Kwong Wing Hing International Ltd. v. Kin Hing Hong Petroleum Products Co. Ltd.

1991, NO. A 2404

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. In this action the Plaintiff's claim against the Defendant arises from the supply of diesel oil by the Defendant to the Plaintiff in Dong Guan in the People's Republic of China. The Plaintiff alleges the diesel oil was so defective that it caused substantial damage to its electricity generating equipment. At the commencement of the trial of this action, objection was taken to the fact that certain documents had been disclosed at a late stage in the proceedings. Since these documents apparently related to the question of quantum and not to liability, the parties agreed to treat the trial before me as the trial on liability only and to defer the question of quantum to be assessed later.

2. The Plaintiff runs a factory in Dong Guan which manufactures a number of products such as detergents, washing powders and camphor balls. The Plaintiff set up its factory in Dong Guan in 1990. Because of the difficulties relating to power supply in Dong Guan, it was necessary for the Plaintiff to arrange its own electricity generating plant for its factory to cater for the long periods of time when electricity was otherwise unavailable. The Plaintiff, therefore, bought a Scania diesel generator. A copy of the contract with Yorkway Limited dated the 8th May 1990 for the supply of the generator is contained in the documents. That generator was installed in July of 1990 and then Mr. Wu Ying Shui, who at that time was the production supervisor of the Dong Guan factory, contacted the Defendant to see whether he could arrange for the supply of diesel oil.

3. The Defendant is the distributor in the People's Republic of China, or at least in the relevant part of the People's Republic of China, of petroleum products made by Mobil Oil. Those products include diesel oil, turpentine, paint thinner and plastic printing ink solvent. The Plaintiff's introduction to the Defendant had apparently been made by another company in the locality by the name of Hop Tak, which lent the Plaintiff 10 barrels of diesel oil, but that is a matter which is incidental to these proceedings.

4. Mr. Wu spoke to a Mr. Lai of the Defendant and wanted assurances on a number of matters. Amongst others, there was firstly the question that the Defendant was able to deliver oil and deliver it in the quantities that would be required. Secondly, that it would be able to deliver directly to the Plaintiff's factory. Thirdly, that any diesel oil that was supplied at Dong Guan would be of the same quality as that supplied in Hong Kong. Mr. Wu told me he was particularly concerned about quality because he knew that diesel oil could be obtained from sources in the People's Republic but that the quality was dubious. The Plaintiff was apparently assured about the matters that were concerning it and it was arranged that the Defendant would supply the Plaintiff with diesel oil from time to time. The diesel oil was supplied in standard 200 litre (equivalent to 50 gallon) barrels (or drums). A deposit of HK$50 was charged for each barrel which was deductible from the next invoice after the barrels had been returned.

5. The first supply of diesel duly took place and thereafter there were further supplies. On 21st September 1990 the Plaintiff's diesel engine broke down and could not be restarted. Investigation revealed that the engine had suffered damage as a result of using contaminated fuel. The first matter in dispute between the parties in this case is as to whether it was the Defendant which supplied the contaminated fuel or whether the Plaintiff itself had caused the contamination by reason of its handling, or rather mishandling, of the diesel fuel after delivery.

6. The Plaintiff's evidence was that all its diesel oil had come from the Defendant; it had been kept in the barrels in which it was supplied and, when required, had been pumped by means of a hand pump into the tank which was underneath the generator. The hand pump and the tank are shown in the Plaintiff's photographs which are exhibited P.2.

7. Although Mr. Wu did not himself pump the oil from the drums in which it had been delivered, he gave instructions as to how the oil was to be stored and pumped by use of the hand pump directly into the tank of the generator when required. Although it was not Mr. Wu's responsibility to supervise the staff, he was satisfied from what he had seen that his instructions were carried out. The person mainly responsible for supervising the workers at the Dong Guan factory in 1990 was a Mr. Chow Pui. He is now 70 and is retired and living in Hong Kong, having retired some three years ago. He appeared to me to be a careful and reliable person. He said that the two people who were responsible for pumping the oil were a Mr. Tse Kam Tong and a Mr. Tang. It seems that it was primarily Mr. Tse, who did the hand-pumping of the diesel oil. It would take between ten and twenty minutes to pump out a 200 litre barrel of diesel oil. Mr. Chow said that he had seen the diesel oil being so pumped from the drums into the Plaintiff's generator tank and that the diesel oil was never stored in other drums than those supplied by the Defendant.

