CHEUNG SHING YUK TONG CO. LTD. v. HIP HING CONSTRUCTION CO. LTD.

1991, No. A6793

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is a sale of goods case arising from events that took place in 1990. The plaintiff was the seller and the defendant the buyer. Little turns on law; the parties' disputes are mainly on facts.

2. The goods were Pittsburgh Corning Foamglas ("FG"), an insulation material that the plaintiff intended to use for part of the roofing of the Heng Sang Bank New Headquarters Building ("the Building") under construction at the time. The defendant was the main contractor of the construction works.

3. The plaintiff's claim is for payment of the unpaid balance of price in the sum of $144,900.00 whilst the defendant makes claim on the following based on which it alleges that it is entitled to a diminution of the price, either by way of the defence of set-off or counterclaim :

(a) short delivery of the goods agreed to be supplied;

(b) part of the goods were damaged when received;

(c) the goods supplied were not in accordance with the contract specifications in thickness; and

(d) costs of remedial work resulting from (b) and (c).

4. There were some arguments as to the exact terms of the sale and purchase agreement ("the contract"), which were contained in correspondence between the parties. After considering all the evidence, including all the witnesses' evidence by way of witness statements and oral testimony, I find as a fact that the following were the relevant terms of the contract :

(1) The plaintiff should be responsible for the design, supply and delivery of FG in accordance with drawings SB/DR/25 (Rev. B) and SB/DR/24 (Rev. B) both dated 1 May 1990, i.e., exhibit P4 ("the contract drawings");

(2) The delivery of FG was to be by the end of June 1990;

(3) The delivery was to be made to the site of the Building;

(4) The price should be at a unit rate of $460.00 per square metre for covering a roof surface area treated as 1,050 square metres making a total price of $483,000.00; and

(5) The area of 1,050 square metres was inclusive of 10% of FG over the quantity required to cover the roof surface area, as wastage or spare.

Short Delivery

5. Pursuant to the contract, the following relevant deliveries were made to the site of the Building :

6. The plaintiff called an expert, Mr Raymond Bruno ("Mr Bruno"), who used to work for Pittsburgh Corning Corp. in USA which was the manufacturer of the FG. He gave very helpful introduction to the manufacturing process, use and installation of FG. In particular, he had prepared a table, exhibit P2, showing inter alia, the quantity of FG required for the roof of the Building in accordance with the dimensions shown in the original of the contract drawings, exhibit P4. In exhibit P2, Mr Bruno also listed the quantities of the various types of FG delivered.

7. Apart from producing a table of calculations showing the quantities of FG required and delivered in exhibit P5, Mr Yeuk Yu Chan ("Mr Chan"), the marketing director of the plaintiff, corrected some obvious typographical or arithmetical mistakes in exhibit P2. His corrections are shown in handwriting in exhibit P6, an enlarged copy of exhibit P2. I have little doubt and accept that Mr Bruno is an expert in the field of FG. The contract drawings were prepared by Pittsburgh Corning Corp., the manufacturer of FG. I prefer the contents of exhibit P2 to those of exhibit P5 produced by Mr Chan. Save for a few mistakes as pointed out by Mr Chan in exhibit P6, exhibit P2 gives clear figures as to the sizes and quantities of FG required to cover the roof surface according to exhibit P4, consisting of figures in square metres as well as in pieces.

8. There were various types of FG required to cover the roof, some called flat blocks, some tapered panels or blocks or boards, and there were a number of types of tapered panels depending on the angle of slant and the size required. Exhibit P4 shows a cross-section of each type required so as to form a roof surface that has a fall for the purpose of allowing water to drain. Some FG blocks were required to form the surface and some were required as underlay. Most of the surface panels were tapered. According to exhibit P2, the area of FG surface panels required was 938.28 square metres, and when 10% of wastage or spare was added on top, a figure of 1,032.11 square metres was arrived at. British and American measurements were, however, used for the sizes of the types of FG blocks. The number of blocks required was obtained by Mr Bruno by taking into account the number of pieces of each type of FG, which were sized by inches, required to fill each of the rows, the number of rows to be covered by each type of FG, and the conversion from such measurements into the metric equivalents. The conversion would produce some discrepancies. The blocks supplied were of standard width of 24 inches. As shown in exhibit P4, however, row 23 in drawing SB/DR/25 and row 21 in drawing SB/DR/24 required a lesser width. The carton containing each type of FG was definitive as to the number of blocks contained in it and only full cartons were delivered. The number of pieces delivered might for all these reasons not be identical to the contract quantity. The result was that, as shown in exhibit P2, the area of surface panels required according to full cartons would be 1,053.63 square metres, which is quite close to the contract quantity.

9. The actual number of panels delivered, according to those shown in exhibit P2 which were based on the quantities shown on the above 4 delivery orders, were more than the number of panels required under the contract in most cases, although there are two types of panels where the delivery was short, namely the 1½ inch flat blocks and the 3 inch blocks, both of which were for underlay. The number of pieces required of the former type being 2,352 pieces whereas that of those delivered was 2,296, a short delivery of 56 pieces. The quantity of the latter type short delivered was 15 pieces, being the difference between 1,216 required and 1,201 delivered. These short delivered pieces should, according to the figures in exhibit P2, be equivalent to 7.84 square metres for the 56 pieces (i.e., 56 x 0.14 square metre) and 4.2 square metres for the 15 pieces (i.e., 15 x 0.28 square metre). The contract unit price being $460.00 per square metre was to cover the surface of the roof, including the underlay. In the circumstances, making calculations as best I can, the price for the short delivered pieces should be as follows:

$460 (the unit price per square metre based on the surface area) × 1,053.63 (the surface area to be covered plus the 10% for wastage or spare) ÷ 1,721.79 (the total square metres required for the surface panels and the underlay) × 12.04 (the short delivered pieces by square metres, 7.84 + 4.2) = $3,389.16.

