GITTING ENGINEERING LTD. v. WALY DECORATIVE PRODUCTS LTD.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The Plaintiff commenced business in early 1988 as a supplier of, inter alia, decorative materials for sites under construction. The Defendant imports and also supplies, inter alia, decoration materials

2. These Actions concern the sale of decorative wood products, in particular, flexible wood veneer, by the Defendant to the Plaintiff. In Action No. 7609 of 1988, American White Oak Flat cut wood veneer ("white oak veneer") was sold to the Plaintiff whereas in Action No.7887 of 1988, Elm Carpathian Burl veneer ("elm burl veneer") was sold. The parties in both Actions are the same and some of the witnesses are common to both Actions The events in both Actions cover more or less the same period of time. For these reasons, I made an order, by consent, at the commencement of the trial that both Actions be tried at the same time. The trial proceeded on this basis.

3. I shall deal first of all with the sale of white oak veneer and then turn to the sale of elm burl veneer. I shall consider the question of liability first.

4. In May 1988, the Plaintiff was a relatively new company. At that time, one of the founders, Leung Tung, was negotiating a contract with a sub-contractor of the site which was then under construction but which is now the Ramada Renaissance Hotel in Tsim Sha Tsui in Kowloon ("the site"). The general contractor for the decoration works at the site was Nomura Display Co. Ltd. ("Nomura") and one of the sub-contractors was Gloire Solide Ltd. ("Gloire"). At that time Leung Tung negotiated with Gloire for the purchase from the Plaintiff of white oak solid wood and white oak veneer. Also at about this time, Leung Tung's half-brother, Leung Pak was invited to join the Plaintiff as a director and shareholder. It turns out that on 1st June 1988, 20% of the shares in the Plaintiff was transferred to him without Leung Pak having to pay for them. Leung Pak was then the showroom manager of the Defendant with his office at the Defendant's showroom at Morrison Hill Road.

5. Leung Tung learnt that white oak solid wood was required for the site and he went about to secure for the Plaintiff all the stock he could get for this wood. This put the Plaintiff in a favourable position to negotiate a contract for the supply of white oak veneer at the site as well. As the Defendant dealt in wood products, like veneer, Leung Tung approached Leung Pak for the supply of white oak veneer.

6. At that time the Plaintiff did not have its own offices but it was permitted to and did use the office of Leung Pak at the Defendant's showroom at Morrison Hill Road. All of the Plaintiff's documents were kept there and the Defendant's staff also performed secretarial work for the Plaintiff there. Leung Pak's wife, Agnes Wong Lai Lin ("Agnes Wong"), also worked for the Defendant but at its head office at Harcourt House. She was a director of the Defendant as well.

7. The above matters are not in dispute between the parties. However, the negotiations between the parties and the circumstances under which the contract for the sale of white oak veneer came to be made and signed are highly controversial.

8. Leung Pak was familiar with veneer as he had dealt in them before. Leung Tung was unfamiliar with wood products like veneer. The white oak veneer that Leung Pak recommended was a now product which the Defendant had not dealt in before. It came with a pressure sensitive adhesive backing ("PSA backing"). This enabled the adhesive backing to be simply peeled off and the veneer could be applied by firmly pressing it onto wooden surfaces. This was unlike the veneer the Defendant had been dealing with which had other backings and required glue to stick the same onto the surfaces. This veneer with PSA backing was cost effective in that the labour cost in the aplication thereof would be far less than with veneeers with the other types of backing. Leung Pak obtained samples of white oak veneer with PSA backing and gave them to Leung Tung. Leung Tung said that he obtained samples of veneer from Leung Pak which he took to Gloire. Initially he negotiated with a Mr Yung of that company but Paul Wong Tak Yan ("Paul Wong"), the site supervisor, took over the negotiations as measurements had to be supplied in order to determine how much white oak veneer was required. The white oak veneer was to be applied onto furniture and fittings in the office area on the ground floor of the site.

9. Eventually, a bill of quantities was obtained from Paul Wong, these being pages 3 to 12 of Bundle A. The first three pages were measurements for the solid white oak required. The remaining six pages, namely, pages 6 to 12 of Bundle A, were the specifications of the white oak veneer prepared by Paul Wong and which formed the specifications ("the said specifications") under the contract Glorie entered into with the Plaintiff. These describe the furniture and fittings for which the veneer was required with the dimensions thereof and the number of pieces required. An example of this is the first item at page 6 of Bundle A. 6 pieces were required for D65, D64, D66 which were for doors as shown in architect's drawings, according to Paul Wong. Each side of the door measured 3 ft. by 8 ft. 6 ins. and this meant that 6 pieces of veneer were required each of that size. This is what Paul Wong said and I accept his evidence. The rest of the items in the said specification were similarly described with the dimensions and the number of pieces required. Apart from the measurements, Paul Wong also drew sketches in the said specifications to show the direction of the grain that was required on the veneer.

10. The said specifications prepared by Gloire were given to Leung Tung who in turn took them to Leung Pak. The column for the amounts required were left blank and there is no dispute that this was later filled in by Leung Pak after calculations were made.

11. Paul Wong attended the Defendant's showroom and met Leung Pak there. He said that he went through the said specifications with both Leung Tung and Leung Pak. Both Paul Wong and Leung Tung said that Leung Pak assured Paul Wong that the goods would arrive in the sizes specified in the said specifications and with the direction of the grain as shown in the sketches. What Gloire wanted was, of course, complete pieces of veneer with sizes as specified in the said specification and taking the first item at page 6 of Bundle A as an example again, for the doors, D65, D64 and D66, 6 pieces of veneer were required each with the size 3 ft. by 8 ft. 6 ins.

12. The contract between the Plaintiff and Gloire is dated 1st June 1988. This document was prepared at the office of the Defendant and typed by the staff of the Defendant on the instructions of Leung Pak. The said specifications were mentioned and were incorporated into this contract. Thus, the Defendant, through Leung Pak, knew the precise requirements of the Plaintiff's sub-purchaser, Gloire and the total quantity which was required, namely 12,442.13 sq.ft. The total quantity of 12,442.13 sq.ft. tallies with the total arrived at by Leung Tung in the document at pages 23 to 27 of Bundle A which he said he had prepared from the said specifications and also by including the spare quantity of 420 sq.ft. to be ordered as suggested by Leung Pak. Leung Tung said that he showed the document at pages 23 to 27 of Bundle A to Leung Pak.

