GING YA METAL ENTERPRISES CO. LTD. v. YU DER YEE t/a YE SANG METAL SUPPLIES CO.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

1989, No. A4569

HEADNOTE

-Sale of Goods - Construction of Contract - reception of evidence of factual background, genesis and objective aim of transaction in aid of construction.

-Whether sale one of specific goods or of generic goods - whether inspection of the goods, if such took place prior to commencement of negotiations leading to execution of contract, rendered sale one of specific goods so as to exclude dimensional specifications from incorporation as part of contractual description.

- Whether evidence of custom as to dimensional tolerance excluded by contractual provision of precise dimensions.

1989, No. A4569

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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J U D G M E N T

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1. In these proceedings, the Plaintiff, one Ging Ya Metal Enterprise Company Limited, a Taiwanese concern which carries on business as, inter alia, an importer into Taiwan of steel and steel products for commercial resale, sues the Defendant, a Hong Kong individual known as Yu Der Yee trading as the Yee Sang Metal Supplies company, for damages for breach of a written contract dated 13th July 1988 ("the Contract") executed by the Defendant as seller and the Plaintiff as buyer for the supply by the Defendant to the Plaintiff of 5,000 metric tonnes (give or take 58%) of hot rolled steel plates ("the Goods") at an agreed price of US$335 per metric tonne CNF FO Kaohsiung, Taiwan ex Japanese port. The Contract 'expressly stipulates ex facie that the Goods must conform to the following size specifications, namely, 3,800 metric tonnes of dimensions 22mm x 1524mm x 6096mm with the remaining 1,200 metric tonnes (comprising slightly thicker plates) of dimensions 25mm x 1524mm x 6096mm. The Contract further provides by a written addendum signed by the parties and dated 14th July 1988 that a certificate issued by one SGS Taipei in Taiwan ("the SGS Certificate") would be,final as to the weight of the Goods delivered.

2. Shortly after mid-August 1988, the Defendant shipped and delivered to the Plaintiff 4,941.03 metric tonnes of hot rolled steel plates and received from the Plaintiff under the terms of a letter of credit opened by the Plaintiff in the Defendant's favour a total sum of US$1,657,486.20 thereby reflecting payment based on the agreed rate of US$335 per metric tonne.

3. The Plaintiff's complaint in these proceedings is that the plates delivered by the Defendant did not correspond with their contractual description insofar as they comprised varying dimensions different from those contractually stipulated and were commercially less valuable than the Goods originally contemplated to be supplied under the Contract at US$335 per metric tonne. The Plaintiff claims the market value of the plates actually delivered to be US$310 per metric tonne. It is that US$25 per metric tonne difference in commercial value which the Plaintiff currently claims as damages in these proceedings.

4. There was placed before me at the trial by agreement of the parties a report dated 29th August 1988 made by SGS Far East Limited ("the SGS Report") as regards the condition of the plates actually delivered by the Defendant to the Plaintiff when the same were unloaded at Kaohsiung between 17th and 19th August 1988. SGS noted a total of 2,866 plates actually unloaded comprising two lots of respectively 2,184 and 682 plates weighing a total of 4,941.03 metric tonnes arranged. in 32 stacks at the buyers' storage yard. SGS inspected 251 plates in 3 stacks selected at random and measured the length and width of the same. It can be seen from the SGS Report that the plates measured were of varying dimensions (a) either longer or shorter than 6,096mm, the longest being 6,350mm and the shortest being 5,095mm and (b) either.wider or narrower than 1,524mm, the widest being 1,685mm and the narrowest being 1,505mm. The Plaintiff relies on the SGS Report in support of its contention that there has^-been breach by the Defendant of the Contract.

5. Defence counsel, Mr. Alan Leong, never challenged the veracity of the contents of the SGS Report throughout the trial of these proceedings. Nor did he seek to adduce other inspection evidence to show, if it be the case, that the plates actually delivered conformed with the contractually stipulated dimensions. Nevertheless, he submits in closing that the Plaintiff has failed to prove its allegation that the plates deliveied did not conform with the contractually stipulated dimensions since SGS never expressly stated in its report that the plates measured had comprised thicknesses of both 22mm and 25mm wherefor, so his argument goes, SGS "might 'well have picked 3 stacks of plates of 25mm thick leaving the 22mm plates not measured."

