HANG PAK ENGINEERING LTD v. THE INCORPORATED OWNERS OF MOW HING INDUSTRIAL BUILDING

[English Translation – 英譯本]

HCSA 63/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 63 OF 2007

(ON APPEAL FROM SCTC NO. 74354 OF 2006)

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JUDGMENT

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1. This is an appeal by the claimant against the decision of the Small Claims Tribunal on 23 August 2007 not to review a ruling that it made on 11 July 2007. The relevant leave to appeal was granted on 14 December 2007.

Facts of the case

2. The defendant was the Incorporated Owners of Mow Hing Industrial Building which was situated at No. 205 Wai Yip Street, Kwun Tong, Kowloon. The claimant was, until March 2006, responsible for the maintenance of the lifts of Mow Hing Industrial Building.

3. On 24 May 2005, the defendant and the claimant signed a works contract of serial no. Q4000/02/HPM-007 (hereinafter “24-5-2005 contract”). The contract stipulated as follows:

 The items of works are as follows:

1.    Replacement of the existing main control panel with brand new micro-computer control panel (Mitsubishi PLC of Japan).

2.    Change of circuit

The price for the above works, inclusive of labour and materials, is HK$75,000 each x 2 = HK$150,000.00

4. Subsequently, on 4 June 2005, both parties agreed to reduce the price of the works to $130,000 and the claimant agreed to supply the alarm to the building free of charge.

5. On 9 June 2005, the defendant and the claimant further entered into a works contract of serial no. Q5329/05/HPK1701 (hereinafter “9-6-2005 contract”). The contract was in the following terms:

        The items of works are as follows:

1.   Replacement of the complete set of press buttons together with the stainless steel front panel and the base box in the cab, a total of 2 sets

2.   Change of the floor indicator in the cab to dot matrix digital indicator, a total of 2 sets

3.   Replacement of the exterior press buttons together with the front panel on each floor, a total of 24 sets

4.   Change of the exterior indicator on each floor to dot matrix digital indicator, a total of 24 sets

The total price for the above works, inclusive of labour and materials, is Hong Kong Dollars Thirty-Six Thousand Exactly (HK$36,000.00).

6. Thereafter, both parties agreed to reduce the price of the works to $33,000. The defendant also added the words “Integral Part of Q4000/02/HPM-007” to the contract, and the claimant had no objection thereto. In other words, both parties agreed that the 9-6-2005 contract was part of the 24-5-2005 contract.

7. The undisputed fact was that the works specified in the 24-5-2005 contract and the 9-6-2005 contract were completed on 31 August 2005. The defendant paid to the claimant the sum of $130,000 under the 24-5-2005 contract but, despite the claimant’s demand, did not pay the sum of $33,000 under the 9-6-2005 contract.

8. On 21 November 2005, the chairman, the secretary and another member of the management committee of the defendant had a working meeting with one Mr. Wong Wai Hing (黃偉興), the claimant’s representative. The relevant minutes of meeting are set out below:

1. Lift control panels works:   Tam Yun Tin (譚潤田) denounced Hang Pak Engineering Limited for its failure to respond to his request for an explanation of the urgency of the works. Tam Yun Tin was of the view that it would have been more cost-effective if the said works had been dealt with together with the lift cab renewal works.

Wong Wai Hing expressed regret for the mistake and apologized on behalf of the company; he promised to give a special concession for the lift cab renewal works and change the existing maintenance contract to a comprehensive maintenance contract.

9. In a letter of 20 August 2006 to the claimant, the defendant claimed that, in order to smoothen the start-up, acceleration and deceleration of the lifts of the building and to improve the accuracy of the level positioning with the floor, one Mr. Fung Ka Leung (馮家樑), an employee of the claimant, had strongly recommended the control panels replacement works and suggested that the works should be carried out prior to the lift cab renewal works. However, the said works failed to deliver the expected results. The letter also stated that the defendant subsequently had the said control panels replaced upon suggestions to that effect by the contractor responsible for the lift cab renewal works. As a result, the defendant requested the claimant to buy back the control panels.

10. Having examined the control panels, the claimant sent the defendant a reply on 17 November 2006, stating that as the parts were no longer complete, the claimant would only buy back the PLC computer parts of the lifts. The claimant offered a buyback price of $1,000 for each set, making a total price of $2,000.

11. In its letter of reply of 5 December 2006 to the claimant, the defendant counter-suggested a buyback price of $36,400 and proposed to set this off against the sum of $33,000 being the balance of the price for the works.

12. It is undisputed that no agreement was reached between the parties on the buyback of the control panels or the parts or the price thereof.

