YU FAT PIECE GOODS CO LTD v. PETER MERCANTILE CO LTD AND ANOTHER

DCCJ 2798/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2798 OF 2002

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D E C I S I O N

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1. This is an application for leave to appeal against my Judgment handed down on 18^th January 2006 (“the Judgment”).  In the said Judgment I ordered that the Plaintiff's (“P”) claims against the 1^st Defendant (“D1”) and the 2^nd Defendant (“D2”) be dismissed and Judgment in respect of the counterclaim of D2 be entered against P.  P was ordered to pay costs to D1 and D2 for both the original claim and counterclaim.  

2. It is against the above orders that P is now seeking leave to appeal.

3. I do not propose to set out the facts as detail as I have done in the Judgment.  Basically, P claimed for goods sold and delivered and Ds counterclaimed for damages of defective goods and sought to set off against the purchase price.  Ds relied on the implied conditions of merchantable quality and fitness for purpose under the Sale of Goods Ordinance, Cap.26 (“SOGO”).

5. Amongst other arguments advanced at trial, P relied on the exemption clauses on the sale contract seeking to exclude its liabilities.  The interpretation of the relevant exemption clauses was in issue.

6. In the Judgment I found that P was in breach of the implied conditions under SOGO and the exemption clauses did not exclude P's liabilities.

7. The principles applicable to an application for leave to appeal are not in dispute. It is common ground that the realistic prospect test stated by Lord Woolf in Smith v Cosworth Casting Processes Limited [1997] 1 WLR 1538 is the proper test.

8. The grounds of appeal before me focus solely on the issue of interpretation of an exemption clause which are as follows:-

“In construing the meaning of the exemption clause (i.e. Remarks No.4 as appearing on the front page of the Sales Contract dated 15^th August 2001):

“Should any complaint of discrepancy, please notify Seller before goods having changed form. Otherwise Seller accept no responsibility therein.” (“the exemption clause”)

(1)	(a) The learned Judge erred in taking into consideration of the implied term requiring the goods to be of merchantable quality and fit for purpose; or alternatively (b) When considering the effect of the implied term the learned Judge failed to apply the prinple that when there is any inconsistency between the express exemption clause (term) and the implied term, the express term prevails.
(2)	The meaning of the exemption clause is plain and clear that it covers any complaint of quality which negatives the implied term requiring merchantable and fit for purpose quality in the circumstance that the form of the goods has changed. Thus the learned Judge erred in construing that the exemption clause does not cover the circumstances of non-merchantable and unfit for purpose quality of the goods in paragraph 52 of the Judgment.
(3)	The learned Judge erred at paragraph 52 of the Judgment in construing that the word discrepancy does not cover the circumstances where the goods were not merchantable and fit for purpose.
(4)	The exemption clause does not in general exclude the duty of the seller to provide goods fit for the purpose but only restrict the seller's liability in the circumstances that the goods has changed form and thus the learned Judge erred in paragraph 51 in finding that the seller was seeking to interpret the exemption clause to the extent that in any event the seller would not be responsible for non-compliance with the standard and purpose of the goods. The learned Judge further erred in paragraph 52 to adopt such a misconceived interpretation to find that the exemption clause is far from specific enough to exempt or restrict the liabilities resulting from a breach of implied terms in providing merchantable and fit for purpose quality fabrics. In other words, the learned Judge erred in failing to consider the change form condition under the exemption clause.
(5)	The learned Judge erred in failing to consider/find that even if the exemption clause is effective the seller still has to provide a merchantable and fit for purpose fabrics and only in the circumstance that the fabrics has changed form that the liability of the seller would then be exempted.”

10. At the hearing I indicated that I had difficulties in understanding the first ground of the intended appeal.  My simple answer is that it is inconceivable how one can consider whether an exemption clause covers a term or breach of the term without giving consideration to that particular term.  Mr. Lam, counsel for P, admitted that he himself found it difficult to argue along that line.

11. The second and third grounds relate mainly to the interpretation of the word “discrepancy” or the words “any complaints on discrepancy”. 

12. Mr. Lam argued that the word “discrepancy” which means “difference” is clearly wide enough to cover “non-merchantable quality” and “unfitness for purpose”. When questioned by this court in the course of his submission, he said further that as the quality of the bulk was in fact different from the sample in question, the exemption clause covers the present situation.

13. Mr. Lam referred me to the following paragraph of the House of Lords in Photo Production v. Securicor Ltd. [1980] 2 AC 827  :-

“It is drafted in strong terms, "Under no circumstances" ... "any injurious act or default by any employee." These words have to be approached with the aid of the cardinal rules of construction that they must be read contra proferentem and that in order to escape from the consequences of one's own wrongdoing, or that of one's servant, clear words are necessary. I think that these words are clear.”

Per Lord Wilberforce, at p.846 and

“In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.”  Per Lord Diplock, at p.851

14. These paragraphs are authoritative statements of law which I can see no reason to depart from.   Those were exactly the very principles that I had applied in arriving at the Judgment.  However, on the other hand, I cannot see how these principles can help Mr. Lam's arguments.

15. The counterclaims of Ds based upon the breach of implied conditions under SOGO.  The complaint was not about the non-conformity of the goods to a sample.  The relevant consideration of the court in relation to the exemption clause is therefore whether it covers a breach of implied conditions under SOGO but not whether the goods conform to the sample. 

16. What Mr. Lam is now trying to do is to merge the two different natures of complaints or causes of action into one and say the exemption clause covers both.   This argument simply cannot stand.  The mere fact that the goods are different from the sample does not change the basis of the complaint into one found on non-conformity or discrepancy.

17. Mr. Wong, counsel for Ds, referred me again, as he had already done at trial, to Henry Kendall & Sons v Williams Lillico & Sons [1968] 3 WLR 110 where the House of Lords said :-

“In my opinion, that is not a satisfactory or necessary effect of the latent defects clause nor does the clause necessarily abrogate in part the condition as to fitness. The goods might have had defects of quality which did not make it unfit for its purpose. It is to these defects that the clause should be read as applicable. If it was intended to cut down the condition as to fitness in respect of all latent defects, the clause should have said so in clear and unambiguous terms, referring expressly to the condition which it was limiting.”

18. The exemption clause obviously failed the above requirement. 

19. The fourth and fifth grounds of appeal are in my view subsidiary to the second and third grounds.  Even if they are accepted at the appeal as valid arguments I do not think they can possibly outweigh the difficulties P faces as set out hereinbefore. 

20. Moreover, there is nothing stated in the Judgment that the seller was seeking to interpret the exemption clause to the extent that in any event the seller would not be responsible for non-compliance with the standard and purpose of the goods.  The 4^th and 5^th grounds are simply misconceived.  

21. In the circumstances, I am of the view that there is no realistic prospect of success for all grounds under the draft Notice of Appeal and leave to appeal ought not be granted.

22. P's summons is dismissed.  I see no reason why costs should not follow the event and I make an order nisi that costs of this application be to D1 and D2 to be taxed if not agreed with certificate for counsel.  This costs order nisi will be absolute after 14 days.