LIP HING METAL MANUFACTURING (HONG KONG) LTD v. GOLDEN METRO MACHINE TOOL CO LTD

HCA 1811/2016

[2019] HKCFI 1547

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1811 OF 2016

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J U D G M E N T

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Introduction

1.  This is the trial of the action.  The Plaintiff is represented by counsel.  Although the Defendant was once legally represented and had filed a Defence and a witness statement of Yuen Yu Fai, it is now unrepresented and according to Mr Lin, there has not been any application by the Defendant to be represented by its directors.  Neither the Defendant nor its witness Yuen Yu Fai appeared at the trial.

2.  The Plaintiff’s case against the Defendant is a straightforward one for breach of a written sale of goods contract date 26 May 2014 (“Contract”).

3.  Under the Contract, the Defendant agreed to sell and the Plaintiff agreed to purchase 3 sets of LM1800TTSY series Hyundai Wia CNC Turning Center (“Center”) together with accessories (collectively “Machines”) to the Plaintiff.  The Center is a computer numerical control cutting and drilling machine with twin‑axis used for producing high precision metal parts and devices.  The purchase price for the Machines was HK$5,188,200 (“Price”). The Price had been fully paid.

4.  The Plaintiff claims the Machines were not of merchantable quality and were not fit for the purpose for which they were being purchased.  As a result, the Plaintiff rejected the Machines and now claims for full refund of the Price and damages.  According to the prayer for relief in the Statement of Claim and paragraph 47 of Mr Lin’s Opening Submissions, the Plaintiff claims as damages:

(1) a sum of RMB1,181,465.55, being the import duty and value‑added tax paid for importing the Machines from Hong Kong to the PRC;

(2) a sum of HK$11,324, being the costs and expenses incurred in shipping the Machines from Hong Kong to Huizhou, PRC; and

(3) a sum of RMB139,308, being the additional labour costs incurred by the Plaintiff as a result of the Machines being of unmerchantable quality and not fit for the purpose.

5.  At the trial, the Plaintiff called one witness Mr Chui Man Ho, Martin (“Mr Chui”), director of Finance and Administration (Global) of the Group referred to below, who confirmed the contents of his witness statement, in particular the calculation of the Plaintiff’s claims for damages aforesaid.  This court is satisfied with Mr Chui’s testimony and that the Plaintiff has proved its case.

The Facts

6.  The Plaintiff was incorporated in Hong Kong and is a member of a group of companies held by LHM Holding Limited and known as Lip Hing Metal Manufacturing (“Group”).

7.  Another member of the Group is Lip Hing Metal Manufacturing (Huizhou) Limited (“LH PRC”) incorporated in the PRC.  At all material times, LH PRC operated a factory in Huizhou, PRC to manufacture products ordered by the Group’s customers.  Among other things, the Plaintiff was responsible for the provision of supporting services to LH PRC including inter alia the purchase of whatever was required for its operation.

8.  The Defendant was at all material times a dealer of imported metal processing machineries.

9.  The Group has been in the business of manufacture and sale of metal parts for industrial use for over 40 years.  The products manufactured and sold by the Group are mainly,though not exclusively, components for anti‑fire equipment and fire extinguishing systems.  3 such physical products have been exhibited at the trial.  According to the testimony of Mr Chui, they were produced by a “lower‑end” model viz SKT100M manufactured by Hyundai Wia, Korea (“Hyundai Wia”) previously purchased by the Plaintiff from the Defendant.  The performance precision of SKT100M is at par with the alleged performance precision of the Center.  The main difference between the Center and SKT100M was its supposedly higher efficiency ie its higher output compared with SKT100M, since the Center is equipped with 2 main spindles whereas SKT100M has only 1.  In fact, the Plaintiff purchased the Machines in order to improve the productivity of LH PRC’s factory and this was known to the Defendant.

10.  The majority of the Group’s customers for the metal parts of such anti‑fire equipment and fire extinguishing systems are multi‑national companies such as Tyco and Viking Group Inc.  The standard set by the Group’s customers is high and the precision of the specifications of the products, such as measurement and dimension, is vitally important and they have to be strictly complied with.  Obviously, when it comes to anti‑fire systems, lives are at stake and the precision of the specifications of each component is critical.  This court has examined the physical exhibits and considered Mr Chui’s explanation about them carefully.  This court is satisfied that high precision of the products to be manufactured by the Machines in accordance with customers’ specifications is of utmost importance and was known to the Defendant by reason of their previous course of dealing.

11.  Hyundai Wia, a well‑known Korean manufacturer of machineries, was also the manufacturer of the Center.  The Center was a high‑end product of Hyundai Wia.  According to the contracts dated June 2012, the price per set of SKT100M was HK$500,000 whereas the price per set of the Center was more than 3 times ie HK$1.65 million.  As can be seen from the brochure of Hyundai Wia provided by the Defendant to the Plaintiff, the Center was marketed with great emphasis on their high precision and high accuracy performance.

12.  Pursuant to the Contract, the Machines were first shipped to Hong Kong and then to LH PRC’s factory in Huizhou.  The Plaintiff had paid all the requisite import duty and taxes in the sum claimed.  The Plaintiff had also incurred and paid the charges for shipping the Machines from Hong Kong to Huizhou, PRC in the sum claimed.