13. Leung Pak said that at an early stage of the negotiations he had told Leung Tung about width and height restrictions for the veneer. He also said that he told Leung Tung that in applying the veneer there should be no dust around, that the relative humidity should not exceed 75% and that the temperature should not exceed 25°C. He denied that he was asked to provide the number of pieces of veneer as set out in the said specifications and he said that he knew that pieces of veneer with widths in excess of 2 ft. could not be   provided. He referred to exhibit D3 which was a fax message dated 9th May 1988 from the manufacturer, S.R. Wood, Inc., in America to the Defendant which made it plain that for the white oak veneer with PSA backing the maximum width that could be manufactured was 2 ft. They could, however, sheet match 2 sheets to make up a width of 4 ft. Leung Pak said that after he received exhibit D3 he at once approached Leung Tung and told him that the veneer with PSA backing came only in 2 ft. width. Leung Tung denied that he had been told this.

14. I have no hesitation in accepting Leung Tung as a witness of truth. Where his evidence is at variance with the evidence of Leung Pak, I prefer to accept Leung Tung's evidence. I was impressed with Leung Tung when he gave . evidence and I find that he is basically an honest witness. I also accept Paul Wong's evidence. I cannot say the same for Leung Pak who did not impress me. Although he may have mentioned to Leung Tung at an early stage that humidity and temperature may affect veneer in general terms, I do not believe that he ever went into such detail as he gave evidence about on the condition of the place where veneer was to be applied and the specific temperature and humidity that were suitable. He was at pains to stress that this detail was repeated on a number of occasions including the occasion when Paul Wong was present. I do not believe Leung Pak. I found him to be unreliable.

15. The written contract that was prepared by the Defendant for the Plaintiff to sign is at pages 33 to 40 of Bundle A. These comprise of eight pages, the first seven of which are dated June 3 1988 and sets out the specifications, measurements, pieces and quantity required and the price. The eighth page of the contract at page 40 of Bundle A is dated June 7 1988. This sets out the total price of $256,804.40 and includes remarks on payment, delivery and colour variation. This is also the signature page. There is no dispute that Johnny Li, sales manager of the Defendant, signed it on behalf of the Defendant and Shek Pak Chuen, signed it on behalf of the Plaintiff. There is also no dispute that when Shek Pak Chuen signed it, Johnny Li's signature was already on it. The circumstances under which Shek Pak Chuen came to sign page 40 of Bundle A are, however, hotly disputed.

16. Shek Pak Chuen is also a shareholder and director of the Plaintiff. Both Leung Tung and Shek Pak Chuen gave evidence that when page 40 of Bundle A was signed by Shek Pal Chuen, only that single page was shown to them by Leung Pak. Leung Pak did not explain the contents nor were the printed terms and conditions on the reverse of the document ever bought to their attention. They both said that this occurred at the Defendant's showroom which the plaintiff was using as its office at the time. The Plaintiff's rubber stamp was also kept there. Leung Pak denied that he was present when Shek Pak Chuen signed the contract. Jennifer Chan Hoi Lan, whose name appears on all eight pages of the document, gave evidence that she, as the order desk manager of the Defendant, received the relevant information from Leung Pak for the preparation of the contract. She says that she explained the contents of the contract to Shek Pak Chuen who went up to the head office of the Defendant at Harcourt House to sign. She said that she also told him that there were clauses at the back of the contract. She was unable to explain why the first seven pages had a date different to that of the eighth page of the contract and she was not able to say how Johnny Li's signature came to be on the document.

17. I was also impressed with Shek Pak Chuen and find that he and Leung Tung have told me the truth. Both he and Leung Tung are not sophisticated businessmen, having had only primary education. Shek Pak Chuen said that he was sure that only one page was shown to him when he signed the document. He said that this was the first formal document he had ever signed. I believe him. I do not accept Jennifer Chan's evidence. I prefer to accept the Plaintiff's version and not the Defendant's version of the circumstances surrounding the signing of page 40 of Bundle A as given in evidence by Leung Tung and Shek Pak Chuen. I find that when Shek Pak Chuen signed that page on behalf of the Plaintiff this was at the request of Leung Pak who was acting on behalf of the Defendant. He signed it on or about 7th June 1988. I also find that Leung Pak did not show the preceding seven pages of the contract to either Shek Pak Chuen or Leung Tung and that Shek Pak Chuen signed the document trusting Leung Pak and Leung Tung. After all, they were both fellow directors and shareholders of the Plaintiff.

18. I find that the contract made between the Plaintiff and the Defendant was partly oral and partly written. The Defendant's printed terms and conditions on the reverse of page 40 of Bundle A were, I find, not brought to the attention of either Leung Tung or Shek Pak Chuen and they were not incorporated into the contract. The said specifications supplied by Gloire were also the specifications required by the Plaintiff under its contract with the Defendant. This was the result of the negotiations between Leung Tung and Leung Pak. The Defendant, through Leung Pak, knew that what was required was a total quantity of 12,442.13 sq.ft. of white oak veneer with PSA backing with the description of the sizes as set out in the said specifications. The total price payable was as stated at page 40 of Bundle A, namely, $256,804.40.

19. I also find that the Defendant, through Leung Pak, knew the particular purpose for which the white oak veneer was required, namely, for the purpose of re-sale to Gloire for fitting onto furniture and fittings at the site. At the meeting with Paul Wong and Leung Tung, Leung Pak gave an express assurance that the veneer would correspond with the description of the sizes ordered, namely, that the pieces of veneer would come in the sizes specified. I find that this was an express condition of the contract. The contract, being a contract of sale by description, Section 15 of the Sale of Goods Ordinance (Cap. 26) implies a condition that the goods shall correspond with the description. Even if I did not find that there was an express condition that the veneer would come in the sizes described in the contract, there would, by virtue of Section 15 of Cap. 26, be an implied condition that the goods should correspond with that description. Further, the Defendant sold the white oak veneer to the Plaintiff in the course of its business and the Defendant, through Leung Pak, well knew the particular purpose for which the veneer was bought. By virtue of Section 16(2) and (3) of Cap. 26 there were implied conditions in the contract that the goods supplied thereunder would be of merchantable quality and would be reasonably fit for the purpose of applying onto the furniture and fittings at the site.