8. After the Plaintiff's generator broke down and the diesel engine could not be restarted, the diesel oil in the generator tank was found to be highly contaminated and to have small particles which could even be felt. Upon further investigation, it was found that at least 5 barrels of diesel oil were contaminated. A sample from one of the barrels was provided in 1991 to Mr. Lo Kok Keung, who was the Plaintiff's expert witness. That sample was exhibited in evidence as P.1. I have examined P.1 visually and it is quite clear to me that it is totally unsuitable for use in an engine. It is a nasty, thick looking, dark fluid floating on a layer of white fluid of unknown composition.

In it are floating small black particles. The best description of it would be "gunk." Mr. Lo said in evidence that, as far as he could remember, when he received the sample it was homogenous and that the white fluid' at the bottom was not there. I found that simply shaking the bottle was sufficient to mix the fluid so that it appeared to be a single thick dark colour, again with bits or particles in it. The Defendant also exhibited in evidence another sample of contaminated fuel which was slightly better looking to the extent that it was not so dark and did not appear to have the white fluid at the bottom. Nevertheless, this too would seem to me to be highly unsuitable to be put in a combustion engine. This sample had apparently been supplied to the Defendant quite recently.

9. I should note at this stage that there was no dispute that if diesel oil of the type which has been exhibited was indeed that which was supplied by the Defendant, then it was not of merchantable quality and not fit for the purpose for which it was supplied. In my view, the Plaintiff has established that, on a balance of probabilities, the diesel oil which the Defendant supplied was seriously contaminated. There is no way of telling from which delivery from the Defendant the contaminated oil came. There were a total of 46 barrels delivered on the 7th September 1990. This was the last delivery prior to the breakdown of the machinery and the natural inference to be drawn is that the contaminated oil was supplied in that delivery. A total of 5 barrels were found to be contaminated and they are shown in the photographs which have been exhibited P.2, specifically the bottom photograph of the last page of P.2 which corresponds to p. 35 of the Plaintiff's bundle. It will be noted that three and probably four out of those barrels are a blue colour and the remaining barrel is red.

10. The Defendant challenged the Plaintiff's evidence as to this. It was the Defendant's case that the Plaintiff had itself contaminated the diesel oil by reason of the fact that the oil had been transferred from the Defendant's barrels into other barrels which the Plaintiff had at its factory.

11. It is an admitted fact that the Plaintiff had a number of other commodities delivered to its factory in 200 litre (or 50 gallon) drums. In particular, there was alkyl benzene sulphonic acid which was delivered in green drums, gum and surfactant. Mr. Wu said in his evidence that to extract the gum from the drums, it was necessary to cut away the top lid and then, using a fork lift truck, the whole drum would be tipped up-side down and the gum put into a large mixer or blender. In respect of the surfactant, the lid was cut away and the surfactant was ladled out as required. In respect of the alkyl benzene sulphonic acid, a hole was punctured in the top of the barrel, so that sufficient pressure could be released in order for the substance to be removed from the barrel. Mr. Chow in his evidence said that the barrels in which these commodities were supplied were new barrels. All this seems perfectly sensible and normal to me and I have no reason to doubt the Plaintiff's evidence in this respect. Mr. Chow said that the emptied barrels were sold off.

