,350,000.00 opening of Letters of Credit in favour of the Sellers, Paid in accordance 《Warehouse Receipt》, Balance HK$100,000.00 to be settled after installation
Remarks :	1. Seller will send designated personnel to Germany for supervising the packaging into the container and taking photos, Seller responsible for cleaning the machine 2. Seller will remould the four ink rollers of the machine

Confirmed and accepted by :	Confirmed and accepted by :
Chop and signed	Chop and signed
(signed : illegible)	(signed : illegible)

It is not dispute that the machine under the April Contract was paid for and installed as required by the Plaintiff. It is to be observed that the April Contract enabled the Plaintiff to acquire a machine of the same model and year of make as that in the March Contract for $180,000 less.

8. On the other hand, the Defendant's case is that no one from the Plaintiff at any time in Portugal informed the Defendant that the Plaintiff was dissatisfied with the machine under the March Contract. Instead, the Plaintiff's representatives on the spot in Portugal specifically told Mr. Lau that they were satisfied with the machine. It was not until some time in May 2000 that the Defendant learned indirectly that the Plaintiff would not proceed with the March Contract. However, by that time, the Defendant had arranged for the machine under the March Contract to be shipped to Hong Kong. The machine arrived in Hong Kong in June 2000. Obviously, the Plaintiff refused to take delivery. Consequently, the Defendant had to re-sell the machine to another dealer by another contract ("August Contract") for the market price that was $500,000 less than the price in the March Contract. The Defendant counterclaims against the Plaintiff for the loss due to price difference on re-sale.

The Law

9. Mr. Chan for the Plaintiff sought assistance from two authorities : Haegerstrand v. Anne Thomas Steamship Co. Ltd. (1904) 10 Com. Cas. 67 and Docker v. Hyams [1969] 1 W.L.R. 1060. The principle supported by these two cases can be found in the headnote of Haegerstrand v. Anne Thomas Steamship Co. Ltd.: -

"that a bona-fide exercise of judgment on inspection entitled the purchaser to disapprove, and that the deposit was recoverable back by him, whether the disapproval of his inspectors was based upon reasonable grounds or not."

10. In the present context, Mr. Chan contended that since the Plaintiff relied on the judgment of Mr. Lei and Mr. Cheung and disapproved the machine, the deposit of $100,000 is recoverable. It does not matter whether the judgment of Mr. Lei or Mr. Cheung was reasonable or not. In other words, the actual conditions of the machine in Portugal are of no relevance.

11. Mr. Kwong, counsel for the Defendant, had no quarrel with Mr. Chan on the principle just mentioned. However, Mr. Kwong contended that the real issue in this case is not whether the Plaintiff disapproved the machine in Portugal on reasonable ground or not, the question the court has to decide is whether in fact the Plaintiff disapproved or accepted the machine. The Defendant's case is that Mr. Lei and Mr. Cheung approved and accepted the machine on the spot in Portugal and the subsequent disapproval as evidenced by the notice of termination cannot be bona fides.

12. In the light of the evidence before the court, I think Mr. Kwong correctly identified the crucial issue. Accordingly, I turn to assess the evidence.

The Facts

13. Mr. Lau gave evidence for the Defendant. According to him, the March Contract was negotiated by him on behalf of the Defendant with the directors of the Plaintiff. He accompanied Mr. Lei and Mr. Cheung to Portugal to inspect the machine. During the inspection, the machine was run for about an hour at first at slower speed but later at higher speed. Samples from the print run were shown to Mr. Lei and Mr. Cheung. Mr. Lei was quiet throughout the inspection. Mr. Cheung, the technician, noticed tiny dot smudge on the print samples. Mr. Lau explained to Mr. Cheung the cause of such dot smudge. Mr. Cheung was satisfied with the explanation. Mr. Lau also pointed out to Mr. Lei and Mr. Cheung that the machine was giving some irregular noise. He, Mr. Lau, was able to locate the source of the irregular noise and showed the cause to the Defendant's representatives. It was a problem with the bearings for one of the ink rollers of the machine. It would be easy to replace the bearings for $1,000. Mr. Cheung also accepted this explanation and he (Mr. Cheung) told Mr. Lau that the machine was accepted.