6. I confess to finding Mr. Leong's submissions. somewhat astounding for a number of reasons: First of all, throughout this trial, Mr Leong. never once disabused the Plaintiff; or indeed me, of the notion (created since the opening submissions of^-the Plaintiff's counsel Mr. Benjamin Chain) 'that the fact of the plates delivered comprising varying dimensions different from those expressed ex facie the Contract was an uncontroversial issue. Mr. Leong, however, now invites me to speculate that SGS, acting contrary to the laws of probability and chance when selecting 251 plates in 3 stacks at random as aforesaid, have somehow managed to select all plates of 25mm thickness leaving the 22mm plates unmeasured. Not only is any such speculation on my part unwarranted by the evidence, the suggestion of defence counsel of such freak selection by SGS flies in the face of both logic and common sense.

7. Mr. Leong also invites me in his closing submission to indulge in further speculation even more outlandish than his previous invitation that if the dimensional deviations set out in the SGS Report were true, one would not expect to see (as one does in this case) a clean bill of lading evidencing the loading of the plates wherefor, so his argument goes, there were no such dimensional deviations, alternatively the Plaintiff has not discharged its burden of proving the existence of the same. There is absolutely no evidence to show that the master measured each individual plate before loading the same onto his vessel prior to issuing the bill of lading. Indeed, any such suggestion again defies logic and common sense. I hold on the basis of the SGS Report (which is, after all, an agreed document) that the Plaintiff has discharged its burden of establishing on a balance of probabilities that the dimensions of the plates delivered differed from those expressed ex facie the Contract.

8. Mr. Leong makes 3 other points by way of defence on liability to the Plaintiff's claim which, in fairness to him, I think he regards more seriously as his major arguments, namely,

1. That the Contract, upon its true and proper construction, was one for sale of specific as opposed to generic goods such that the dimensions specified ex facie the Contract were never intended by the parties to form part of the contractual description.

2. That the Contract, upon its true and proper construction, incorporated the tolerance levels on dimensional deviations laid down by the Japanese Industrial Standards ("JIS") Handbook wherefor -the plates actually delivered were not in breach of the Contract.

3. That the Contract, upon its true and proper construction, provided for positive tolerance levels of 150mm on both length and width deviations wherefor the plates actually delivered were not in breach of the Contract.

9. Each of the above arguments operates as an independent and.alternative point and I propose to deal with them in turn.

10. The material part of the Contract depicting the Goods and their dimensions is set out as follows:-

11. The first argument submitted by the Defendant raises primarily a question of construction although a question of fact is also interwoven therein. I say this because whether a contract of sale ought properly be characterised as a contract for the sale of specific goods or one for the sale of generic goods is, of course, a question of construction. In aid of construction, I am at liberty to take into consideration, as enjoined by Lord Wilberforce in Prenn v. Simmonds [1971] 1 WLR 1381 (PC) at 1385H "the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the arm of the transaction".

12. Mr. Alan Leong invites me to find as part of that background known to the parties the fact that the Plaintiff (by its director Mr. Huang Ching Sun) had inspected the plates in Tianjin in China prior to executing the Contract to buy the same such that, by the Contract, the Plaintiff intended to buy the very plates inspected wherefor the dimensional specifications appearing in the Contract were intended for reference only and not as a contractual description binding the parties.

13. The difficulty with Mr. Leong's submission lies in the fact that Mr. Huang, who has given evidence in this court and who I regard as a witness of truth having listened to his evidence and observed his demeanour in the witness box, has testified that he had never inspected the plates in Tianjin. The broker who negotiated the Contract between the parties, Mr. Chuang Wan Shan, who has likewise given evidence in this Court and who I also regard as a witness of truth having listened to his evidence and observed his demeanour in the witness box., has testified that not only was he unaware of Mr. Huang having inspected the plates in Tianjin prior to executing the Contract, he was under no impression that the negotiations stemmed from there having been any such inspection.

14. As against the aforesaid evidence, the Defendant has called no witnesses to challenge or contradict the clear evidence of Mr. Huang. The Defendant does not allege that either he or any member of his staff ever accompanied Mr. Huang at the supposed inspection. Towards the end of the trial, Mr. Leong sought my leave to adduce in evidence a statement dated 7th September 1989 signed by two members of staff of one Metal Material Corporation in Shenzhen in China, namely one Lau Wai Fai and one Cheung Kwok Kwong, that they had accompanied Mr. Huang to Tianjin and, whilst there, Mr. Huang "had, in passing, seen the fixed sized steel plates of [the Defendant] and taken some photos of [the Defendant's] plates at the same time".