12. Each of the Plaintiff's witnesses were clear that there was no syphoning out of diesel oil from the Defendant's barrels into the Plaintiff's as there was no need for that to be done, it would have been time-consuming and in any event was contrary to instructions. The Defendant suggested that the Plaintiff's employees did remove the diesel oil from the Defendant's barrels into other containers so that the Defendant's barrels could be returned to the Defendant as soon as possible and in some instances on the same day as delivery, so that the HK$50 deposit could be retrieved by the Plaintiff as quickly as possible. In my view, it is quite clear that did not happen and indeed, there would have been no commercial sense in the Plaintiff trying to return barrels to the Defendant early simply for the sake of retrieving their HK$50 deposit at an earlier date. If one took into account the fact that it is merely the interest on the HK$50 deposit on the barrel which would have been at stake, one can see the small amounts that would be involved. One could hardly imagine that the Plaintiff's workers would syphon out oil into other barrels on their own initiative since they would stand to gain nothing from it themselves, save ten to twenty minutes extra labour in pumping out each barrel.

13. The Defendant attempted to support its contention that the Plaintiff had pumped out diesel oil into other containers, by the suggestion that because more barrels had been returned to the Defendant than the Plaintiff would have had on a particular delivery date, therefore the inference should be drawn that in the interval between the first and second delivery on a particular day, the workers, or at least one of them, at the Plaintiff's factory were busy decanting diesel oil. The up-shot would be that there would have been extra empty barrels from the Defendant which would be ready to be returned when the Defendant's lorry appeared with its second delivery of the day. Although on the face of the records, the Plaintiff did return more barrels to the Defendant than it had received on previous deliveries, I consider that it is most likely that the Plaintiff's workers gave the Defendant's delivery lorry driver barrels which had not come from the Defendant. I accept Mr. Chow's evidence that the Defendant's barrels were of variable quality and hence it is quite likely that their drivers would have taken back any barrels that would have been given to them. I am not satisfied on the evidence that all the Defendant's barrels had the Defendant's names on the top although I do accept, as Mr. Lai, who gave evidence on behalf of the Defendant said, that some and probably many of their barrels did.

14. The Defendant's case was that they had a system of keeping the drums for the separate products which they supplied, in particular diesel oil, turpentine, paint thinner, plastic printing ink solvent, separate and that there could be no possibility of confusion. I accept, as must be natural, that the Defendant would necessarily need to keep these commodities separate, since of course, it would be disastrous if a customer received the wrong product from the Defendant and attempted to use it. Mr. Lai said that all the Defendant's diesel oil was supplied in blue barrels. That may well have the intended practice and indeed, as I have noted, three and probably four of the five barrels shown in the photograph which is part of exhibit P.2, were indeed blue barrels. I am by no means satisfied, however, that the Defendant's system was anything like fool proof. The photographs which were exhibited at pp.11 and 12 of the Defendant's bundle, were taken some two years or more after the events with which this case is concerned. The photograph at p.11 shows that although some of the Defendant's barrels may well have been marked with the "Eternal" logo in a hexagonal device, the Defendant's barrels seem to me to vary slightly in construction and also in shade of colour to the extent that they may not all have originated from the Eternal Chemical Company, but may have come from other sources. The photograph at p.13, when examined, does not bear out Mr. Lai's suggestion that the diesel oil barrels were carefully segregated. There is, as Mr. Lai pointed out to me, in the row of barrels seen being filled with diesel oil, one barrel which is apple-green. Mr. Lai stated in evidence that some of the Defendant's barrels were not necessarily in pristine condition because there were customers who returned them in a battered state. Furthermore, I bear in mind that in this case, the complaint which is made by the Plaintiff, is not that the wrong fuel was delivered, but that it was contaminated.

15. I note here that it was Mr. Lai's evidence that great care was taken in cleaning the inside of the used barrels which the Defendant would then fill with the relevant product. Indeed, it appeared that the Defendant found it necessary not only to clean the inside of all its barrels with caustic soda, but to insert a chain and then roll the barrel so that the chain could scrape the inside of the barrel. Clearly, if this was found to be necessary, the Defendant was in a habit of using barrels to contain the fluids which it sold, which previously contained serious amounts of dirt and foreign matter which caused such stringent cleaning to be necessary.