Proceedings before the Small Claims Tribunal

13. On 15 December 2006, the claimant commenced proceedings in the Small Claims Tribunal against the defendant, seeking recovery of the sum of $33,000 being the balance of the contract sum.

14. The defendant filed a defence, stating that it would not pay the balance of $33,000 because “the purchase is a fraud purchase”. The defendant also stated that the claimant had suggested to the Incorporated Owners that, before calling tenders for the lift renovation works, it should install the computer control panels and replace the interior and exterior press buttons as well as the floor indicators in the cabs.

15. In his statement of 24 April 2007, Mr. Wong, the secretary of the management committee of the defendant, further stated that Mr. Fung Ka Leung had, in persuading the defendant to install two computer control panels, claimed that they would enhance the smoothness of the start-up, acceleration and deceleration of the lifts as well as the accuracy of the level positioning with the floor.

16. At trial, the claimant called Mr. Fung Ka Leung to give evidence. In his evidence, he stated that the operation of the lifts of the building was originally controlled by relays, and more than 100 relays had been installed in the building; and that the relays had to be replaced by reason of wear and tear following years of continual use. Upon Mr. Wong’s request, he indicated that a computerized control system could be used which would reduce the usage and replacement of relays. Later, with the agreement of Mr. Wong, the claimant issued to the defendant a quotation for the replacement of control panels.

17. After trial, on 11 July 2007 the adjudicator ruled against the claimant, dismissed its claim and made no order as to costs.

18. The claimant applied for review on 19 July 2007. After hearing, on 23 August 2007 the adjudicator dismissed the application and made no order as to costs.

19. On 10 October 2007, the claimant applied to the Court of First Instance for leave to appeal. On 14 December 2007, I granted leave to the claimant to appeal on grounds 1 to 3, 6 and 7 as stated in its amended application for leave to appeal.   

The adjudicator’s reasons for ruling

20. The adjudicator took the view that the main issues of the case were which party was in breach of contract and whether the defendant was liable to the claimant for the sum of $33,000.

21. The adjudicator ruled that the claimant had failed to prove its case on a balance of probabilities. She found the claimant in breach of contract because the works carried out by the claimant fell short of the reasonable standard, i.e. they were not of merchantable quality. The adjudicator ruled that the defendant had on 20 August 2006 accepted the claimant’s repudiation of the contract by requesting the claimant to buy back the control panel components, and that the claimant, by agreeing to buy back those components, the claimant had acknowledged and accepted that it had repudiated the contract. The adjudicator dismissed the claim accordingly.

22. As regards the application for review, the adjudicator refused to accept the claimant’s allegation that, by reason of Mr. Wong Wai Hing’s acquiescence at the meeting of 21 November 2005, the claimant misunderstood that the defendant was agreeable to a settling of accounts. The adjudicator took the view that the claimant’s allegation was sheer speculation as Mr. Wong had already left the claimant’s employ and the claimant had made no mention of the matter in its correspondence. 

The claimant’s grounds of appeal

23. The claimant’s grounds of appeal are:

(1) As the contract between the claimant and the defendant was not a contract of sale of goods, the adjudicator erred in law when she ruled that the works provided by the claimant were not of merchantable quality.

(2) The adjudicator erred in finding that as the claimant had agreed to buy back the control panel components, the defendant could rely on this to defend the claim and was not liable for the outstanding sum of $33,000.

(3) The adjudicator erred in failing to consider Mr. Fung Ka Leung’s evidence on how the parties entered into the works contracts involved in the present case.

(4) The adjudicator should not have found that the claimant had agreed to buy back the control panel components and that such agreement constituted an admission of breach of contract.

(5) The adjudicator should not have found, merely because of the absence of Mr. Wong Wai Hing’s evidence, that the claimant’s allegation about the acquiescence and the misunderstanding about the settling of accounts was pure conjecture.

Nature of the contracts between the parties

24. It is abundantly clear from the documentary evidence adduced at trial that the 24-5-2005 contract and the 9-6-2005 contract related to lift works. Both contractual documents expressly provided that the claimant was required to provide to the defendant the works of replacing and installing control panels, interior and exterior press buttons and floor indicators, as well as changing the circuit. In other words, the claimant had agreed to supply to the defendant services in respect of lift works.

25. Mr. Wong, who represents the defendant, submits that the contract between the parties was a contract for goods because the claimant was selling computer control panels, press buttons and floor indicators to the defendant, and the job of replacing and installing these components as well as changing the circuit was merely an ancillary condition. I do not agree with this submission.

