THE INCORPORATED OWNERS OF GREENVILLE GARDENS OF SHIU FAI TERRACE v. WIN-TECH ENGINEERING CO LTD

DCCJ 21789/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 21789 OF 2001

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J U D G M E N T

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1. There is no dispute as regards the factual background.

2. This is a claim for loss and damages for breach of warranties and implied terms in relation to a security system installed by the Defendant at Greenville Gardens, Siu Fai Terrace ("the System").

Factual Background

3. Much of the factual background is undisputed. The Plaintiff is the Incorporated Owners of Greenville Gardens, a residential estate consisting of 4 blocks A, B, C and D. Guardian Property Management Limited ("Guardian") is the manager of the said estate.

4. The contract for the security system was entered into on about 14 April 1999 between Guardian, acting as agent on behalf of the Plaintiff, and the Defendant ("the Contract"). The Contract is contained in or evidenced by a Tender Form at page 2 of the Bundle of Document (BD - 2) together with a Specification attached thereto at pages 3-5 of BD2. In short, the Contract was for the installation of the System together with a Defect Liability Period ("DLP") of 1 year.

5. The System consists of the following:-

(a) 60 sets of infra red detectors mounted at the external walls of the lower floors of each Block to detect any trespasser;

(b) the data from the detectors are then fed back to 4 local control panels installed at the caretaker counters at Blocks A, B, C and D;

(c) the data from the local control panels are further fed back to a repeater control panel (ie the central control panel), located at the management office at Block B;

(d) the whole system is controlled by a computer, next to the repeater control panel.

(Photos of the above components will be adduced at trial.)

6. After some hiccups and minor disputes during the installation process, which are not really relevant for present purposes, the System was handed over by the Defendant on 26 November 1999. The document "System Handover", at page 19 of BD2 evidences this. That was the start of the 1 year DLP. The terms of the DLP are set out in a letter dated 30 November 1999 from the Defendant at page 20 of BD2.

7. One of the terms of the DLP is that the Defendant "shall not be responsible for repairing equipment which shall have been the subject of misuse or malicious damage caused by typhoon, lighting or any other causes outside the normal operation of the equipment."

8. The Defendant has been paid in full following the handover of the System.

9. Mr. Oscar Dimanlig (hereinafter referred to as "Mr. Dimanlig"), the Senior Building Supervisor of Guardian (P.W.1) stated that problems developed in early April 2000, when the alarm buzzer of the local panel at block A kept ringing and the System could not be re-set. On 11 April 2000, Mr. James Lee Cheuk Wah ("Mr. Lee"), D.W.1, of the Defendant conducted an inspection of the System.

10. What followed the inspection on 11 April was a lengthy dispute in the correspondence:-

(a) In the letter of 14 April 2000 at p.25 of BD2, the Defendant alleged that the System malfunctioned because of "misuses". The "misuses" were said to be constant turning on and off the power supply, and changing the internal settings of the computer. In that letter however, the Defendant was willing to effect repairs free of charge.

(b) In the letter reply of 18 April 2000 from Guardian at page 26 of BD 2, the allegation of "misuse" was denied. The Defendant was urged to repair the System at no cost in accordance with the terms of the DLP.

(c) In the next letter from the Defendant, 19 April 2000 at page 27 of BD2, the Defendant changed its stance. They then said they would only carry out repairs at the cost of $11,500 because the defects were due to "misuses" and that fell outside the scope of free repair under DLP.

(d) The Plaintiff refused to accept the Defendant's demand for payment. The Defendant insisted in their letter dated 28 April 2000 at P.34 of BD2 that the Plaintiff must "admit" that they had misused the System. Only then would the Defendant provide free repairs.

(e) The parties then reached a stalemate in the correspondence.

11. In view of the stalemate, the Plaintiff has obtained quotations from other contractors to repair the System. The quotation from Success Security dated 30 June 2000 is at pages 39-40 of BD2.

12. In August 2000, the Plaintiff also engaged Jensen Engineering Co. Ltd. to inspect the System. A brief report from Jensen dated 8 August 2000 is at page 44 of BD2. However the maker of the Report Mr. Wong Ki Wai was not able to satisfy me that he was an expert in the field and therefore his opinion evidence in the report was not accepted by the Court.