16. I do not lose sight of the fact that Mr. Lai in answer to a leading question from his Counsel, gave evidence that the Defendant had never had any other trouble in supplying goods from the Dong Guan plant. It was unfortunate, however, that as a result of a leading question from the Defendant's Counsel, the impression that was at first given, was that this had been after 16 years operation of that plant. Whilst I had found it difficult to imagine that it should have been for as long as that, it transpired that the plant had only been in operation for two years prior to 1990. Whilst I do not believe that Mr. Lai was trying to mislead me, I consider that this incident is symptomatic of the way Mr. Lai gave his evidence, that he was inclined to say things without really thinking about them. I did not feel that his evidence was truly reliable.

17. Mr. Lai also said in evidence that when he visited the Plaintiff's factory in Dong Guan after the contaminated fuel was discovered, he found that the fuel was stored in an alkyl benzene sulphonic acid drum. He said that he had written this down on a card, exhibit D.3, which was one of Mr. Chow's business card. This document was not disclosed on discovery, but revealed during the cross-examination of Mr. Chow. I allowed this document to be admitted in evidence although I am clearly of the view that it should have been disclosed earlier. The card has the words "fulfonic acid" on it and not the words "alkyl benzene", in English at any rate. Mr. Chow, whose evidence I accept, says that when Mr. Lai arrived at the Plaintiff's factory in September 1990, he was otherwise engaged and only met Mr. Lai when Mr. Lai was about to leave. I consider that it would have been more than likely that Mr. Lai would have seen alkyl benzene sulphonic acid drums in the Defendant's premises and I consider that his notation on Mr. Chow's card is equally consistent with him having noticed those barrels around and noted down what was contained in them with a view to querying whether or not it was that which caused the contamination. I do not accept that the oil which Mr. Lai was shown on that occasion was in those drums. That would have required the oil to be decanted yet again into one of the five drums shown in the exhibit P.2. where it is now. There is no reason for that to have happened and indeed if it had happened deliberately to deceive the Court, it would have been a very serious matter of which no suggestion has been made.

18. In paragraph 14 of the Statement of Claim, it is pleaded that an admission was made by the Defendant at a meeting on the 14th December in the Plaintiff's offices, that the contaminated diesel oil was supplied in drums which the Defendant had mistakenly retrieved and which had previously been used to contain other chemicals. I consider that Mr. Lai may well have said something to that effect but I disregard it from the point of view of holding the Defendant liable for the following reason. Having seen Mr. Lai, in the witness box, I consider that he is liable to say things without considering the full implication and I consider that probably what happened was that Mr. Lai thought that, whilst making a concession in the course of discussions, he could satisfy the Plaintiff sufficiently by making an offer which would not cost the Defendant an excessive amount. In my view, the discussions on the 14th December are likely to have been in the nature of settlement discussions and I disregard them.

19. I hold, therefore, as a fact that the contaminated diesel oil of the type which has been exhibited and which is contained in the 5 drums shown in the photographs on p.35 of the Plaintiff's bundle, were supplied by the Defendant and in all likelihood came from the last delivery, i.e. that made on the 7th September.

20. Mr. Lo Kok Keung was, as I have indicated, called as an expert on behalf of the Plaintiff. He gave evidence that he had used some of the contaminated diesel oil in an engine which was a smaller, yet similar in filters in the engine fuel line so that there could be no difficulty caused by that. However, the dirt and sediment in the fuel caused the filters to become blocked and he also found that after a short period of running, small particles had accumulated around the injection nozzles and indeed, he said in evidence that the fuel lines, both up-stream and down-stream of the filters, had particles thereon as well.

21. It was the Defendant's case that as a matter of causation, they are not responsible for the damage to the Plaintiff's engine because of the use of the contaminated fuel. They say in the first place that the Plaintiff's workers should have noticed the contamination of the fuel when they were filling the tank of the generator. That is a contention which I entirely reject. If people supply fuel which is contaminated, they cannot complain if the persons supplied use it without noticing the contamination. It is perfectly obvious that any fuel for combustion engine must be clean, free from sediment and contamination. Every specification that was looked at during the course of this case and also the Bosch handbook said the same thing.