26. Section 3(1) of the Sale of Goods Ordinance (Cap. 26 of the Laws of Hong Kong) provides as follows:

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.

27. The sums of $130,000 and $33,000 that the claimant sought from the defendant under the 24-5-2005 contract and the 9-6-2005 contract were fees for the replacement and installation works, inclusive of labour and materials. They were not the prices for the sale of computer control panels, press buttons and floor indicators. Whether judging from the terms of the contracts or as a matter of common sense, the contracts between the claimant and the defendant did not fall within the definition of a contract of sale of goods under the Sale of Goods Ordinance, nor could they constitute contracts of sale of merchandise.

28. Ms. Cheung, Counsel for the claimant, refers the court to the definition of a contract for the supply of a service under section 3 of the Supply of Services (Implied Terms) Ordinance (Cap. 457 of the Laws of Hong Kong). It is true that the definition under section 3 is specific to contracts for the supply of services within the purview of the Ordinance, which is not engaged in the present case. However, useful reference can still be made to the definition under the Ordinance. The relevant provisions of section 3(1) and (2) are set out below:

(1) In this Ordinance a ‘contract for the supply of a service’ (服務提供合約) means, subject to subsection (2), a contract under which a person (‘the supplier’) agrees to carry out a service.

(2) For the purposes of this Ordinance ―

(a)  …

(b)  a contract is a contract for the supply of a service whether or not goods are also ―

(i)   transferred or to be transferred; or

(ii) …

under the contract, and whatever is the nature of the consideration for which the service is to be carried out.

29. This shows that even though the claimant also supplied the parts and components of the control panels, press buttons and floor indicators when it performed the replacement and installation works, the supply of goods was not the principal nature of the contracts between the parties and would not convert the contracts into contracts of sale of goods.

30. As the contracts between the parties were not contracts of sale of goods, it was improper, and hence an error of law, for the adjudicator to apply the implied term as to merchantable quality under the Sale of Goods Ordinance.

Was the claimant in breach of contract?

31. What the claimant was claiming were the fees for the works. The defendant agreed that the said works were already completed on 31 August 2005. Nor did the defendant deny that it failed to pay the sum of $33,000 for the installation of press buttons and floor indicators. It was therefore improper for the adjudicator to find as she did that the claimant had failed to prove its case.

32. The defendant’s stated defence was that the purchase was a fraud purchase. Its representative, Mr. Wong, has clarified and time and again stressed in the instant appeal that the defendant refused to pay the sum because the goods were unsatisfactory and failed to meet the specifications, namely the speed could not be adjusted or controlled and level positioning with the floor could not be achieved accurately. In such circumstances, the defendant bore the burden of proving that the works performed by the claimant did not, as alleged, meet the specifications and therefore the defendant did not have to pay the sum of $33,000 for the works. The claimant bore no burden of proof in this respect.

33. Judging from his testimony at trial, Mr. Wong’s case seemed to be that Mr. Fung Ka Leung had suggested the replacement and installation of the computer control panels so as to achieve the results that the defendant hoped to achieve (i.e. the start-up, change of speed and level positioning of the lifts with the floor would be smoother and more accurate). Mr. Fung apparently did not agree with what Mr. Wong said because Mr. Fung said he suggested using computer control panels because it would reduce the number of relays required. In this respect, Mr. Fung’s evidence was relevant and material. However, the adjudicator neither analyzed his evidence nor indicated whether she accepted his evidence. She merely stated that the defendant’s version of events was more credible and agreed that the works failed to meet the standard, but then she did not explain the evidential basis and reasons for those conclusions.

34. The defendant stressed both at trial and in the present appeal that Mr. Wong Wai Hing of the claimant had admitted the mistake and apologized for it at the meeting on 21 November 2005. However, the relevant minutes of meeting only showed that the chairman, Mr. Tam, was dissatisfied with the claimant’s failure to explain the urgency of the works and was of the view that it would have been more cost-effective if the works had been dealt with together with the lift cab renewal works. Reading them in context, although Mr. Wong Wai Hing had expressed regret and apology, the mistake that he referred to might only have been concerned with the timing of the relevant works. The minutes of meeting per se could not show that Mr. Wong Wai Hing had admitted that the works performed by the claimant had failed to meet the requirement or had been in breach of contract, much less show that he had expressed regret and apology for it.