13. Eventually the Defendant contacted the chairman of the Plaintiff directly and it was agreed that the Defendant would provide repairs at no cost. Mr. Lee inspected the System again on 7-8 September 2000. After the inspection, he wrote a letter dated 25 September 2000 alleging that the defects he found in early September were different to the defects he found in April 2000. See page 46 of BD-2.

14. The Defendant took away the circuit boards of the System for repairs on 18 October 2000.

15. Repairs took some 31/2 months. The circuit boards were only returned on 30 January 2001. The 5 sets of circuit boards were tested by Mr. Lee in the management office in front of a committee member of the Plaintiff and according to Mr. Oscar Dimanlig it appeared to function properly. Mr. Lee then reinstalled the circuit boards back to the respective position in each Block. However, Mr. Dimanlig gave evidence to state that the System could not function properly after the reinstallation. The problems and defects after the re-installation were set out by Guardian in their letter of 31 January 2001 at page 58 of BD2.

16. However, the Defendant's response in their letter dated 1st February 2001 was that the DLP had already expired and therefore they were no longer responsible for any problem of the System.

The Issues

17. In view of the above background, the following issues fall to be determined:-

(a) what are the implied warranties or terms of the Contract (if any);

(b) what are the defects or problems of the System (if any);

(c) were the defects caused by any "misuse" of the System as alleged by the Defendant;

(d) did the Defendant breach the Contract by:-

(i) breach of implied warranties as to fitness for purpose and/or quality and/or workmanship; and/or

(ii) fail to carry out their repair obligations under the terms of the DLP;

(e) if there were breach(es) by the Defendant, the quantum of damages.

The 1st Issue

18. The Plaintiff pleaded in its Statement of Claim the following implied terms:-

(1) it was an implied warranty or term of the Agreement that the System would be of merchantable quality;

(2) the Defendant would install the System in a proper and workmanlike manner; and

(3) the System would be reasonably fit for the purpose of being used as a burglar alarm system.

It was pleaded that the said warranty or term was implied as a matter of law and/or to give business efficacy to the Agreement and /or to give effect to the parties' intention.

19. I agree with the submission of the Plaintiff's Counsel that the Contract is not a contract for sale of goods alone. It is a contract for sale of goods and services to be provided by the Defendant. It is the same or similar to a construction contract where both goods and services were provided thereunder. The Plaintiff's Counsel relied on the case of Young & Marten v McManus [1969] 1 AC 454. In this case it was held that in the contract of a contractor who agreed to do work and to supply materials, two warranties may be implied in respect of the materials supplied; namely a warranty of their reasonable fitness for the purpose and a warranty of their good quality, in particular against latent defects.

20. In Chitty on Contracts Vol. 2 para 37-074, in a section about implied terms for construction contracts, it states,

"There will be a further implied warranty that the work carried out by the contractor will on completion be reasonably fit for its particular purpose where; (i) the employer makes known to the contractor the particular purpose for which the building is required; (ii) the work is of a kind which the contractor holds himself out as performing; (iii) the employer relies on the contractor's skill and judgment. The scope for the implication of a warranty as to fitness for intended purpose will vary considerably depending upon the nature of the express obligations of the contractor. Where the express obligations of the contractor are broadly in the nature of "design and build" obligations, then there will be far greater room for the implication of the warranty as to fitness for intended purposes."

21. The Contract is a contract where the Defendant designed the System and built it. So, there is far greater room for the implication of the warranty as to fitness for intended purpose. It is clear that the Plaintiff had made known to the Defendant the particular purpose for which the System was required. The Defendant had held himself out as performing the type of work of designing and making and installing the System. It is clear that the Plaintiff had relied on the skill of the Defendant.

22. Section 5 of the Supply of Services (Implied Terms) Ordinance Cap 457 states;

"5. Implied term as to care and skill

In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill."