14. After returning to Hong Kong, according to Mr. Lau, he and his firm chased Mr. Lee to chase the Plaintiff for the second instalment of $500,000. This is because in the second hand printing machine dealing trade, Mr. Lee was a kind of agent between the buyer and the seller. Allegedly, Mr. Lee told Mr. Lau and the Defendant firm that the Plaintiff was stalling payment. In May 2000, Mr. Lau could no longer find Mr. Lee but Mr. Lee telephoned Mr. Lau to say that he (Mr. Lee) had been forced by the Plaintiff to sign a document. Mr. Lau and his firm got formal notification later in May when solicitors for the Plaintiff wrote to the Defendant of the Plaintiff's stance that the March Contract had been cancelled.

15. Mr. Lau's evidence also went into some details about the background and the performance of the machine during inspection. I think it cannot be seriously disputed that Mr. Lau has expert knowledge of the type of machine under consideration.

16. It appeared to me that there is nothing inherently incredible in the evidence given by Mr. Lau. In terms of demeanour, this witness exhibited supreme air of confidence and integrity. In short, I can find no reason to doubt his evidence.

17. The Plaintiff called three witnesses - Madam Wan, Mr. Lei and Mr. Cheung. Madam Wan and Mr. Lei are in fact a couple and co-directors of the Plaintiff. Madam Wan was the first witness. But since only Mr. Lei and Mr. Cheung went to inspect the machine and allegedly these two gentlemen rejected the machine on the spot, I shall deal with their evidence first.

18. Both Mr. Lei and Mr. Cheung stated under oath that during the inspection they found the machine in Portugal dirty, damaged, giving irregular noise and the print sample of unacceptable quality. However, there are significant inconsistencies in their evidence. According to Mr. Lei, he has operated printing machines and is knowledgeable about printing and printing machines. But Mr. Cheung said that Mr. Lei had little or no knowledge about printing machines, thus he (Mr. Cheung) was brought along to do the inspection. Mr. Cheung was adamant that Mr. Lei told him that if he (Mr. Cheung) find the machine acceptable then Mr. Lei and the Plaintiff would take it.

19. Also according to Mr. Cheung, Mr. Lei did not speak to Mr. Lau; it was Mr. Cheung who told Mr. Lau that the machine was unacceptable. Mr. Lei who gave evidence before Mr. Cheung, however, stated that it was he (Mr. Lei) who (after consulting Mr. Cheung) decided to reject the machine and personally told Mr. Lau of this decision. Mr. Cheung, when confronted during cross-examination with the earlier evidence of Mr. Lei, corrected his own evidence and said that in fact both Mr. Lei and he had told Mr. Lau that the machine was rejected. However, the discrepancies do not stop on this point. Mr. Cheung also said that it was when the inspection party had left the printing factory and gone to the hotel that he (Mr. Cheung) told Mr. Lau outside the hotel that the machine was unacceptable. But Mr. Lei said that he told Mr. Lau that the machine was unacceptable when the inspection party were at the airport about to board the plane for return to Hong Kong through Frankfurt. So it is not entirely clear where, when and how many times Mr. Lau was told that the machine was rejected.

20. On the quality of the print samples, Mr. Lei and Mr. Cheung gave different descriptions of what they said was the defect in the samples.

21. In regard to the physical aspects of the machine and the factory in Portugal, Mr. Lei and Mr. Cheung gave different versions too. Furthermore, although both Mr. Lei and Mr. Cheung said that one of the reasons for rejecting the machine in Portugal was that it was dirty, there cannot be serious dispute that the machine can be cleaned and would be cleaned for delivery. Indeed, by the April Contract, the Plaintiff bought a machine that required cleaning.

22. Both Mr. Lei and Mr. Cheung were closely questioned by counsel for the Defendant about the unacceptable features of the machine that they alleged. Their answers gave me the distinct impression that neither of them knew much about the type of machine or that machine under consideration.

