GLOBAL ASIA LTD. v. LUCKY FOREST LTD. t/a DELTA PRINTING CO.

HCA 2854/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2854 OF 1999

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J U D G M E N T

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Introduction:

1. The plaintiff is a dealer in both new and used printing machines. It has an associated company, Asahi Printing Equipments Co Ltd which is responsible for installation, repairs and maintenance of the printing machines sold (hereinafter called "Asahi"). The defendant is a printer and has a factory in Long Kong in the People's Republic of China ("the PRC").

2. Upon seeing the plaintiff's advertisement of a Sanjo PO1 offset printing machine, Mr Chan of the defendant contacted Mr Chu of the plaintiff. He told Chu his printing requirements. Chu recommended a used 1989 Sanjo PO1 waterless offset printing machine to Chan and showed him some printouts of images similar to that in Exhibit P-1, but of better quality. Chan was satisfied with the quality of the printouts. After a series of negotiations and test printing, a contract, on the plaintiff's standard form, dated 19 May 1997 was prepared and sent to Chan for consideration. A few days later, Chan returned the signed contract to Chu and paid a deposit of $100,000. The payment terms were later revised to include a rebate of $350,000 to the defendant. The purchase price was financed by International Bank of Asia, but an amount of $150,000 of the purchase price remains outstanding and due to the plaintiff.

3. Between June and November 1997, there were further examination and testing of the machine. Chan considered the demonstration printouts acceptable. Mr Ho, the defendant's factory manager in the PRC, came and underwent one week training in the operation of the machine. Chu also visited the defendant's factory in the PRC and made some recommendations for installation.

4. On 22 November 1997, the machine was delivered to the defendant's factory in the PRC. It was 6:30 p.m. by the time the machine was installed. As the defendant had not installed a voltage stabiliser, only a brief test run could be conducted. This yielded a printout, Exhibit P-1, which was accepted by Ho, who signed a certificate of acceptance of the machine.

5. The plaintiff now sues for the outstanding balance of purchase price of $150,000. The defence is that the machine is not of merchantable quality and not reasonably fit for its purpose as a printing machine. The defendant also seeks rescission on the basis of misrepresentation and counterclaims for its price and damages.

Expert evidence:

6. On 20 August 1999, the defendant instructed Mr Robert Vart to witness a series of test-runs carried out on the machine to determine if its output quality was commercially acceptable. Mr Vart has a bachelor's degree in mechanical engineering. He is a Chartered engineer in the United Kingdom and a registered engineer in Hong Kong. I accept his evidence as an expert in mechanical engineering but not in printing technology.

7. Mr Vart opined that the machine was installed in a modern light industrial building which was dry, dust-free and air-conditioned. He considered that installation had not been carried out in accordance with good engineering practice. His complaint was basically that the machine was supported on adjustable mounting screws resting on loose steel packing pieces on the concrete floor. In some locations, the mountings were wedged up by small pieces of loose steel, timber or rubber packing. He suggested that the machine should be mounted on purpose built resilient mountings, firmly affixed to the concrete floor by anchor bolts to prevent movement and absorb vibration. He said it was the vibration which drew his attention to the mounting and he opined that vibration might affect the quality of the printouts. The vibration was more significant when operating at high speed. I have no doubt about the validity of this opinion but have reservation as to its usefulness in the present dispute. This is because Mr Vart examined the machine almost two years after its first installation. The mounting might have deformed through time or usage. Even if the mounting had not been desirable, had there been regular maintenance, the mounting could have been improved and levelling adjusted from time to time to reduce vibration. In any event, if it was the vibration which affected the printout quality, it was not due to defect of the machine, but rather to poor installation and more probably lack of maintenance.

8. Mr Vart observed that the printouts generated from high speed tests were still wet. He sent the printouts from three different speed test runs to the Printing Materials Testing and Analytic Centre for analysis. The analysis showed mis-registration problem, i.e. the inking of the four different colours printed by the machine was not properly aligned. Other problems are non-uniformity, colour matching, scratching and inking of non-imaged areas. As the printouts were of an unacceptable quality, Mr Vart concluded that the machine was not of merchantable quality and was unfit for its intended purpose.