23. In the light of the aforesaid legal principles, I find that there are the following implied terms in the Contract: -

1. The products supplied by the Defendant in the System would be of merchantable quality;

2. The Defendant would install the System in a proper and workmanlike manner; and,

3. That the System would be reasonably fit for the purpose of being used as a burglar alarm system.

The 2nd Issue

24. There is clear evidence that the System was not functioning properly in early April 2000. Mr. Dimanlig had stated that in his evidence, see paragraph 6, 7, 8 of his witness statement, which had been adduced into evidence. Mr. Dimanlig stated under cross-examination that on 5 April 2000, the System was malfunctioning. The alarm at Block A was set off and started to ring. When they silenced the alarm, it still rang until the alarm stopped. Then the System in Blocks B, C and D could not receive the alarm. The Defendant in his letter dated 14th April 2000 at page 25 of the BD2 had admitted that the alarm in Block A kept ringing; and the repeater control panel at the management office at Block B would not receive signals from the 4 blocks.

25. The letter of Guardian to the Defendant dated 27 July 2000 stated that the System had not been in working condition and had not been repaired until then. Further the letter dated 8th August 2000 from Jensen Engineering Co. Ltd. at page 44 of BD2 show that Jensen could not repair the System. There were no further daily alarm reports since 5 April 2000. The evidence of Mr. Dimanlig showed that neither he nor anyone in Guardian has changed the settings of neither the computer of the System nor the software of the System.

26. Mr. Wong Ki Wai of Jensen Engineering Co. Ltd. gave evidence to state that he had not changed anything in the System when he inspected the System.

27. In my view, the defects in the System had remained throughout the period after early April 2000 and were the same through the period until October 2000 when the Defendant took the 5 circuit boards away. In January 2001, when the Defendant re-installed the 5 circuit boards back into the System, the evidence showed that the System still did not function.

The 3rd Issue

28. The burden of proving any "misuse" is on the Defendant. The Defendant alleged that from 26th November 1999 to 5th April 2000, the System was being constantly switched on and off and the settings of the System were changed.

29. The Defendant's claim was that the System had been subjected to misuse. The claim of the misuse is stated in the letter dated 14th April 2000 from the Defendant to Guardian at page 25 of the BD2. Therein he stated that there had been constant switching on and off of the power supply of the infrared sensors in Block A. This caused the alarm in Block A to sound continually. Further there was an allegation that the power source to the System had been repeatedly switched on and off. This caused the instability of the power supply to the System. This caused the breakdown of the parts that handled the transmission of signals in the infrared alarm system. That caused the failure of the System to receive signals from the infrared sensors. Thirdly, the letter stated that the technicians of the Defendant discovered that the settings of the computer had been changed. The PIN of WINTECH was no longer there. The Input and Output setting had also been changed. That was why the computer was not working normally.

30. In evidence, Mr. Lee had not referred to all the specifics stated in his letter dated 14th April 2000. In his evidence-in-chief, he adopted the contents of his witness statement in evidence. Paragraph 17 of his witness statement stated that after receiving the report from Guardian related to the mal-function of the System on or about 11th April 2000, he attended Grenville Gardens to inspect the System. He found that the circuit boards of the indication panel were not functioning properly due to misuse and/or alternatively due to some other causes outside the normal operation of the System. He stated that in the subsequent letters exchanged between the Defendant Company and Guardian, the Defendant Company informed Guardian that since the defect was not within the scope of the DLP, the Defendant Company was not responsible for the rectification of the said defect. The witness statement did not specify or particularize the defects found apart from stating that the circuit boards were not functioning properly.

31. In his cross-examination of Mr. Dimanlig, Mr. Dimanlig stated that the control panels in each of the Blocks was kept within a cupboard as shown in the photographs at pages 192-193 of BD-2. The cupboard wherein the control panels in Blocks A and B had a lock and was locked. There was no lock to the cupboards in Blocks C and D. Mr. Dimanlig stated that he had not switched the on/off switch of the System and he had told his staff not to do so. He agreed that even though he told his staff not to switch the on/off switch of the System he could not be sure if they obeyed him.

32. However, the evidence showed that there was no on/off switch of the power supply for the System. There was a transformer in each of the Blocks that controlled the infrared sensors. There is an on/off switch in the transformer in each of the Blocks. When the transformer was switched off the infrared sensors were switched off. However this would not affect the ringing of the alarm directly. The transformer could not control the power supply to the alarm. That being the case, there would not be too much incentive to turn off the power supply to the infrared sensors for the purpose of stopping the alarm.