20. The Defendant placed the order for the white oak veneer with its American supplier, S.R. Wood Inc., by Order No. 2A092. This was the first time that the Defendant ordered veneer with PSA backing. Pages 61 to 64 of Bundle A were faxed by Catherine Lam together with the fax message at page 60 of Bundle A on 10th June 1988 on Leung Pak's instructions. Leung Pak converted the measurements given by Glorie. He explained. that only measurements for width and height should be mentioned to the manufacturer so he converted all the measurements that were described differently in the said specifications to measurements for width and height as set out at pages 60 to 64 of Bundle A. By this conversion, he explained also that the manufacturer would understand the direction in which the grain of the veneer should run. I accept that these were faxed by Catherine Lam to S.R. Wood, Inc. on 10th June 1988 and that S.R. Wood, Inc. replied by a fax message of the same date which is at page 65 of Bundle A. The order was converted by S.R. Wood, Inc. because, as explained in its fax message, the veneer with PSA backing came in sheets that were 2 ft. wide. The order was, therefore, converted to 2 ft. sheets by S.R. Wood, Inc. so that, for example, instead of 6 pieces of veneer of 3 ft. width by 8 ft 6 ins. height, there would be 9 pieces of veneer of 2 ft. width by 8 ft. 6 ins. height. Leung Pak said that when he received S.R. Wood, Inc.'s reply of 10th June 1988, he at once informed Leung Tung that the goods would come in 2 ft. wide pieces. He said that because of this there was an excess quantity which it was decided that the Plaintiff would acept. He also said that this took place in the presence of Shek Pak Chuen. Leung Tung denied this and he said that he received a copy of Exhibit P3 which was the document at pages 61 to 64 of Bundle A as converted by S.R. Wood, Inc., only on 30th July 1988, which is the date stamped on Exhibit P3. S.R. Wood, Inc. faxed their corrections to the defendant's order on June 10, 1988. By that date, on the balance of probabilities, I find that the contract between the Plaintiff and the Defendant had already been made.

21. I would also observe that pages 33 to 39 of Bundle A prepared by the Defendant as the first seven pages of the contract to be entered into between the Plaintiff and the Defendant contained the sizes and pieces of veneer as set out in the said specifications of Gloire, and not as converted by S.R. Wood, Inc. on 10th June, 1988. I find it more likely that the order with S.R. Wood, Inc. was placed by the Defendant after it had already entered into the contract with the Plaintiff in the circumstances as I have found. I prefer the evidence of Leung Tung to that of Leung Pak and find that Leung Pak did not inform Leung Tung at any time before the goods arrived in Hong Kong that the veneer would come in standard 2 ft. width sheets.

22. The white oak veneer arrived in Hong Kong on 19th July 1988. A total quantity of 12,709 sq. ft. arrived instead of the quantity ordered by the Plaintiff. The excess was no doubt due to the order being converted by S.R. Wood, Inc. Although there were complaints by the Plaintiff about the quantity that arrived in excess of that ordered, nothing turns on this as there is no dispute that the Defendant eventually received full payment for this from the Plaintiff. The goods arrived in 36 drums each containing rolls of white oak veneer of varying sizes. Labels were provided by the manufacturer and these were stuck onto the drums giving details of the contents of each drum. The labels also contained the Defendant's name or logo. In addition, there were also written on the drums the drum numbers and other information.

23. Both Leung Tung and Shek Pak Chuen said that they went to take delivery of the goods at the Defendant's godown in Wanchai. Leung Tung noticed from the specifications on the drums that there was something wrong with the sizes and voiced his complaint to the person in charge of the godown. The veneer that arrived were 2 ft. wide but the order the Plaintiff had placed included pieces of veneer more than 2 ft. wide. .

24. There is no doubt that the veneer that arrived did not come in the sizes as described in the contract between the Plaintiff and the Defendant. Instead, a substantial portion of the goods came in the sizes of S.R. Wood, Inc.'s converted order. In my judgment, there was a breach of the condition in the contract that the goods should correspond with the description of the sizes in the contract.

25. Having discovered that the goods did not arrive in the sizes he ordered, the goods were transported to the backyard of the Defendant's showroom by Leung Tung to show them to Leung Pak. Leung Pak looked at the drums and asked Leung Tung to cut away the labels. Shek Pak Chuen also confirmed this. Leung Pak denied that he asked Leung Tung to cut the labels away. I prefer the evidence of Leung Tung and Shek Pak Chuen to that of Leung Pak. I believe Leung Tung. His reaction on finding out that the goods did not conform to the sizes specified in the contract demonstrates that he did not know beforehand that the goods would come in a pre-set width of 2 ft. Leung Tung also said that Leung Pak told him not to be afraid and to use the veneer first.

26. What next transpired is also disputed between the parties. The goods were delivered to Gloire at the site after they were transported from the backyard of the Defendant's showroom. When it was discovered by Gloire that the sizes were wrong, Gloire complained to Leung Tung that the sizes were not as ordered. Both the Plaintiff and the Defendant already knew this and the Plaintiff took up the matter with Leung Pak's wife, Agnes Wong at the head office. Leung Tung and Shek Pak Chuen both said that she gave Leung Tung the packing list to compare it with the drums that had arrived. Both Leung Pak and Agnes Wong said that it was Leung Pak who gave the packing list to Leung Tung. I prefer the Plaintiff's version although nothing turns on the packing list. I also accept Leung Tung's evidence that Agnes Wong told Leung Tung to ask Gloire to use the veneer which were not quite correct. Though Agnes Wong denied that she asked Leung Tung to use the veneer first, I prefer Leung Tung's evidence on this. I find that she also agreed, on behalf of the Defendant, to compensate the Plaintiff for employing workers to piece up the veneer. There was also a complaint about the direction of the grain of the veneer that arrived. Because the veneer did not arrive in the sizes ordered, there would be labour involved in piecing up and matching the veneer. Agnes Wong also said that she would send replacement goods but that the workers should carry on with the job. She denied this but I prefer the evidence of Leung Tung.