15. I gave such leave to the Defendant in the exercise of my discretion under 0.38 r.29 of the Rules of the Supreme Court over the Plaintiff's objections. However, I am not impressed by the quality of such evidence and I am not, at the end of the day, persuaded that I should attach any or any substantial weight to the same for the following reasons:

16. First of all, even if I were to take the statement at its face value, Mr. Lau and Mr. Cheung allege no more than that Mr. Huang had, in passing, seen the plates. No proper inspection of the same was ever contended. Secondly, Mr. Leong never once cross-examined Mr. Huang on the question whether or not he had taken photographs of the plates in question. Thirdly, for reasons unexplained, the Defendant has never sought specific discovery of such photographs in the 33 months since commencement of proceedings on 16th August 1989. I am not assisted by the fact that neither Mr. Lau nor Mr. Cheung ever came to Hong Kong to testify whereas the manager of the same corporation, one Madam Mei Yu Hui, did make it to Hong Kong to act as an expert witness in these proceedings on the Defendant's behalf. Mr. Leong sought to attribute the absence of Mr. Lau and Mr. Cheung to the failure or refusal of the Public Security Bureau of the People's Republic of China to issue either of them with the necessary exit permit. However, he was, I surmise, aware of the prospects of their not being able to testify in these proceedings at the very latest by the first week of this trial but, for reasons unexplained, he had neither discovered nor disclosed the statement purported to have been made by these two gentlemen until the second week of the trial when he sought my leave to adduce the same in evidence.

17. I must confess I am not favourably impressed by the defence conduct of these proceedings. If and insofar. as there exists any conflict in the admissible evidence on the question of whether or not there was any inspection or photographing by Mr. Huang of the plates in Tianjin, I prefer the evidence of Mr. Huang to that of Mr. Lau and Mr. Cheung's joint statement wherever such conflict appears. In short, I find as a fact that the Plaintiff had not inspected the steel plates in question prior to executing the Contract. Accordingly, I find the Contract on its true and proper construction to be a Contract for the sale of generic rather than specific goods and that the dimensional specifications form part of the contractual description.

18. I observe, in passing, that even if I were to find that there had been any inspection the plates in Tianjin, the same would not necessarily disqualify the Contract from being one of a contract of sale by description: see s.15(2) of the Sale of Goods ordinance, Cap. 26 and Beale v. Taylor [1976] 1 WLR 1193.

19. Mr. Leong submits in his second argument that the notation "JIS SS34-47" appearing on the Contract incorporates, as a matter of its true and proper construction, the JIS tolerance levels on dimensional deviation. The difficulty with this submission lies in the fact that whereas "SS34" is a JIS notation or abbreviation referring to "steel plates and sheets, strips, flats and bars" there is no such JIS abbreviation "SS47". The explanation for the use of this anomalous notation in the Contract would appear to lie in the need for the parties, catering to the Taiwanese ban on the importation of goods from the People's Republic of China, to suppress the Chinese origin of the steel plates and to disguise the same as Japanese products wherefor the JIS notation crept into the Contract. Following the principles laid down by Lord Wilberforce in Prenn v. Simmonds loc. cit. to look to the background known to the parties in aid of construction of the terms of a written agreement, I bear in mind that the Defendant's original quotation given to the broker referring to the Goods prior to execution of the Contract refers to the tensile strength of the Goods as being 34-47 kgs/mm². Accordingly, I find, as a matter of its true and proper construction, the notation "JIS SS 34-47" to refer to the tensile strength of the plates and not to any tolerance limits on dimensional deviation. Indeed, the JIS tolerances on dimensional deviation are set out in Tables 5 and 6 dealing with respectively.width and length tolerances appearing on pages 1016 to 1018 of the 1988 JIS Handbook, none of which said Tables or pages are referred to in the Contract.

20. Further, there is no warrant for me to imply any such reference to the JIS tolerance limits since the same is not necessary to give business efficacy to the Contract. I have heard much submissions as to whether the JIS tolerance limits ought to be implied as a matter of trade custom governing the supply of hot rolled steel plates. I regard none of those submissions as being persuasive since the specification of precise dimensions in the Contract itself would tend to militate against any such implication on the principle of expressio unius exclusio alterius: see Chitty on Contracts (26th edn.) Vol.1, para.920 and Kum v. Wah Tat Bank Ltd. [1971] 1 Lloyds Rep. 439.

21. Accordingly, I hold that the Contract on its true and proper construction did not incorporate either expressly or by necessary implication any JIS tolerance levels on dimensional deviation.

22. I note in passing that even if I were to hold the JIS tolerance levels on dimensional deviations to have been incorporated in the Contract, the Defendant would still have been in breach of the Contract in that the majority of the plates delivered would still fall outside such tolerance limits. By way of illustration, I note that 190 out of the 251 plates actually measured by SGS exceed the 25mm positive tolerance limit on length deviation provided under Table 6 of JIS 1988 Handbook.