33. Since there was no on/off switch to the power supply to the entire System, Mr. Lee suggested that Mr. Dimanlig or his staff could have turned on and off the power supply to the System by means of plucking out the fuse in the control panel. Mr. Wong Ki Wai had earlier given evidence and under cross-examination he had said that there was a fuse in the repeater panel of the System and when he took out the control panel for inspection, he cut off the power supply by taking out the fuse. There is a fuse to each of the control panels of each of the Blocks. Mr. Lee alleged under cross-examination that the staff of Guardian could have turned off the electricity supply by taking out the fuse in the control panel of each of the Blocks or by taking out the fuse in the repeater panel kept in the management office of Greenville Gardens. However this had not been put to Mr. Dimanlig in cross-examination.

34. Under re-examination, Mr. Dimanlig clarified that the statement in the report at page 67 of the Alarm Record referred to switching off the alarm at Block D. He stated that the note by the night shift in-charge that he had switched off the alarm, could have meant that he switched off the transformer of Block D as there was no way in which he could have switched off the entire power supply to the System. .

35. In cross-examination, Mr. Lee stated that Mr. Dimanlig had stated that he did not know how to use the computer. He merely followed the steps Mr. Lee himself taught him. Yet he had to teach another how to use the System. Mr. Lee stated that there is no proof that the Plaintiff used the System correctly. Mr. Dimanlig gave evidence as to the steps he took to re-set the System through the computer, after the alarm goes off. He stated were the No. 3 alarm in Block A to go of, the alarm in the Management Office would go off. He would use the cursor in the computer screen and point it to the word "Accept", then press "Enter". He would ask the staff to go to Block A to check if there is anything wrong. If there is nothing wrong, he enters the secret code. He would point the cursor to No. 3 and press "Enter" to re-set the System. Then he would call Block A to say the Management Office found that everything is normal and switch off the alarm in the Management Office with the re-set switch on the computer.

36. On another note, Mr. Dimanlig confirmed however, that the computer could not control the power source of the System. The method stated by Mr. Dimanlig for re-setting the System after the alarm goes off, was verified by Mr. Lee, to be correct. Mr. Lee stated that if the alarm of the System was set off, the System had to be re-set in the way stated by Mr. Dimanlig. To re-set the System, it is not necessary to switch off the power. Mr. Dimanlig stated that he taught the night shift staff Ah Ming the method that he himself used and explained to the Court. There was no reason why Ah Ming would not follow his instructions. I accept Mr. Dimanlig's evidence on this.

37. Under cross-examination, Mr. Lee was asked whether he could think of any reason why the staff of Guardian would have to turn on and off the power supply to the System when it was in operation 24 hours every day, when it was also clear that to re-set the alarm, the power supply to the System was not required to be turned off. Mr. Lee could not give any answer.

38. Mr. Lee also stated that as the control panels of the alarm system was at the entrance of each of the Blocks as shown in the photographs at pages 192 and 193 of BD2, those who enter the buildings could have maliciously played around with the control panels.

39. Having heard the evidence, it seems to me that it is highly improbable that either Mr. Dimanlig or his staff would have turned on and off the power supply of the System by means of taking out the fuse of the repeater panel in the management office of Grenville Gardens or in the control panels placed in each of the Blocks of Grenville Gardens. Further it seems to me highly unlikely that any person entering in and out of the Blocks in Grenville Gardens would have maliciously played around with the control panels in the blocks or played around with the repeater panel in the management office as suggested by Mr. Lee. It is highly dangerous to take out the fuse in the control panels or the repeater panels. It would not seem to be a reasonable suggestion that anyone would do this. Further, there is no reason to turn the on/off switch of the transformer for it would not be effective to turn off the alarm. This would only happen in very few instances of extreme frustration when the proper method of switching off the alarm by the computer did not work, as a last resort.