22. The Defendant also attempted to suggest that the cause of the breakdown was the fact that the filters in the Plaintiff's engine must have been defective or badly maintained. In my view, this contention is not open to the Defendant. Their own expert, Mr. Kwan, said in his report as his conclusion that it was his opinion that the fuel oil was contaminated and caused machinery damage as a result. Whilst his report makes reference to various matters relating to filtration, in no way is it suggested that the filtration of the Plaintiff's generator must have been defective. Indeed, as Mr. Wong for the Plaintiff rightly, in my view, pointed out this contention which was mounted by the Defendant through its Counsel at a very late stage in the proceedings, is based on a misunderstanding of the contamination. On the one hand, there are particles which are clearly visible in, for example, exhibit P.1, but there is also the contamination of the diesel oil which results in a high carbon residue which is termed conradson carbon residue. Both the Plaintiff and the Defendant have analysed the diesel oil and found it to contain on the one hand, 0.72% conradson carbon residue as analysed by the Defendant and 0.67% as analysed by the Hong Kong Standard & Testing Centre Limited on behalf of the Plaintiff. As described in the German specification DIN 51551, the amount of carbon residue provides information on the chemical behaviour of petroleum products and gives indications regarding the tendency of diesel fuels to clog injection nozzles of diesel engines ... . As Mr. Kwan, the Defendant's expert, put in his report at p.2 para. 3.1, the limit for carbon residue, according to his standards, should not exceed 0.1%. It may be that according to the British standards, the carbon residue might be as high as 0.2%. But whatever standard is taken, it is clear that the carbon residue of the contaminated diesel oil was excessive. This in my view, fully supports Mr. Kwan's conclusion that the contaminated diesel oil was prone to be the major element in the blockage of fuel nozzles. Once it is appreciated, there may be a difference between conradson carbon residue and particles or sediment, it appears to me that the Defendant's point on the possible defects in the fuel filtration system and the Plaintiff's generator fall away. I would mention that there was no basis for Mr. Kwan's implication in his report that it was the Plaintiff who was responsible for the contamination.

23. I should also note that when Mr. Lo conducted his tests he found that particles accumulated on the pipes of the fuel pipes both up-stream and down-stream of the filters. He was quite clear about that in his evidence. No suggestion was made to him that the engine he was using had inappropriate or malfunctioning filters. From the care Mr. Lo took about replacing the filters before starting the tests it seems to me that at the very minimum I should proceed upon the basis that Mr. Lo was using an engine that was maintained in a manner that could be expected of a well serviced engine in Hong Kong. Despite this however particles accumulated beyond the filter when the contaminated fuel was used. That it seems to me on its own should be enough to establish that using that fuel was likely to cause problems due to accumulation of particles.

24. In my judgment, therefore, the Plaintiff has succeeded in demonstrating that it was the Defendant's diesel oil as supplied which was defective and contaminated and caused the breakdown of the Plaintiff's machinery. I hold therefore that the Plaintiff is entitled to judgment for damages for breach of contract and that it is not liable to pay the Defendant for the 5 barrels of diesel oil which I have held to have been contaminated. Since it is not established from which of the delivery orders of the 7th September, those are 5 barrels came, I hold that the Plaintiff should be given credit for 5 barrels at the price of HK$460.00 per barrel being the cheaper price of the two prices of diesel oil which was delivered on the 7th September.

25. I give judgment therefore to the Plaintiff for damages to be assessed, against which should be off-set the amount owing to the Defendant as claimed in the Defence and Counterclaim, giving an allowance of the 5 barrels as I have indicated, making a total to be off-set against the Plaintiff's claim of HK$19,708. Since I consider that the Plaintiff was fully justified in refusing to pay for the oil until it had been compensated, I consider there is no merit in the Defendant's contention that the Plaintiff was not entitled to off set the Defendant's claim.

26. Since the hearing of this Action finished after the normal sitting hours on the final day of the hearing, I have been requested to hand this judgment down and make an order nisi for costs which I do. The order, which I make being that the Plaintiff should have its costs of this action to date, to be taxed, if not agreed, and paid. I also make an order nisi that there shall be an enquiry as to damages to be taken before the Master.