9. The plaintiff did not dispute the factual findings of Mr Vart or the analysis of the laboratory, but disagreed with his conclusion. The greatest limitation of Mr Vart's evidence is that he is not an expert on printing machine or printing technology and he examined the machine almost two years after delivery. Mr Vart admitted that he was no expert in the area of printing paper or printing ink. The defects such as wet printouts, inking of non-imaged areas and other defects as discovered by the laboratory could be due either to the ink or the paper or the ultra violet light curing system. Waterless offset printing is an advance technology for which ordinary offset printing ink is not suitable. The ink used must be of the waterless type. There is no dispute that the ink used for the testing was not of the approved type. Thus Mr Vart's observation and conclusion is subject to severe limitation.

10. Furthermore, Mr Vart has not been shown the contracted standard, i.e. the standard as shown in the demonstration printouts accepted by the defendant. He has not tested the machine mechanically and electronically. His conclusion was based on some very fundamental assumptions such as that the machine had been properly maintained and was operated in accordance with prescribed procedures and under prescribed conditions, and using proper type of printing paper and approved ink. Most of his assumptions were on false premises. Most importantly and obviously, the wrong type of ink was used. This must significantly affect the quality of the printouts, such as curing, inking of non-imaged areas and colour matching. The operators had not previously received training from the plaintiff and it was not known if they followed prescribed procedures. This is not a factor which could be easily ignored. In my view, all these false assumptions render Mr Vart's conclusion unsafe. Though quality of the machine determines the quality of its printouts, it does not necessarily follow that quality of the printout must reflect the quality of the machine, because of all these other variables mentioned above. Furthermore, the excessive vibration caused by incorrect levelling must also significantly affect the quality of the printouts. It is therefore wrong to conclude, as Mr Vart did, from the quality of the printouts that the machine is of unmerchantable quality. Thus while I accept Mr Vart's evidence as to his factual findings, I am unable to accept his conclusion because most of the assumptions on which he based his conclusion were false.

11. The plaintiff's expert is a marine cargo surveyor. He has no training in engineering, or printing technology at all. I do not consider him an expert and treat him as a factual witness only. His evidence, at its highest, is that there was little oil in the oil reservoir of the machine.

Credibility:

12. There were only two witnesses called, one from either party. For reasons as will become apparent in the following analysis of the evidence, I find the plaintiff's witness, Mr Chu, more credible and accept his evidence. I reject the evidence of Chan where it differs from Chu's.

Mis representation:

13. The defence pleaded that during the negotiation, Chu represented to Chan that the machine was of good quality and working order. However, the evidence as adduced by the defence is that Chan showed Chu some labels produced by his own machine which was capable of printing 175 lines per inch ("lpi") and which he intended to print with the machine to be bought. Chu recommended him the machine and said it could print better quality images as it had a printing capability of 300 lpi. Then their discussion was centred on the capability of the machine. Chu also generated printouts from the plaintiff's demonstration PS plate, and at a later stage printouts of the labels. These printouts had images similar to those in Exhibit P-1 and D-2, but were of much better quality. Chan was satisfied with the quality of the demonstration printouts. Apart from a very brief mention in his witness statement, which was tendered as his evidence in chief, Chan mentioned nothing about the alleged representation as to the quality and condition of the machine. Chu denied having made the alleged representation and said that he only represented about the capability of the machine in terms of lpi.

14. Chu's evidence is consistent with the tenor of their discussion and the sale of a precision but used machine. In view of the quality of Chan's evidence and the unfavourable view I formed of his credibility, I reject his evidence that Chu had represented to him about the quality and working condition of the machine. In addition, for reasons as will become apparent below, I find Chan has accepted the machine. I am therefore not satisfied that a claim for rescission as a result of misrepresentation has been made out.