27. Shortly after some of the white oak veneer had been applied onto the furniture and fittings at the site, it was found that part of the veneer curled or crumpled up. This was noticed on almost all the veneer that had been applied. When first applied, the veneer was smooth but after a few days parts of it curled or crumpled up giving an uneven appearance to the surface of the veneer. As it involved a substantial portion of the veneer that had been applied, a complaint was made by Nomura to Glorie. This led to a complaint by Glorie to the Plaintiff. To Wai Shing, of Nomura, who was the project co-ordinator at the site, gave evidence, which I accept, that when he noticed the white oak veneer with the crumpled condition, which was described by a number of witnesses, about 20% of the furniture had veneer applied on them and all of them had this problem. Leung Tung also said that the crumpled condition was on all the veneer that had been applied onto the furniture and fittings. Yau Pak Man, the project manager of Gloire, also supported this though he said that when he saw the crumpled condition of the veneer, about 15% to 20% of the furniture and fittings had veneer applied on them and up to 90% of that had this particular problem. I find that a substantial part of the veneer had this problem.

28. There is no dispute that when the crumpled condition was discovered on the veneer that had been applied, the Plaintiff informed the Defendant of this. Leung Tung said that he spoke to Leung Pak about this as well as Johnny Li, the sales manager. Both Gloire and Nomura were under time constraints in getting the project completed at the stie. The complaints from the Plaintiff resulted in the Defendant sending a fax to their manufacturer on 23rd July 1988 raising the complaint about the veneer curling up when applied in a non air-conditioned environment which the site was in at the time. The manufacturer suggested using an alkyd primer sealer over the plywood before application. This was tried. I accept the evidence of Yau Pak Man, Paul Wong and Leung Tung who gave evidence to the effect that the use of the sealer did not cure the problem. I am satisfied that the use of alkyd primer sealer did not cure the problem as the crumpled condition of the veneer persisted. Fans and dehumidifiers were also provided at the site at a later stage to see if this would cure the problem. This did not improve matters.

29. Exhibit P6 is a board with white oak veneer applied thereon. Leung Tung said this was the very board that was used as a demonstration to Gloire and Nomura so that the workers could see how to apply the veneer onto the plywood. Yau Pak Man gave evidence, which I accept, that before the demonstration, the place at the site was tidied up and fans and dehumidifiers had been turned on a few hours before the demonstration. This was to create an environment which he said was close to what Leung Tung wanted for the demonstration so as to show that it was not the product but the environment and the manner of application that caused the veneer to crumple. Unfortunately, the demonstration failed to prove this. After the veneer had been applied onto the plywood, the board was placed in an air-conditioned room at the site for a few days during which time it was placed in an air-conditioned environment, except for a period when there was an electricity blackout. Leung Tung, Paul Wong, Yau Pak Man and To Wai Shing all said that they saw the demonstration sample after it had been placed in the air-conditioned room at the site and the crumpled condition of the veneer was still present. Leung Pak, however, gave evidence that Exhibit P6 was the board that he used to demonstrate to Leung Tung to show how the veneer should be applied. he said that he asked Leung Tung to bring him a sample of the white oak veneer after delivery of the same to Gloire and he gave a demonstration to Leung Tung at the Defendant's showroom and placed the sample brought back by Leung Tung onto a piece of plywood. On this conflict of evidence about Exhibit P6, I believe Leung Tung and prefer his evidence to that of Leung Pak. I fail to see why Leung Pak would want to conduct a demonstration on how the veneer should be applied at that stage. There was no reason to do so as there were no complaints about the crumpled condition at that early stage and I do not believe him when he said that Exhibit P6 was the board he used for the demonstration for Leung Tung. It was also suggested to Paul Wong that the demonstration by Leung Pak took place in his presence, which he denied, but Leung Pak never supported this in his evidence. I am satisfied that Exhibit P6 was the board used for the demonstration at the site and notwithstanding that a favourable environment was created for this demonstration, the crumpled condition on the veneer was still present.

30. As a result of the Plaintiff's complaints to the Defendant about the white oak veneer, an inspection was arranged at the site at which Johnny Li and Ringo Hui of the Defendant attended. This took place on 9th September 1988. On the Plaintiff's side, Leung Tung, Shek Pak Chuen and Daisy Lee Yuet Mei were present. Leung Tung gave evidence that at this inspection, Johnny Li, the Sales Manager of the Defendant agreed to pay for the repair work on the veneer to try and remove the crumpled condition. He said that as a result of a discussion he had with Johnny Li there, it was agreed that the Plaintiff would engage repairers to try and repair the veneer and that he could send the bill to Agnes Wong of the Defendant for repayment. Shek Pak Chuen also said that when he spoke to Johnny Li at the site inspection about the crumpled condition of the veneer, he was told that they should get someone to repair the same and to bill the Defendant for the amounts that were incurred for this. Johnny Li did not give evidence at the trial. Ringo Hui Kin Sun gave evidence about this site inspection the effect of which was that Johnny Li did not agree with the Plaintiff that it would pay for labourers to repair the veneer. I prefer the evidence of Shek Pak Chuen and Leung Tung to that of Ringo Hui on this. I got the impression that Ringo Hui's recollection of these matters may be faulty. He even said that the site inspection took place in the basement of the site when it is clear from all the evidence that the work was carried out on the ground floor of the site.

31. I am satisfied on the evidence that the crumpled condition of the white oak veneer which had been applied was due to defects in the goods and not in the way the veneer was applied onto the furniture and fittings at the site. The defects were probably due to the PSA backing and I find that the white oak veneer supplied by the Defendant to the Plaintiff were defective and not fit for the purpose of application onto furniture and fittings at the site. Accordingly, there was a breach of the implied condition that the goods would be fit for the purpose made known to the Defendant.

32. Due to the condition of the white oak veneer, the architect in charge of the project naturally rejected the work on the veneer. Yau Pak Man and To Wai Shing both gave evidence, which I accept, that red oak wood was substituted for the white oak veneer that had been applied onto the furniture and fittings at the site and the red oak wood was eventually applied directly onto the white oak veneer at the site. The red oak wood was supplied by Gloire who applied them over the white oak veneer.