23. Taking all factors and circumstances into consideration, I find both Mr. Lei and Mr. Cheung unreliable as witnesses. I am not convinced, on the balance of probabilities, that either of them at any time told Mr. Lau that the machine was rejected or that they had bona fides reasons to reject. I believe Mr. Lau told the truth, i.e. that Mr. Cheung told Mr. Lau in Portugal that the machine was accepted and that this must be communication with the tacit approval of Mr. Lei.

24. Theoretically, even though representatives of the Plaintiff had told Mr. Lau in Portugal that the machine was accepted, those representatives might have reported back to the Plaintiff that the machine was unacceptable and the Plaintiff on such report could still decide to reject the machine. It is the evidence of Madam Wan that she was informed by Mr. Lei that the machine had been found to be unsatisfactory and she gave written notice of rejection to the Defendant. This notice was allegedly acknowledged by Mr. Lee on behalf of the Defendant. I have already dealt with the question of the authority of Mr. Lee to bind the Defendant. My concern now is the written notice. Madam Wan said that the notice was prepared by her and printed by computer on the day Mr. Lee signed to acknowledge it. However, as pointed out by counsel for the Defendant, the date "3rd April 2000" on that notice is of a font obviously different from that of the other computer printed parts. This is highly irregular. No one would deliberately choose to tell a computer to print a document of this nature in different fonts. Counsel urged me to infer that the date on this written notice was inserted later i.e. the written notice of disapproval was an ex post facto reversal and not genuine. I find that this notice was contrived evidence to support the Plaintiff's decision to look for another machines.

Conclusion

25. For the reasons given, I believe the Plaintiff did not find the machine unsatisfactory. I find that the Plaintiff had in fact accepted the machine. In the premises, the claim for recovery of the deposit of $100,000 fails.

The Counterclaim

26. Mr. Lau gave evidence as to how and why he sold the machine to another party in August 2000. He produced the contract for this sale in August 2000. A witness from the purchaser ("Mr. Au Yeung") gave evidence to confirm completion of the transaction.

27. There is no reason for me to think that the sale in August 2000 was otherwise than genuine and for market price. Mr. Lau explained that the massive drop in price for the August Contract was due to the machine being in packing and could not be set up for demonstration to end-user buyers. The machine had to be sold to a trade dealer as a "dead machine". Counsel for the Plaintiff diligently cross-examined the Defendant's witnesses but he really did not have significant materials on which to challenge the August sale. Counsel did, however, succeed to show that the sale in August saved the Defendant a few thousand dollars for delivery costs to China that would have to be spent by the Defendant had the sale to the Plaintiff went through. Counsel for the Defendant conceded that credit may be given to the Plaintiff for this to the tune of $6,000.

28. Counsel for the Plaintiff also succeeded to show that the sale in August meant that the Defendant did not have to incur costs of installation of the machine for the Plaintiff. Counsel for the Defendant, on instructions, could not accept that this was a real saving because installation would normally be done by staff engineers of the Defendant and so there was no need to pay extra. I think staff engineers must cost the Defendant unless they normally work for no wages. However, I have been given no material to assess the (staff) cost for installation.

29. Finally, counsel for the Defendant properly conceded that credit should be given to the Plaintiff for the $100,000 deposit already paid to reduce the amount of damages that the Defendant counterclaims for loss of bargain.

30. There is no doubt that the Defendant lost $500,000 as the difference in contract price. Credit for the $100,000 deposit paid by the Plaintiff reduces the loss to $400,000. I think justice would be done if I take off a round sum of $50,000 from the $400,000 to reflect savings in delivery and installation costs for the Defendant as a result of being discharged from the March contract.

Order

31. Accordingly, the Plaintiff's claim is dismissed. There is judgment for the Defendant on the counterclaim for $350,000 with interest at the judgment rate in accordance with section 50 of the District Court Ordinance, Cap. 336. The Plaintiff is also to pay the costs of the Defendant for the whole action, such costs to be taxed if not agreed. There is certificate for counsel.