Merchantable quality:

15. The second defence is that as the plaintiff sold the machine in the course of a business, there is an implied condition under section 16(2) of Sales of Goods Ordinance, Cap 26, that the machine supplied shall be of merchantable quality and good working order. Mr Leung referred to section 16(2)(b) and submitted that there was no such implied warranty as the plaintiff had examined the machine before contracting to buy. In my view, the exception under section 16(2)(b) applies, as the section so provides, only "as regards defects which that examination ought to reveal". The defect now alleged is one of mis-registration in respect of an expensive precision printing machine. The examination that Chan conducted was one of visual examination of the outward appearance of the machine, its function and visual examination of its printouts. In the context of the sale of an expensive precision printing machine, colour registration is of particular importance. If the defect now complained of, if there is one, is one of colour registration and not of improper tuning, then such defect could not have been revealed by the visual examination of the machine or of its printouts. I do not think the plaintiff could exclude its liability under this implied warranty as to merchantable quality by reason only of Chan's visual examination.

16. Section 2(5) of the Sales of Goods provides:

"Goods of any kind are of merchantable quality 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."

17. The subject matter is a quality printing machine capable of printing 300 lpi. It is an expensive and precision machine in which advanced waterless offset printing technology is employed. One of the relevant circumstances is that it was an eight years old machine, while the usual life span of such a machine is about 30 years. It was able to generate printouts of much better quality than Exhibit P-1 and D-1 which are now produced in Court. Chan was satisfied with the quality of those demonstration printouts. I consider a machine capable of producing that quality of printouts and of reasonable durability meets the criterion of merchantable quality. Being constrained by the evidence and in particular by the lack of expert evidence, I cannot be more specific. There is no dispute that the machine was of that quality at the time of negotiation and at the time when it was disassembled for delivery. I must also add regrettably that those demonstration printouts are no longer available and equally missing is evidence whether the machine is capable of printing 300 lpi.

18. The issue is whether the machine was of merchantable quality when it was delivered and maintained that quality during the balance of its life span subject to proper maintenance and service. There is no expert evidence as to the quality of the machine when it was delivered and installed in the PRC on 22 November 1997. The defendant's expert, Mr Vart, opined that the machine was not of merchantable quality when he examined it 21 months later. There is no dispute that the labels printed at the time of Mr Vart's examination, Exhibit D-1, are of inferior quality than those that were produced by the machine before delivery and were not of a commercially acceptable quality. But given all the variables which determine the quality of the printouts, I cannot come to the conclusion from this exhibit alone that the machine was of unmerchantable quality. For reasons as I have explained, due to the severe limitations on Mr Vart's evidence, I reject his conclusion that the machine was not of merchantable quality.

19. There is also no dispute that the test printouts generated at the time of delivery, Exhibit P-1, are not as good as the demonstration printouts produced before delivery. Mr Chu explained that this was because the PS plate which was used to produce the printouts had been damaged in the course of delivery. That was why some of the letters printed were not fully inked. Another reason for the inferior quality was due to improper tuning of the machine. That is not a defect and could be readily rectified. As the defendant had not provided a voltage stabiliser at the time of installation, it was not possible to operate the machine for a considerable length of time to enable fine tuning to be made. Mr Chu explained that the purpose of the printouts was to check the registration of the machine, i.e. whether the colours were properly aligned. The defendant's factory manager in China was satisfied with the registration and signed the acceptance certificate. He said two weeks later, after the voltage stabiliser was installed, there was a further tuning and test printing and that the defendant was satisfied with the result. However, neither party kept any of those printouts.

20. The same PS plate which had been used to produce the demonstration printouts had not been removed from the cylinder before shipment and was used as a protective cover for the cylinder. This is certainly not an appropriate means of protection. This PS plate was then used to produce the test printouts, Exhibit P-1, after the machine was installed in the PRC. Obviously some damage had been done to this PS plate in the course of the shipment or handling, which resulted in some of the letters on the printout being un-inked. There is nothing to suggest that the cylinder itself has been damaged. The PS plate is a consumable item, like a computer diskette. Its damage does not render the machine non-merchantable or unfit for its purpose.