33. The contemporaneous documents also tend to support the Plaintiff's case. The letter written by the Plaintiff to the Defendant date 7th September 1988 supports the fact that notwithstanding the use of alkyd primer sealer, the crumpled condition persisted. As a result of this letter, the Defendant wrote to its supplier S.R. Wood, Inc. on 8th September 1988 complaining about the PSA backing of the veneer and that despite the use of an alkyd primer sealer as suggested by them, the veneer still' curled up. The Defendant expressed the view there that the veneer with PSA backing was not suitable for use in Hong Kong. The Defendant also wrote to S.R. Wood, Inc. on 12th September 1988 after the site inspection at the site. There the Defendant said that it found edges curled up and streaks rising above the surface. The Defendant also complained that on a random inspection that it did of veneer with the backing still attached, streaks could be seen rising above the surface of the veneer and on removing the backing, patches of paste had formed into a thin translucent layer; air was trapped inside the layer and there was no adhesion.

34. A number of letters were also written by the Plaintiff to the Defendant in August and September 1988 voicing its complaints about the white oak veneer and putting on record matters that had been agreed between the representatives of the Plaintiff and the Defendant. The defendant did not reply to the earlier letters. Agnes Wong explained that the reason why there was no reply to the earlier letters was because the Defendant did not wish to adopt a hostile stance with its client, the Plaintiff. She also said that when the Defendant wrote to S.R. Wood, Inc., she merely put forward the views of its client and not the Defendant's views. I do not believe her. If the Defendant felt that the Plaintiff's complaints and allegations were ill founded, I think that they would have replied to that effect at a much earlier stage. Such letters need not, of course, adopt a hostile stance. I also do not accept that what the Defendant was doing in so far as corresponding with S.R. Wood, Inc. over the matter was merely putting forth the views of the client and not its own. The Defendant knew that the goods were defective and its representatives had observed the condition of the veneer. That is the view they took at the time.

35. The Plaintiff also called Christine Lee Kwai Cheng from the Hong Kong Standards and Testing Centre Ltd. to support the fact that even if placed in ideal conditions in an air conditioned environment, the white oak veneer still crumpled up. She was given samples of white oak veneer by the Plaintiff in October 1989 for testing and the report produced by her, Exhibit P27 summarises the test she conducted and her findings. There was no evidence that the samples she tested were indeed samples of veneer that the Defendant had supplied the Plaintiff under the said contract and I do not think that I can infer this on the evidence before me. She was provided with samples by the Plaintiff about a year after the complaints were made and there was no evidence where the Plaintiff obtained these samples from. In reaching my findings that the Defendant was in breach of contract, I have ignored the evidence of Christine Lee.

36. The Plaintiff also complained that the grains of the veneer delivered were in the wrong direction. This complaint, however, is closely related to the sizes ordered so that if the sizes of veneer did not match the specifications, the grains did not match. The evidence about this complaint was not entirely satisfactory and I think that the complaint is really directed to the fact that the sizes did not match the specifications and hence when joining pieces of the veneer together, the grains in the pieces of veneer did not perfectly match. I think Counsel for the Plaintiff is right when he submitted that the complaints about the sizes and the grains are closely related to each other and cannot be taken independently. Nothing turns on this complaint. I have already found that the goods did not correspond with the description as to the sizes of veneer ordered.

37. By paragraph 18 of its amended Defence, the Defendant relies on an exemption clause being one of the printed terms on the reverse of the contract. I have found that the printed terms and conditions on the reverse of page 40 of Bundle A were not incorporated into the contract the Plaintiff had with the Defendant and the Defendant is not entitled to rely on the exemption clause relied on.

38. As the Defen dant was in breach of contract, the Plaintiff is entitled to damages. I shall deal with this later.

39. I turn now to the question of liability on the sale of the elm burl veneer.

40. Shortly after the contract for the white oak veneer had been made between the Plaintiff and the Defendant and also in June 1988, Nomura negotiated with the Plaintiff for the supply of elm burl veneer for use on the wall panel at a Chinese restaurant at the site. Leung Tung spoke to Sakai of Nomura about this and what Nomura wanted was some replacement goods for the veneer they had already ordered for the Chinese restaurant from another supplier.

41. Leung Tung gave evidence that Nomura wanted pieces of veneer measuring 20 ins. by 20 ins. with no joint line or with only one joint line. This meant that the piece would come either as an entire piece without any joining line or if it did not come as an entire piece, there should be only one line in the middle of the piece to show one joining line on that piece. Also, the patterns on the piece had to be book matched which meant that one side of the joining line had to match the other side in pattern.

42. Leung Tung said that he started negotiations with Agnes Wong of the Defendant for the supply of this veneer in around mid-June 1988. Eventually, he was shown samples of the same by Johnny Li, the sales manager. He was shown two samples of elm burl veneer of A4 size; one sample had no joining line whereas the other had only one joining line with the pattern on one side matching the other side. Leung Pak, however, said that it was he who gave samples of elm burl veneer to Leung Tung and he explained the characteristics of the veneer to him. He said that he explained to Leung Tung that a piece of the elm burl veneer was made up of a number of pieces and the sample he gave him exceeded one joining line. Agnes Wong also said that she was not involved in the original negotiations for this veneer and that it was Leung Pak who gave her the information for her to send out the documents at pages 2, 5 and 6 of Bundle B to the plaintiff. Johnny Li did not give evidence and I have not had the benefit of hearing what he has to say about these matters. I do, however, prefer the evidence of Leung Tung to that of Leung Pak and Agnes Wong and I find that Johnny Li showed two samples to Leung Tung of elm burl veneer one of which had no joining line and the other with one joining line in the middle and which was book matched. I also accept that Leung Tung sent by fax to Agnes Wong a drawing he made like Exhibit P10 to show that the piece of veneer required had one joining line in the middle.

43. There was a lapse of time in the negotiations to the time when the contract between the plaintiff and the Defendant was made no doubt due to the problems the parties had encountered over the white oak veneer.

44. Although Leung Tung gave evidence that both the Plaintiff and Nomura signed a contract for the supply of 200 pieces of elm burl veneer, I think he is mistaken about this. He produced as Exhibit P18 a document called a quotation contract dated 12th August 1988 addressed to Nomura for the supply by the Plaintiff to Nomura of 200 pieces of elm burl veneer with plywood backing at a unit price of $230 per piece. He also produced as Exhibit P19 a confirmation letter dated 3rd August, 1988 from the Plaintiff to Nomura. I accept that both Exhibits P18 and P19 were faxed to Nomura only on 15th August 1988. I am satisfied that although Nomura did not sign and return these documents to the Plaintiff, there was a contract between the Plaintiff and Nomura on the terms as set out in these documents.

