KEYSTONE ASSOCIATES LTD v. LAW'S CLEANING SERVICES LTD

CACV 149/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 149 OF 2009

(ON APPEAL FROM DCCJ NOS. 6149 OF 2005 AND 2596 OF 2006)

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REASONS FOR JUDGMENT

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Hon Tang VP (giving the reasons for judgment of the Court):

1.  By three quotations all dated 5 September 2005, the plaintiff agreed to sell:

(1) 3 units of mobile refuse compactors at the price of $564,300;

(2) a set of hook-lift for $22,800; and

(3) (and install) certain ground rails for $25,500

on terms which required the payment of a deposit of 40% and the balance upon the defendant taking delivery.

2.  The plaintiff’s claim is for $353,880 which is made up of $338,580, the balance of the payment of $564,300 for the three compactors as well as the remaining balance of $15,300 relating to the ground rails.  There were also claims for $4,000 for miscellaneous items.

3.  The defendant counterclaimed the sum of $235,920 which was the 40% deposit paid in respect of the compactors and the ground rails. 

4.  The defendant was in the business of providing cleaning services including collecting and processing of refuse and the compactors were required to be used for a rubbish handling contract entered into between the defendant and the Food and Environmental Hygiene Department of Hong Kong (“FEHD”). 

5.  It was the defendant’s case that the compactors and the ground rails should be “brand new” and should not be “used products”.  Alternatively that they were defective and were not of merchantable quality and not fit for the purposes for which they were purchased by the defendant.  The defendant claimed that eventually it had to purchase replacement compactors from one Wai Hong Cleaning and Pest Control Company Limited (“Wai Hong”) to replace the three compactors supplied by the plaintiff. 

6.  I should add that little was said about the ground rails, so I will ignore them for the purpose of this judgment.

7.  It was the plaintiff’s case that the compacters were unused but had been in storage for 2 years after shipment from Singapore.  It is common ground that there were obvious rusting on the compacters.  Indeed according to a survey report procured by the defendant in November 2005 the rusts “were excessive and obvious”. 

8.  After trial, the learned judge found in favour of the plaintiff and dismissed the counterclaim. 

9.  Mr Jonathan Chang, for the defendant, relied on the following grounds:

“(A)   Judge Chow erred in rejecting the Defendant’s expert reports (Grounds 5 and 6).

(B)    Judge Chow mis-construed the evidence and erred in finding that the parties had not agreed that the compactors had to be brand new (Grounds 1 to 4, and 9).

(C)    Judge Chow erred in holding that the Defendant had lost its right to reject the compactors (Grounds 7 and 8).”

I will deal with them in the reverse order.

Right to reject

10.  This is a short answer to the appeal.  The defendant took delivery of the compactors at the end of October 2005, but it continued to use them until December although the defendant alleged that they were not brand new and defective.  That being the case, the defendant has lost any right to reject the compactors.  It is no excuse that they continued to use the compactors because they had no alternative supply.  The defendant was not left with no remedy.  The remedies are set out in section 55 of the Sale of Goods Ordinance, Cap. 26.  However, there was no evidence from the defendant on the value of the compactors in diminution or extinction of the price.  Instead, they claimed the repayment of the deposit or alternatively the price that they had paid for their replacement.  These claims cannot be maintained without evidence, for example, that the compacters were valueless.  So for this reason alone, the learned judge was right to have dismissed the counterclaim and ordered payment of the balance of the price to the plaintiff. 

Brand-new

11.  The defendant claimed that it was a condition of the FEHD contract that the compactors should be brand new equipment.  In para. 14 of the judgment, the learned judge said that the FEHD contract had not been produced.  He rejected the evidence of the defendant’s witness Mr Chung to that effect.  He thought that the defendant who was legally represented should have realised the importance of producing the contract to support its allegation that the compactors should be brand new. 

12.  We note that in the quotation from Wai Hong dated 28 December 2005, it provided that after the defendant had accepted the quotation and paid the deposit of $100,000, Wai Hong would begin the reconditioning of the compacters as follows:

“5. …開始壓縮機之翻新工程，每部壓縮機之翻新工程需時約5天（如遇天雨或其他不可預測之自然災害，則工程或會延遲）”

13.  Moreover, it was the plaintiff’s case that prior to taking delivery of the compactors the defendant’s staff had inspected them twice.  On the first occasion some photographs of the compactors were takenand it was agreed because of the comments by the defendant’s staff about rusting that all three garbage compactors would be repainted before delivery.  The learned judge also accepted the evidence of Mr Chan that the defendant’s staff had been told that the compacters had been in storage for 2 years.  Where the evidence of the plaintiff’s witness and the defendant’s witnesses differed, the learned judge accepted the evidence of the plaintiff’s witness.  We have no reason to disagree with the learned judge’s conclusions.

14.  As for the defendant’s allegation that the compactors should be brand new and unused, on “unused”, the learned judge accepted the evidence of Mr Chan of the defendant and held that the compactors were indeed unused.  On “brand new”, he came to the conclusion that the agreement was that the compacters was new and that the defendant had been told that they had been in storage for two years.  Mr Jonathan Chang, in the appeal, submitted that not only should the compactors be unused, all its components should be brand new, so that if any of its components had been made of recycled material, the defendant would be entitled to reject it.  But in the cross-examination of Mr Chan at trial, it was put to him that one of the conditions was that the compactors must be new in the sense that they were unused and not been in storage for a long time:

“…「新」嘅意思大家同意咗係除咗冇人用過之外，仲要係唔係上咗倉好耐，好似而家呢三部機咁樣。你同唔同意？”  Transcript page 64G

Expert reports

15.  As for the expert reports, two were made by Mr Alex K C Kwan dated 28 November 2005 and 29 November 2005 respectively.  Unfortunately, Mr Kwan had died before the trial.  This is his conclusion in his report of 28 November 2005 which related to the compactors:

“Being based upon the above findings and our professional judgement, we have reasons to believe that the subject MRCs were not brand-new, re-conditioning and ex-stocked.

Considering their conditions at the time of survey, we have reasons to believe that the subject MRCs were defective and used.

We have reasons to foresee that the subject MRCs will encounter with unexpected downtimes and expenses at unscheduled broken down and defect repairs.”

16.  With respect, we agree with the learned judge that they do not prove that the compactors were unmerchantable.

17.  The third report was prepared by IR Lam Cheung Wing, Joseph, dated 20 March 2008.  His conclusion is:

“The manufacturing discrepancies indicated that the three sets of refuse compactors were not quality products with proper design, testing and manufacturing.  It seemed that they were built from bits and pieces by some contractors, not the refuse compactor manufacturer.  Some of the pieces might be cut from used product of Marathon (USA) since labels of Marathon (USA) irrelevant to the order specification were found.”

18.  Insofar as this report touched on the condition of the compactors, with respect, we agree with the learned judge, that since the report was prepared 3 years after delivery and that in the interval the compactors had been placed in a refuse collection area which was not a proper place for storing compactors, the report is unhelpful.  Mr Chang, however, relied on the 3^rd report to show that some areas of the compactor were made of recycled or not new material.  That may be so, and that does not necessarily mean that the compacters could not be regarded as unused, hence new in the sense put to Mr Chan in cross-examination.

19.  For the above reasons, the appeal was dismissed with costs.