21. I was asked to find there was mis-registration by viewing Exhibit P-1. However, I am quite unable to see with my unaided eyes colour displacements of the order of microns, which is the precision required of the machine. The defendant had obtained laboratory reports on the printouts produced on 20 August 1999, but did not see fit to have a similar analysis of Exhibit P-1, which could have yielded a more conclusive result. It only has itself to blame for not making such evidence available, especially as it bears the burden of proving non-merchantable quality.

22. The plaintiff relied on the certificate of satisfaction signed by Ho as evidence of the merchantable quality of the machine. The certificate is titled, "certificate of satisfaction, inspection and receipt" (滿意驗收證明書). Paragraph 2 confirms that the machine has been mechanically installed, tuned and tested and found to have good result (機械上安裝及調試良好). Paragraph 4 confirms that the test run and registration was normal in operation (調試之印樣本及行位(拉位)操作正常).

23. The defendant disputed that this certificate is evidence of the quality of the machine. Chan said that the certificate is evidence of receipt and installation of the machine only. He said he was informed by Ho that the plaintiff forced him to sign the certificate as it was getting late. The certificate contains repeated expression of satisfaction, tuning and testing and normal operation. It supports Chu's evidence that the machine had been tested and produced printouts of acceptable quality. I do not think there is much truth in Chan's evidence that his factory manager was coerced into signing the certificate because of the pressure of time. On the contrary, Ho was able to bargain for an alteration of clause 3 in the certificate.

24. Next, Chan said that the term 「行位(拉位)」 are references to paper in-feed and out-feed movement and not to registration. There is a paper in-feed drum and out-feed drum in the machine. These are just mechanical parts of the machine which have far less significance than colour registration in an expensive waterless offset printing machine. Colour registration must be one of the most important features of this expensive and precision printing instrument. If the parties saw fit to give express reference to a feature in the certificate, it must be to this important feature than in-feed and out-feed movement. Ho who signed the certificate is an experienced printer and had examined the machine in Hong Kong and received training on its operation. He ought to know the significance of registration in a machine of this nature. If he was not satisfied with the registration, he would not have signed the certificate. Further, Chu was present when the certificate was prepared and signed while Chan was not. I see no reason why I should ignore Chu's evidence as to what the parties meant by those words and accept Chan's, when Chan was not even present at the time the certificate was drawn up and signed.

25. It is not in dispute that when the voltage stabiliser was installed in about a fortnight, the plaintiff had another testing performed on the machine and generated printouts with similar images to that in Exhibit P-1. Chu said that the printouts were satisfactory, but that is disputed by Chan. This batch of printouts showing the defect was not produced. If the machine had registration problem on delivery but was accepted due to pressure of time subject to further tuning and testing when the voltage stabiliser was installed, then this second test-run would have been documented and defective printouts kept, especially if the problem of registration remained unsolved and as it is Chan's case that he did not accept the machine.

26. For all these reasons, I find that when signing the certificate, Ho was satisfied with the condition and operation of the machine and in particular that there was no problem of registration, that the machine was fine tuned and test-run in a fortnight to the defendant's satisfaction. Accordingly, I find that the machine was of merchantable quality at the time of delivery.

27. According to Chu, during the six months free maintenance period between November 1997 and June 1998, nothing significant happened between the parties. He received a few telephone calls from the defendant making enquiries about the operation of the machine but there was no complaint. After the six months maintenance period expired, he made four after sales visits to the defendant's factory at the defendant's request. These visits were to assist the defendant's staff in better understanding and operating the machine. He received no complaint from the defendant about the machine. The defendant also requested no repair or maintenance from Asahi.

28. According to Chan, the machine never operated properly and was idling in the factory during these two years. He made verbal complaints to Chu but Chu just talked him off saying that it was a matter of operation only. Chan and his team visited his factory on four occasions during June 1998 to October 1998 and sometimes stayed for a day or two to rectify the problem but were unsuccessful. He did not request Asahi for maintenance services or for tuning as he considered the machine not acceptable and had not accepted the machine so that the six months maintenance period did not start to run until the registration problem was rectified. Thus the machine was idling in his factory for the six months and thereafter. It is a surprise that if Chan did not accept the machine, he would not have made a single written complaint during these 15 months.