45. Leung Tung gave evidence that he received the contract for the elm burl veneer with PSA backing, Exhibit P11, which was faxed to him by the Defendant on 15th August 1988.Johnny Li had telephoned him before faxing the contract over to the Plaintiff to enquire if the order could be placed and if so, the contract would be faxed over to the Plaintiff. He said he received the contract by fax and it already had Johnny Li's signature on it. Daisy Lee confirmed this in evidence and she also said that she explained the contents of P11 to Leung Tung. Only one page was faxed over and hence, the printed terms and conditions on the reverse did not arrive with the document faxed. The document was faxed back shortly after Leung Tung signed it. Leung Tung said that Ringo Hui attended the Plaintiff's offices a few days later with the original contract, a copy of which is at pages 13 and 14 of Bundle B, and asked Leung Tung to sign the same so that he could bring it back to his boss. He said that the printed terms and conditions on the reverse of the contract were not drawn to his attention and he signed the document at his request. Daisy Lee confirmed in evidence the visit by Ringo Hui to the offices of the Plaintiff and she says she explained the contents of the contract to Leung Tung. She did not pay attention to the printed terms on the reverse. She also said that Ringo Hui did not explain the document at all to Leung Tung.

46. Johnny Li, as I have said, did not give evidence at the trial. Ringo Hui, however, gives a completely different version of events about the contract between the Plaintiff and the Defendant. He said that he explained the original of the contract to Leung Tung at the offices of the Defendant at Harcourt Road. He said Johnny Li was also present on this occasion. He also said that he mentioned to Leung Tung about the printed terms at the back of the contract. He said the original contract was signed at the Defendant's office and not at the Plaintiff's office. Although he knew that a copy had been faxed to the Plaintiff before Leung Tung came to sign, he was not aware if it had been returned by the Plaintiff.

47. On this conflict in the evidence, I prefer the evidence of Leung Tung and Daisy Lee to that of Ringo Hui. I find that the contract was made when the Plaintiff signed and faxed the contract back to the Defendant on 15th August 1988. At that time the printed terms and conditions were not, I find, incorporated into the contract. When Leung Tung signed the document brought by Ringo Hui, the contract between the parties had already been made. The original document was signed by Leung Tung as a matter of formality only and adds nothing to the formation of the contract. The contract was partly oral and partly written and although Exhibit P11 did not specify that the pieces of the elm burl veneer were to be either with no joining line or with one joining line, I find that this was agreed by Leung Tung and Johnny Li and it was a requirement under the contract between the parties. It was a contract of sale by description, namely, that each piece of the veneer should have either no joining line or with one joining line in the middle and by virtue of Section 15(1) of the Sale of Goods Ordinance there was an implied condition that the goods should correspond with the description. I am also satisfied that the contract was also a contract of sale by sample, namely, by the two samples shown to Leung Tung by Johnny Li and there was an implied condition under Section 17 of the Sale of Goods Ordinance that the bulk of the goods should correspond with the sample in quality. The Defendant also knew that the elm burl veneer was to be used at the site and there was also an implied condition that it would be reasonably fit for that purpose under Section 16(3) of the Sale of Goods Ordinance. As the Defendant sold the goods in the course of its business there was also an implied condition that it should be of merchantable quality under Section 16(2) of the Ordinance.

48. The Defendant ordered the elm burl veneer also from S.R. Wood, Inc. and the goods eventually arrived in Hong Kong in September 1988. The Defendant's delivery order and invoice are dated 12th September 1988 and there is no dispute that the goods were delivered on that day. Leung Tune gave evidence that on seeing the goods at the time of delivery, he noticed that the pieces had too many joints. They were not as he had ordered. He found six pieces with no joining line and not a single piece had only one joining line in the middle. He said he refused to accept the goods and complained to a Mr Wong at the Defendant's warehouse over the telephone. He then complained to Johnny Li over the telephone that the goods were not as promised and informed him about the defect, namely, the fact that the veneer had more than one joining line. He was advised by Johnny Li to take the goods temporarily and to send it out to his client in the hope that they could make use of the goods. He says he met Johnny Li the following day and it was agreed that the Plaintiff would temporarily acknowledge receipt of the goods. It was in those circumstances, he said, that he acknowledged receipt of the goods on the delivery order at page 15. of Bundle B. A colleague of his wrote on the delivery order that it was Mr Wong of the warehouse and Johnny Li who had instructed that receipt be acknowledged in that manner, namely, to receive the goods first and to test them later. The words written on the delivery order tend to support his version of what took place. He also said that he sent samples to Agnes Wong who assured him that if his client refused to accept the goods, she would compensate the Plaintiff for its loss. Leung Tung also said that after this assurance, all the pieces that were delivered were applied onto plywood and were delivered to Nomura at the site. He said that Sakai of Nomura complained that the job had to be completed that day and that he was bound to complete the job using the veneer with plywood first and that if the architect should reject the goods, then they would have to be removed. He also advised Leung Tung to order replacement goods right away. Agnes Wong denied that she had given any assurance to Leung Tung. I prefer, however, to accept Leung Tung's evidence and find that she did give an assurance to Leung Tung that the goods should be delivered to the client and that if they were not acceptable, she would compensate the Plaintiff.

49. Leung Tung also gave evidence about speaking to Johnny Li over the telephone when he promised to send replacement goods to the Plaintiff as required by Nomura. This conversation took place about one or two days before the letter at pages 20 and 21 of Bundle B was sent by the Plaintiff to Agnes Wong. I believe Leung Tung and accept his evidence. I find that Johnny Li did so promise Leung Tung.

50. Bundle B also contains the correspondence between the Plaintiff and the Defendant for the period from 14th September to 1st October 1988. I regard this correspondence as largely neutral as each side was putting forth their contentions, although it is surprising that Agnes Wong never replied to the letter from Leung Tung at pages 20 and 21 of Bundle B.