13.  Between May and November 2015, the Defendant had arranged for Hyundai Wia’s technical personnel to set up and commission the Machines at LH PRC’s factory in Huizhou.  The setting up and commissioning of the Machines was completed in November 2015.[1]

14.  An ex‑factory Conformity Certificate[2] was issued by Hyundai Wia for each of the 3 sets of the Center showing inter alia the precision standards that could be achieved by them (“Certificates”).  The precision tolerance range for outer diameter cylindrical cutting and milling stated in the Certificates was +0.01mm or below.

15.  Shortly after the Machines were set up and commissioned, the Plaintiff found 2 critical quality problems: first, the variances of the products’ precision were all outside the acceptable tolerance range of +0.01mm; second, the variances were unstable — the variances outside the acceptable range of tolerance were sometimes larger and sometimes smaller.  The actual variances found on the products manufactured by the Machines were +0.015mm and +0.02mm or even greater and were unacceptable to the Plaintiff.

16.  The Plaintiff immediately complained to the Defendant and Hyundai Wia about the problems.  Hyundai Wia arranged its maintenance service team to attend LH PRC’s factory and carried out an examination on 18 and 19 January 2016.  During the examination, it was found that the measurements of the products produced by the Machines were unstable and the variances of the products’ precision were well outside the acceptable tolerance range of +0.01mm.  On 1 and 2 March 2016, Hyundai Wia again arranged its maintenance service staff to attend the factory to examine the Machines but the problems persisted and no solution could be found.  On 28 and 29 April 2016, the maintenance service staff of Hyundai Wia again attended the factory and attempted to fix the Machines, but this attempt also failed.  Similar attempt was made by Hyundai Wia in May 2016 and the attempt also failed.

17.  By May 2016, none of the Machines could be used for the intended production by the Plaintiff.  Instead, the Plaintiff had to deploy other single‑axis turning centers to fulfil the customers’ orders.  As a result, the Plaintiff had incurred extra labour costs which could have been saved if the Machines had worked properly.

18.  The said problems with the Machines were well documented and acknowledged by the Defendant and Hyundai Wia.  They were set out in inter alia an examination report made on or about 1 and 2 March 2016, emails exchanged between the Plaintiff, the Defendant and Hyundai PRC in May 2016 and a minutes of meeting on 17 June 2016 attended by representatives of the Plaintiff, LH PRC, Hyundai Wia, Hyundai PRC and the Defendant.  At that meeting, Hyundai Wia and Hyundai PRC agreed to come up with a solution between 21 June and 4 July 2016.  As it turned out, no acceptable solution was found during that period.

19.  Eventually, by letter dated 5 July 2016 from the Plaintiff’s solicitors to the Defendant, the Plaintiff rejected the Machines and demanded a full refund of the Price and compensation for its losses. 

Deliberation

20.  Section 16 (2) and (3) of the Sale of Goods Ordinance, Cap 26, (“SOGO”) provides:

“ (2) Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that there is no such condition:

(a) as regards defects specifically drawn to the buyer’s attention before the contract is made; or

(b) if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal; or

(c) if the contract is a contract for sale by sample, as regards defects which would have been apparent on a reasonable examination of the sample.

(3)  Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's skill or judgment.”

21.  Section 2(5) of SOGO provides:

“ Goods of any kind are of merchantable quality (可商售品質) within the meaning of this Ordinance, if they are:

(a) as fit for the purpose or purposes for which goods of that kind are commonly bought;

(b) of such standard of appearance and finish;

(c) as free from defects (including minor defects);

(d) as safe; and

(e) as durable,

as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances; and any reference in this Ordinance to unmerchantable goods shall be construed accordingly.”

22.  In Rogers v Parish (Scarborough) Ltd [1987] 1 QB 933, the Court of Appeal held that merchantability was to be judged at the moment of delivery and that goods which were defective on delivery were not to be taken to be of merchantable quality by reason only of the fact that the defects had not destroyed the workable character of the goods.

23.  In the present case, while the Machines were workable in the sense that they could produce metal parts, the parts so produced were not of the standard that Hyundai Wia claimed in the Certificates and that the Plaintiff was entitled to expect.

24.  Given this court’s findings of fact that (i) the Center was a high‑end product of Hyundai Wia and was marketed with great emphasis on its high precision and high accuracy performance, (ii) the price of the Center was 3 times higher than the lower‑end model of SKT100M, (iii) the precision tolerance range was stated in the Certificates as +0.01mm, and (iv) the critical quality problems exhibited by the Machines as aforesaid, this court is satisfied that the Defendant was in breach of the implied conditions under section 16 (2) and (3) of SOGO in that the Machines were not of merchantable quality within the meaning of section 2(5) of SOGO and were not reasonably fit for the purpose for which they were bought.

25.  In these circumstances, this court is satisfied that the Plaintiff is entitled to and has rejected the Machines.  This court is also satisfied that the Plaintiff is entitled to a full refund of the Price and seek compensation for its loss and damage as claimed.

Disposition and Costs

26.  There shall be judgment in favour of the Plaintiff in the sums of (i) HK$5,188,200; (ii) RMB1,181,465.55, (iii) HK$11,324, and (iv) RMB139,308, together with interest at the rate of prime plus 1% from the date of the Writ to Judgment and thereafter at the Judgment rate until full payment.

27.  Costs of the Action be to the Plaintiff to be taxed if not agreed and paid forthwith by the Defendant.