29. On the other hand, the defendant ordered significant quantities of ink and accessory from the plaintiff during October to December 1997, worth $48,000. In addition, in January 1998, it also ordered ink, worth $95,400 and $7,047.50, direct from the suppliers, Toka Ink International (Hong Kong) Ltd and Toyo Ink Asia Ltd respectively. If the machine was idling as Chan alleged, it would not have ordered such a large quantity of ink in January 1998, when the previous stock of ink ordered from the plaintiff have shown that the machine was incapable of operating satisfactorily. Chan said that the ink had not been used and was kept in the factory. Under cross examination, when asked why he used Sakata ink from yet another supplier during the test run in October 1999 instead of the ink left over by the plaintiff or from Toka or Toyo, he said his staff had forgotten about those large stock of ink. His own document also showed that in July 1998, some accessories were purchased for the use of the machine. Thus the machine was more alive than idling as Chan would have me to believe. I do not find Chan a credible witness.

30. According to Chu, on 8 December 1998, the plaintiff received an audit confirmation from the defendant's auditor enquiring if the balance was still owing. On 11 December 1998, Chu sent a fax to Chan urging for immediate settlement of the outstanding balance. A month later, Chan responded offering to pay $30,000 and on condition that the plaintiff would arrange another training course for his staff. That offer was rejected. Yet, at that stage, Chan made no complaint about the machine. Chan's account was that he offered to pay $30,000 on condition that the plaintiff would rectify the machine, after which he would pay the balance.

31. I find Chan's evidence unconvincing. He is in the business of printing and purchased the machine to upgrade his production so as to meet the requirement of his client for printing labels. He paid monthly finance charges to the bank for the machine, which according to him was lying idling in his factory. The large quantity of ink and accessories ordered showed that this could not be true. There was not a single written complaint of the quality of the machine for 15 months despite his allegation of non-acceptance. He said he made verbal complaints but was talked away by Chu. That is hardly convincing. I reject his evidence.

32. On the other hand, I find Chu a credible witness. He was not shaken on cross-examination. His account was cogent and inherently credible. I accept Chu's evidence. I find that when the machine was delivered and installed, it operated properly. It also operated properly during the six months free maintenance period and when Chu made the after sale visits. It may not have operated properly thereafter or when it was examined by Mr Vart. However, there could be many possible explanations, including inadequate maintenance, improper levelling and mounting, use of unsuitable ink, or use of inappropriate procedures. The poor quality of the printouts at the time of Mr Vart's examination is not necessarily due to the quality of the machine.

33. Being constrained by the evidence, I am not in any position to find if the machine is of merchantable quality as of today or as of Mr Vart's examination in August 1999. But I am satisfied that the machine was of merchantable quality at the time of delivery and was very much in operation at least between then and January 1998 when the defendant ordered accessories. There is no dispute that machine has not been serviced or maintained since its installation by Asahi. There is also nothing to suggest that it has been serviced by anyone else. Even if the machine is not of merchantable quality today, I could not conclude it was not durable due to lack of proper care and maintenance. The defendant bears the burden of proof that the machine is not of merchantable quality. It has quite failed to discharge that burden.

34. The signing of the certificate of acceptance, the use of the machine and the absence of serious complaints for about two years all point to the irresistible inference that the machine was of the quality contracted for, was of merchantable quality and suitable for its purpose when it was delivered and was reasonably durable. Indeed, by retaining the machine without intimating to the plaintiff that he has rejected it after such a long time, the defendant is deemed to have accepted it under section 37(4) of Sales of Goods Ordinance.

Conclusion:

35. Having rejected the defence of misrepresentation and that the printing machine is not of merchantable quality, and having found as a fact that the defendant had accepted the machine, I am satisfied that the defendant is liable to the plaintiff for the balance of the price of the machine. Accordingly, I enter judgment for the plaintiff in the amount of $150,000 with interest at judgment rate from 19 February 1999 and costs, to be taxed if not agreed. The defendant's counterclaim is dismissed.