23. Some considerable time was taken up at the trial by the parties canvassing the question whether the Goods contemplated to be supplied under the Contract were to have mill edges or cut edges. I understand by the evidence that steel plates freshly rolled off the roller have sides which are slightly convex in configuration wherefor width deviation may result unless the sides are sheared or cut to precise dimensions. The length of the plate freshly rolled off the roller is necessarily determined by cutting so that a plate would either have two cut edges and two mill edges if the sides be not cut in the manner I have indicated or alternatively four cut edges. The significance between the two edges lies in the fact that the JIS Handbook appears (in Table 5 on p.1017) to provide for unlimited positive tolerance on width deviation in respect of mill edges as opposed to specified tolerance limits on width deviation in respect of cut edges. I find it unnecessary to decide the question whether the Goods under the Contract were to have mill or cut edges since I have ruled the JIS tolerance limits to be inapplicable by reason of their not being incorporated into the Contract.

24. Mr. Leong submits in his third argument that the Contract itself provides positive tolerance limits of 150mm in both length and width deviation. Although it is not a matter of controversy that the draft Contract originally submitted by the Defendant to the Plaintiff expressly provided for such positive tolerance limits, those limits were deleted by the Plaintiff and the deletions were stamped and initialled by respectively the Plaintiff and the Defendant. The sole issue which remains is whether those deletions are contractually binding since the Defendant contends that he was induced to agree to and initial the deletions by a representation made by the Plaintiff through its agent the broker Mr. Chuang Wan Shan that the deletions were wholly insignificant since the Plaintiff had already inspected the goods. Mr. Leong submits to me that, the deletions notwithstanding, the Contract ought properly to be construed as one incorporating positive tolerance limits of 150mm on both length and width deviation.

25. Mr. Leong supports his submissions by reference to the evidence given at the trial by one Miss Yu Man Man, the Defendant's daughter, who handled the negotiations leading up to the execution of the Contract and who testified that the broker Chuang had indeed made such representation to her by telephone which induced her to initial the deletions. As against such evidence, Mr. Chuang has denied ever making any such representation and Mr. Huang of the Plaintiff has likewise denied ever authorising Mr. Chuang to make any such representation on his behalf. Having heard all 3 witnesses testify and having observed their demeanour in the witness box, I have no hesitation in preferring the evidence of Mr. Chuang and of Mr. Huang on this matter where they conflict with that of Miss Yu. Accordingly, I hold that there was no such representation ever made and that the deletion of the tolerance limits means that plates of precisely 6096mm in length and 1524mm in width were contracted to be delivered by the Defendant to the Plaintiff.

26. Mr. Leong submits that in construing the Contract as regards its dimensional specifications, I ought to bear in mind the fact that the Goods contracted to be sold by the Defendant had already been manufactured in China and were being stored in a warehouse in Tianjin awaiting shipment when the Contract was executed. Bearing the same in mind, I see no reason why the Defendant ought not to have cut the plates to their precise contractual dimensions prior to delivery to the Plaintiff (albeit at cost to the Defendant) or alternatively refused to sell the same to the Plaintiff with the dimensional tolerances deleted. The evidence shows that the Defendant might well have lost the Plaintiff as a customer had he insisted on maintaining such tolerance limits, but he would have avoided the legal difficulties he faces now.

27. I turn now to the question of quantum of damages. Mr. Leong rightly points out to me that the Plaintiff relies exclusively on Mr. Chuang's expert evidence in arriving at the respective market values of the goods contracted for and the goods delivered and that he equates the former with the Contract price of US$335 and the latter with the price of goods of varying dimensions sold by one Wishing Long Hong to the Plaintiff at the end of June 1989 at a contract price of US$310 per metric tonne. Mr. Leong submits, therefore, that the Plaintiff has failed to prove any loss and should be awarded nominal damages. I do not accept this submission. Mr. Chuang, whose expertise in the field of steel and steel products was not challenged, testified that those two figures reflected, in his expert opinion, the market value of the two different types of goods. In cross-examination, however, Mr. Chuang conceded that the goods as delivered by the Defendant to the Plaintiff were superior to those sold by Wishing Long Hong to the Plaintiff and should attract an extra US$5 per metric tonne in the market. I accept this evidence and find the market price of the goods delivered to be US$315 per metric tonne so that the difference between the market price of goods delivered and the Contract price is US$20 per metric tonne. I accordingly award the damages to the Plaintiff at the rate of US$20 per metric tonne for 4,941.03 metric tonnes thereby totalling US$98,820.60.

28. In the light of my findings I award costs by way of an order nisi to follow the event to the Plaintiff to be taxed on a party and party basis. I make this award an order nisi since Mr. Leong is not present today so that, if the Defendant wishes to be heard on the matter of costs, a separate appointment could be made and the matter dealt with then.