51. On the evidence adduced, I also find that the architect rejected the elm burl veneer after they had been put on the wall panel at the site. The Plaintiff therefore had to supply replacement goods. Although Johnny Li of the Defendant had promised to send replacement goods to the Plaintiff, it appears that none were ever ordered by the Defendant. After making enquiries from a number of suppliers, the Plaintiff eventually ordered substitute goods from a German supplier which were applied onto the wall panel at the site. The goods that arrived from Germany were not defective as there was only one joining line in the middle and were book matched.

52. Leung Tung also produced in evidence as Exhibits P12 and P13 samples of the veneer which had been applied on plywood. The veneer came from the goods delivered by the Defendant and these plainly show that the pieces of veneer had more than one joining line thereby giving the appearance that it was made up of a number of pieces. In addition, part of Exhibit 13 was not book matched in that the pattern on one side did not perfectly match the pattern on the other side.

53. I do not think there is any real dispute between the parties that the veneer arrived with more than one joining line. I find that the Defendant was in breach of its contract with the Plaintiff in that it failed to deliver the elm burl veneer with either no joining line or only one joining line in the middle of each piece. Because of this defect, the bulk of the goods delivered also did not correspond with the samples shown to Leung Tung by Johnny Li and the goods were also unmerchantable and not suitable for the purpose for which they were required, namely, to put onto wall panels at the Chinese restaurant at the site. The Defendant was, therefore, in breach of the implied conditions under the contract.

54. The Defendant pleads and seeks to rely on exemption clauses contained in the reverse of the contract, namely, in the printed terms and conditions found on the reverse of the contract. In particular, clauses 1(a), 8 and 9 are relied on. I have, however, found that the Defendant's printed terms and conditions on the reverse of the contract form were not incorporated' into the contract made between the Plaintiff and the Defendant for the elm burl veneer. The Defendant is, therefore, not entitled to rely on the exemption clauses pleaded.

55. As the Defendant was in breach of contract, the Plaintiff is entitled to damages for breach of contract.

56. On the question of damages, I shall take the sale of the white oak veneer first. It is pleaded that the loss and damages suffered by the Plaintiff include the price paid by the Plaintiff for the goods. There is no dispute that the Defendant eventually received from the Plaintiff a total of $262,096.40. Also claimed is the Plaintiff's loss of profit which is pleaded as $116,459.50. The Plaintiff also claims for the cost of employing a sub-contractor to cut and re-arrange the veneer, labour costs for rectifying the crumpled condition of the veneer and the cost of adhesive materials and food for workers in rectifying the crumpled condition.

57. The profits that the Plaintiff would have made should be the difference in the amount received from Gloire, namely $373,263.90 and the amount eventually paid to the Defendant, namely, $262,096.40. Thus its loss of profit was $111,167.50. The Plaintiff received the price under its contract with Gloire by means of a letter of credit and the Plaintiff was paid the sum of $373,263.90 in full by Gloire. Counsel for the Defendant submitted that there was no evidence that the Plaintiff ever refunded this amount to Gloire and since the Plaintiff has been paid in full, it has already kept its profits on the transaction. Accordingly, it was submitted that the Plaintiff was not entitled to claim loss of profits or repayment of the price paid to the Defendant since the Plaintiff has kept the sums paid to it by Gloire.

58. It is, of course, for the Plaintiff to prove its loss and damage as pleaded. Leung Tung gave evidence that the sum of $373,263.90 which had been received by the Plaintiff under the contract was subsequently refunded to Gloire. There was, however, no documentary evidence produced at the trial to show that this was the case. It would have been simple enough to do so if indeed there was a refund of the said sum to Gloire. I think that Leung Tung is mistaken about this. The letter from the Plaintiff's solicitors to the Defendant dated 11th October 1988 makes no claim for loss of profits or for the price paid by the Plaintiff to the Defendant for the goods delivered. Gloire wrote to the Plaintiff on 15th December 1988 setting out in detail its claim for loss and damage with full particulars. No claim is made there for the price of the goods which had already been paid to the Plaintiff. In its letter to the Plaintiff dated 21st February 1989, Gloire returned eleven drums of the white oak veneer to the Plaintiff comprising a total of 4,118.5 sq.ft. In the same letter Glorie asked to be reimbursed the sum of $123,555 which was for 4,118.5 sq. ft. at $30 per sq.ft., the unit rate as specified under Gloire's contract with the Plaintiff. Gloire did not ask for re-imbursement of the whole amount paid under its contract. The letter of 21st February 1989 was signed by Yau Pak Man who gave evidence and who said that as far as he knew, the sum of $123,555 mentioned in the letter had not yet been received by Gloire. I am not satisfied that the Plaintiff has refunded the sum of $373,263.90 paid in full by Gloire under its contract with the Plaintiff or the sum of $123,555 as claimed in the said letter of 21st February 1989. 1 think Counsel for the Defendant is right when she submitted that the Plaintiff has kept its profits and I do not think that the Plaintiff is entitled to the loss of profits and the price paid to the Defendant for the goods delivered. I make no award for the items in the particulars (a), (e) and (f) of paragraph 14 of the re-amended Statement of Claim.

59. $250,000 is claimed for employing a sub-contractor to cut and re-arrange the said veneer. I am satisfied that the Plaintiff engaged Leung Ping Sun of Kam Shing Engineering Company to do repair work for the Plaintiff on the veneer at the site. This was to piece the veneer and to match them according to the direction of the grain in accordance with drawings and specifications supplied to him. He signed a contract with the Plaintiff for this work which is at page 80 of Bundle A. The contract specifies that the repair work was to be on the white oak veneer at a total cost of $250,000 but I am satisfied on the evidence of Leung Ping Sun that the work he carried out for the Plaintiff was not only in relation to the white oak veneer but another type of veneer as well. He was unable to say how much of the $250,000 under his contract was attributable to the work on the white oak veneer but he did say, and I accept, that in terms of quantity, the other type of veneer he worked on was less than the quantity of the white oak veneer. I infer from this evidence that more time and materials were spent in repairing the white oak veneer which I find were reasonably incurred. Doing the best I can on the evidence, I apportion 60% of the $250,000 as being the expenses incurred for the repair by Kam Shing Engineering Company and I award $150,000 for this item.