40. I therefore find on the evidence that there is no basis for the allegation that the staff of Guardian or any resident or anyone entering into the entrance hallways of Blocks A, B, C and D, had repeatedly turned on and off the power supply to the System. There is no basis for the bare allegation that the on/off switch of the transformer of the control panels had been repeatedly turned off and on to interrupt the power supply to the infra-red sensors. There is no expert evidence on the effect this would have on the circuit boards. Mr. Lee's allegation that this would have an adverse effect on the circuit boards is bare allegation.

41. In relation to the allegation that the staff of Guardian had changed the setting of the computer of the System, Mr. Dimanlig had stated in evidence that to his knowledge there had been no changes to the settings of the computer of the System. Under cross-examination, related to his allegation that the setting of the System had been changed, Mr. Lee stated that there are those in the management of Guardian who had been given responsibility to change the code setting and to by pass the infrared sensor. The PIN of the control board of each Block could be changed. Mr. Lee stated that between 11th April 2000 and 14th April 2000 he discovered that the PIN of the control board had been changed. The setting for entry and output of data in the control board had been altered. However he agreed that changing the PIN of the System by the management of the client is normal practice to protect security. The PIN is not an important point. He agreed that if the PIN had been changed it would not affect the running of the System. Again under cross-examination he withdrew his allegation that the PIN had been improperly changed by the management of Guardian.

42. Mr. Lee stated in evidence that when he went to Grenville Gardens on the 7th and 8th September 2000 to inspect the System, he found that the defects in the System were not the same as that found by him in April 2000. He listed these in his letter dated 25th September 2000. In his letter, written in Chinese, he stated words to the effect that

"Our company gave the infrared system of Grenville Gardens, Shiu Fai Terrace, a thorough inspection on 7th and 8th of this month. The inspection is as follows: -

1. The connecting cable in the hard disc of the main computer was altered; the irregular connection causes the computer to be unable to boot. Damages might have been caused to the hard disc and the motherboard. Further inspection is required.

2. The main infrared electricity supply of the Blocks was switched off.

3. The built-in ICs of each and every infrared controller were all damaged in the same way. The damage was caused by external factor.

(photos are enclosed)"

He further wrote that, "the above system inspection result is very different from the findings of the inspection carried out by our company on 14th April. The result of the inspection dated 14th April only revealed that the main computer and main receiver of Block B were damaged; and because of the mismanagement of the management office, our company is not able to repair through the months. However, the systems of other Blocks were functioning properly.

It is different from the inspection report done recently because when the other Company changed the System, the System was seriously damaged, causing the whole System to cease. Our company is so sorry for that. Since the System was seriously damaged, our company needed time to look into the matter as to how the operation of the System can be restored and thus that delayed our reply to you."

43. However, these allegations stated in the Defendant's letter aforesaid were not supported by any evidence from the Defendant, nor supported by the evidence of an expert. The Defendant did not give evidence on these allegations.

44. Mr. Wong Ki Wai of Jensen Engineering Company Limited who went to Grenville Gardens to inspect the System in about August 2000 gave evidence that he did not change the hardware, the hardware connections such as wiring or parts connections, nor change the software setting of the System. When he inspected the System, he took out the repeater control panel and the computer panel for inspection. When he inspected he did not change anything. He checked to see why the signal could not be transmitted to the computer. He took the repeater control panel and the computer back to his office for inspection. After inspection, brought these back to Grenville Gardens and he installed the computer board and the repeater control panel into its original position. During the inspection, he did not change anything. He could not do any repair because the serial numbers of some of the integrated circuits have been deleted. Without the serial numbers there could be no repair.

45. The evidence of Mr. Wong that he had not changed anything during the inspection could not be challenged. There is no evidence to challenge that. In view of the aforesaid, I find that the Defendant has not discharged the onus of proof that the defects in the System was caused by any "misuse" of the System as alleged by the Defendant.

The 4th Issue

46. The evidence disclosed that the System had not been able to function after since 5th April 2000, namely less than 5 months from its date of installation. I find that the System was not of merchantable quality and/or was not installed in a proper and workmanlike manner. Further that the Defendant had failed to repair in accordance with their obligations under the terms of the DLP. The Defendant had therefore breached the Contract.