35. The defendant also produced a letter of 1 June 2006 from Chun Ming Engineering Limited (hereinafter “Chun Ming”) (振明工程有限公司), the contractor responsible for the subsequent lift cab renewal works of the building. In the letter, Chun Ming pointed out that as the control panels used by the building at that time were single-speed lift control panels, the lift cab could not line up with the floor level (with the extent of difference varying from floor to floor) when the lift was braked to stop upon arriving at a floor. Chun Ming took the view that level positioning precision could be effectively controlled and enhanced only if the control panels were changed to speed-adjustment control panels. Judging from the letter, the crux of the problem did not lie with the quality of the computer control panels installed by the claimant. Nor could the letter prove that the replacement and installation of the computer control panels by the claimant was of an unsatisfactory quality or that there had been the so-called “non-conformity with specifications”. Furthermore, Mr. Fung Ka Leung‘s evidence was that he suggested using computer control panels instead of continuing to use relays to control the lifts for the purposes of saving costs and reducing the number of relays required, and his suggestion had met with the defendant’s agreement. 

36. Therefore, in the absence of resolution of the factual disputes between the parties on the background to and rationale behind the 24-5-2005 contract, the adjudicator’s rulings that the works had not been up to standard and that the claimant had been in breach of contract was unsafe.

The question of buying back the control panels or components

37. Under the general law of contract, where a party is in repudiation, the other party has two options: he may affirm and continue to perform the contract, and claim damages for the loss arising from the breach; or he may accept the repudiation and treat the contract as being terminated, and claim damages for the loss caused by the termination of the contract.

38. In the present case, the installation works of the computer control panels were completed as early as on 31 August 2005. Thereafter, the two lifts of the building were operated by the newly-installed computer control panels until Chun Ming carried out the lift cab renewal works and replaced the control panels with speed-adjustment control panels. That being the case, even if, as the defendant alleged, the works of the claimant had failed to meet the contractual requirement and the claimant had been in breach of contract, it would at law have been impossible for the defendant to make, after almost one year (i.e. on 20 August 2006), a request that the claimant bought back the computer control panels, thereby purporting to accept the alleged repudiation, terminate the contract and relieve itself from liability to pay the contract sum of $33,000. The defendant could only claim damages for any loss incurred as a result of any breach by the claimant.

39. Furthermore, as the contracts in question were not contracts of sale of goods, it was not open to the defendant to relieve itself from the contractual obligation to pay the contract price by returning the computer control panels or asking the claimant to buy them back.

40. Apart from this, it appears from the correspondence between the claimant and the defendant regarding the buyback of control panels that the parties had not reached any agreement on the price or, indeed, on whether the claimant was to buy back the components at all. The claimant made no admission on any mistake with the works when it put forward the buyback proposal in its letter of 17 November 2006. It was an error of law to presume, in the absence of factual and evidential bases, that the claimant had admitted to a breach of contract solely because it had considered the defendant’s request of buying back and put forward a buyback proposal.

41. In my judgment, the discussion between the parties about the buyback of the control panels or their components was not relevant to the question of whether the claimant had been in breach of contract. Nor was there any legal basis on which the defendant could seek to set off the sum of $33,000 that it owed to the claimant against the buyback price. And it was contrary to legal principles for the defendant to calculate the amount to be set off with the claimant by reference to the assets depreciation rule in the context of taxation. Even assuming that the claimant was proved to be in breach of contract, the defendant could only set off the outstanding contract sum against the defendant’s actual loss. However, the defendant had neither adduced any evidence showing its loss nor filed a counterclaim against the claimant.

Conclusion

42. On the foregoing analysis and for the above reasons, the adjudicator’s dismissal of the claim was wrong in law and has to be set aside.

43. The defendant has admitted that the works had been completed and that the Incorporated Owners have not paid the contract sum of $33,000 that the claimant is claiming; the defences that the contracts in question were contracts of sale of goods and that the computer control panels sold by the claimant did not meet the specifications cannot be sustained in law; and the evidence adduced by the defendant does not establish any breach of contract on the part of the claimant. The claimant’s claim should be allowed accordingly.         

Costs

44. The usual rule is that costs should follow the event. Mr. Wong, the defendant’s representative, submits that the Incorporated Owners are not well-off and requests the court to exercise its discretion in respect of costs. However, this does not constitute a reason for departing from the usual rule in the present appeal.

Orders

45. I therefore make the following orders:

(1) The claimant's appeal is allowed.

(2) The ruling of the Small Claims Tribunal on 11 July 2007 dismissing the claim and its decision on 23 August 2007 dismissing the application for review are set aside.

(3) The claimant’s claim is allowed. The defendant is liable to pay to the claimant the sum of $33,000.

(4) The defendant has to pay the claimant costs of the present appeal, to be taxed if not agreed.