60. I turn now to item (c) in the particulars. I am satisfied that the Plaintiff engaged workers to repair the crumpled condition of the white oak veneer. Leung Tung gave evidence about this as did Shek Pak Chuan. One of the workers Yan Chung Yu, a carpenter, gave evidence, which I accept, that he did repair work for the Plaintiff on the crumpled condition of the veneer at the site. The repair work included cutting the crumpled parts open, applying glue and sticking them back. Irons and blow dryers were also used. For the work that he and the group of workers who were working with him on this job, he received a total of $64,000. The pay slip for this amount was produced. Daisy Lee, whose evidence I accept, produced a number of pay slips including that signed by Yan Chung Yu to evidence payments to workers who carried out the repair work on the veneer. These were exhibits P28, P29, P30, P31 and P32. The total of these pay slips exceed the amount of $115,500 claimed. I allow the sum of $115,500 as pleaded as being expenses reasonably incurred by the Plaintiff.

61. The sum of $35,000 is also claimed as the cost of adhesive materials and food for the workers to rectify the crumpled condition of the veneer. Leung Tung gave evidence, which I accept, that apart from paying wages to the workers who were engaged to rectify the crumpled condition of the veneer, the Plaintiff incurred expenditure in meals for these workers and for materials required by the workers. He was unable to give an accurate figure of the amount expended for this but he estimated it at about $30,000. I will allow $20,000 for this item as being expenses reasonably incurred by the Plaintiff.

 

The total damages I award to the Plaintiff are therefore :

62. In addition, a declaration is claimed in respect of damages which the Plaintiff may have to pay Gloire. Gloire has written to the. Plaintiff setting out its loss and damages but up to date hereof, no action has been commenced by Gloire against the Plaintiff. There is, however, nothing to prevent Gloire from doing so and I think the Plaintiff is entitled to the declaration sought. I am not, of course, saying that the loss and damages as set out in Gloire's letter to the Plaintiff dated 15th December 1988 are all recoverable. These are to be determined elsewhere. I grant the Plaintiff a declaration that it is entitled to recover from the Defendant such damages for which it may be held liable to pay or may reasonably pay to Gloire as a result of the Defendant's breaches of contract.

63. I turn now to the damages for the Defendant's breach of contract in respect of the elm burl veneer. The first two items particularised in the pleading are for the price of the goods paid by the Plaintiff to the Defendant and the Plaintiff's loss of profit in the resale of the goods. It is not disputed that the price paid to the Defendant was $35,456. The contract the Plaintiff had with Nomura was to supply elm burl veneer with plywood backing. The total sum under this contract was $46,000. 50% of this sum was paid to the Plaintiff by Nomura as a deposit under the contract and the Plaintiff has received $23,000. To Wai Shing gave evidence that the deposit was paid but that the full amount under the contract was not paid to the Plaintiff because of the defective condition of the goods. To arrive at the Plaintiff's profit under its contract with Nomura, I must deduct the cost of the plywood backing and for the labour in applying the veneer onto plywood. This was estimated by Leung Tung to be about $2,000 or $3,000. Deducting $3,000 from $46,000 one arrives at $43,000. The profit the Plaintiff would have earned is therefore $43,000 - $35,456 which comes to $7,544. Also, the Plaintiff has kept the $23,000 already paid to it under its contract with Nomura and in respect of items (i) and (ii) particularised in paragraph 20 of the pleading, this sum must be deducted. I allow therefore under particulars (i) and (ii) the sum of $35,456.00 and $7,544 less $23,000 which comes to $20,000.

64. The Plaintiff purchased replacement goods from a German supplier. The document at page 41 of Bundle B shows that the Plaintiff's bankers debited the Plaintiff's account for the sum of $36,244.22 as the cost and expenses of opening a letter of credit in favour of the Plaintiff's German supplier, Schorn and Groh Gmbh. Leung Tung gave evidence about this and I find that the replacement goods were supplied to Nomura by the Plaintiff as substitute goods and that the expenditure in relation to this was reasonably incurred. The Plaintiff ordered 310 pieces of elm burl veneer from the German supplier. This was not veneer with PSA backing as the Defendant's but I am satisfied that reasonable enquiries were made by the Plaintiff for substitute goods and this was what was available. Leung Tung ordered 310 pieces at US$14.50 for each piece which was more than required as he did not want problems to occur. It is not clear on the evidence how much was in fact used but I do not think that the Defendant ought to be liable for the cost of 310 pieces of the substitute goods. I allow only the cost for 200 pieces which comes to US$2,960. Converting this to Hong Kong currency at HK$7.80 to US$1. it comes to HK$23,088. The bank's commission and cable charges for opening the letter of credit was a total of $350 according to the document at page 41 of Bundle B. For item (iii) in the particulars, I allow $23,438.

65. Items (iv) and (v) in the particulars are claims for extra labour cost in fitting the replacement goods and extra cost for plywood and materials. Leung Tung could not give figures for these items save that he said it was very costly to apply the substitute goods onto plywood and it came to tens of thousands of dollars. As the substitute goods were not of PSA backing, I accept that some extra labour was involved in putting there onto plywood. Taking Leung Tung's estimate of $2,000 or $3,000 for the cost of plywood and labour for putting on the Defendant's elm burl veneer onto plywood, I think that I should allow the Plaintiff about twice this in view of the extra labour involved for the substitute goods. I allow $6,000 for the items particularized in (iv) and (v).

66. The total damages I award to the Plaintiff for the Defendant's breach of contract for the sale of the elm burl veneer are therefore :

67. Here again, a declaration is claimed in respect of damages which the Plaintiff may have to pay Nomura. Nomura wrote to the Plaintiff on 1st October 1988 laying a claim for loss and damage. Up to date hereof, Nomura has not instituted proceedings against the Plaintiff but it may do so. Whether or not the amounts Nomura set out in their letter are recoverable are, of course, to be determined elsewhere. I grant the Plaintiff a declaration that it is entitled to recover from the Defendant such damages for which it may be held liable to pay or may reasonably pay to Nomura as a result of the Defendant's breach of contract.

68. Judgment is accordingly entered for the Plaintiff for the said amounts and the said declarations in these Actions. Interest is to be payable on the said amounts from the date of service of the writs until judgment at the rate of 9% per annum, namely from 25th November 1988 in Action No. 7609 of 1988 and from 9th December 1988 in Action No. 7887 of 1988. The Defendant is also to pay the Plaintiff its costs of these Actions.