The 5th Issue

47. The Plaintiff applied to re-amend the Statement of Claim at the final submission of their case. This was not opposed and the re-amendment was allowed by me. The re-amendment added a paragraph 10 (c) to the Amended Statement of Claim. This included an item of loss being the "Cost of repair in the sum of HK$103,250.00.

48. This amendment was necessitated because the Plaintiff had originally sought to claim the cost for the supply and installation of the System in the sum of HK$198,500.00. However, the System had been in use for nearly 5 months. The Plaintiff had gained a benefit from the System. I find that the Plaintiff is not entitled to claim for the cost for the supply and installation of the System. There is no expert evidence before the Court as regards whether the defects could be repaired or how they could repaired. The Plaintiff sought to apply for damages on the basis that the defects could be repaired and to apply for the cost of repairs and damages for loss of use during the period when the Plaintiff was deprived of the use of the System.

49. There is no expert evidence adduced in relation to the repair that was required to be made to the System or the cost of repair. The only evidence adduced was a quotation from Success Security at pages 39-40 of BD2. This quotation was dated 30th June 2000. Mr. Lee gave evidence related to the quotation. He stated that items 1-4 refer to the replacement by a different type of alarm system. Items 5-8 are parts of a system relating to access control with up to 3,800 cards. This was not in the System designed by him. Item 6 is a converter unit. Item 7 is a software to communicate between access control and the computer. Hence items 5 - 8 has no relevance to the claim for repair of the System. Mr. Lee stated that if it were required to substitute the System designed by him, then items 1-4 could do that. The quotation in items 1 - 4 is the price to replace the System with a different system and is not the price of repair of the System. The quotation in items 1 - 4 also contains a direct dial to control room then to inform police station and key holders. There would be a fee to pay to a security centre per month of $280 with a deposit of HK$840 to be paid in advance. This is not in his System. Hence the system in items 1 - 4 is different from the one supplied by him.

50. The system in the quotation has a digital communicator. The System does not have this. The control board quoted there is better than that in the System. It has a built-in standby battery. The control board of the System has 64 zones. The system quoted has 36 zones with expander. The digital console, he believed to be a repeater for each Block to repeat the alarm transmission. The System has one repeater. The system quoted needs four. It is clear that the Quotation relates to a different system that has different specifications. Further it is out-dated having been quoted on 30th June 2000.

51. Mr. Lee stated that in January 2001, the Defendant paid between $3,000.00 to $4,000.00 to change all the integrated circuits of the control panels of the System. Mr. Lee denied that that it was necessary to be able to read the serial numbers on the integrated circuits before they could be repaired. He stated that it would cause only $4,000 to change the cables. He stated that there was a problem with the cables, which was required to be exchanged by January 2002. Upon cross-examination by the Plaintiff's Counsel related to the price of a pair of infrared sensors, Mr. Lee stated that it would cost about $1,500 to replace 1 pair of infrared sensor. Mr. Lee stated that the quotation by Success Security was not reasonable. He stated that during their dispute he had offered to repair the System at $10,000.00.

52. The Plaintiff had adduced no expert evidence to support their contention that the serial number of the integrated circuits had been deleted and no repair could be made to the System because the serial number of the integrated circuits had been deleted. Hence I find that the Plaintiff could not establish that the System could not be repaired. That being the case they could not establish that the System had to be replaced in its entirety.

53. I therefore find that the Plaintiff is only entitled to damages for repair of the System. There is no expert evidence of what is required to be done to repair the System nor any factual evidence of the amount required to repair the System. Mr. Lee stated that they themselves gave the quotation after April 2000 that they would charge $10,000.00 to repair the System. There being no other acceptable evidence to support the amount required to repair the System, I have no other basis of assessing the price required to repair the System except that.

54. I assess damages in relation to the cost of repair at $10,000.00.

55. There has been no evidence adduced by the Plaintiff to establish their claim for loss of use. I therefore give Judgment as follows:-

Judgement for the Plaintiff against the Defendant in the sum of $10,000.00 together with interest thereon at judgment rate from date of Writ to date of judgment and thereafter at judgment rate until payment together with an order nisi for costs of action against the Defendant to be taxed if not agreed with Certificate for Counsel.