Subject to what I say below, this sum of $3,389.16 should be deducted from the balance of price unpaid.

10. Before I leave this issue of short delivery, I think I ought to deal, albeit briefly, with the quantities as submitted by the defendant in exhibit D2. Two different bases were employed. The defendant used measurements on the contract drawings, i.e., exhibit P4, to arrive at the area of the roof of 930.76 square metres and used a different method to arrive at the pieces of FG required to cover the surface of the roof, i.e., by taking the number of full pieces of boards required for each row to be covered and then multiplying that number with the number of rows. Apart from my view that it is unjustifiable to use different bases on the two matters, it is unlikely that these different bases were used when the contract was made. When the contract was entered into through correspondence on 10 May, 14 May and 8 June 1990, the defendant stated that 1,050 square metres to be supplied under the contract were "quantity including wastage" and "included 10% spare". 930.76 square metres plus 10% would become 1,023.86 and not 1,050 as provided in the contract documents. There is no justification to work backwards from 1,050 square metres to say that there was in fact a 12.81% surplus ordered based on the required covered surface area of 930.76 square metres. Moreover, the quantity specified in the contract documents was in square metres and not in pieces. The pieces were merely used for the purpose of calculating the price in respect of short delivery and perhaps other damages in this action. The conversion of square metres to pieces, or vice versa, for any other purpose is inappropriate. The defendant's calculations in exhibit D2 therefore must be and are rejected.

Damaged Goods

11. There is an issue which must be decided first before dealing with the quantity of FG which arrived at the site damaged. The issue is what exactly the purposes for which the 10% over the required quantity of FG was contracted to be supplied were.

12. The three main contract documents were the defendant's fax dated 10 May 1990 and letter dated 14 May 1990 to the plaintiff, and the plaintiff's letter dated 8 June 1990 in reply. The fax of 10 May 1990 referred to quantity including wastage being 1,050 square metres and the letter of 14 May 1990, however, referred to 1,050 square metres being inclusive of "10% spare". The plaintiff replied to these by its letter of 8 June 1990, referring to both of the documents. Mr Bruno told me that FG was a form of glass, which was liable to break in transit, in loading and unloading the container, transport to the job site, transport from the lower level to the roof of the site, handling by workmen, and in the laying process when the excess part must be cut off from the end of a row or at penetrations like drainage and ventilation vents, etc. The breakage aspect was always included for waste. He said that giving the distance of the travel from the manufacturer to Hong Kong, he would not expect 7% of damage to be unusual. However, he did not expect more breakage at the site than in the delivery, bearing in mind the project involved was a simple one. He would allow 3 to 5 per cent breakage at site. He opined that as the defendant allowed 10% for breakage, which he understood it to mean unusable quantity, the allowance was probably very accurate.

13. On the other hand, Mr Ellis Kam Wing Leung ("Mr Leung"), a Chartered Quantity Surveyor employed by the defendant at the material time, told me that the 10% of the required quantity was for spare, in the sense that it included breakage by workmen at the site and surplus for future maintenance purposes. He said that out of the 10% spare, he expected that about one half would be breakage by workmen at the site and the rest would be kept for future use. Although Mr Bruno was of the view that FG once laid seldom required to be maintained in the kind of job involved in this case, because the FG would have been covered with tiles or reinforced concrete, Mr Leung told me that it was not unusual for roofs in buildings in Hong Kong to leak and in such an event it would be necessary to do remedial work requiring FG panels to be replaced. I accept that it was reasonable for the defendant to add 10% to the quantity required for the job as wastage and spare, reserving about half of that added quantity for future maintenance. When a roof leaks, it will not be unusual to remove the concrete layer in order to relay the waterproofing materials. If any FG under the concrete is damaged, it will need to be replaced.

14. From the point of view of the purchaser, it is difficult to see how it is reasonable for an allowance to be made for breakage during delivery of the goods ordered, and that he has to bear the cost for such allowance. Nor do I think any reasonable supplier will say to a purchaser that the latter will need to pay for a certain added percentage for the breakage of the goods before they arrive at the destination. There was no clear stipulation in the contractual documents one way or the other. The words used to describe the added 10% were "wastage" and "spare". Perhaps, the parties understood the word "wastage" in different senses, each to their respective advantage. Both words were used in the letters written by the defendant and not the plaintiff. I think in all the circumstances of this case, it is reasonable to construe the word "wastage" as for any FG which could not be used. Wastage in this sense could be caused at the time of pre-delivery and post-delivery. Taking into account what Mr Bruno and Mr Leung told me, I am of the view that the reasonable construction of the contract between the parties is that the 10% was to allow 5% for wastage where the FG was unusable by breakage during installation and 5% for future maintenance as covered by the word "spare".

15. The reports of the surveyors employed by the defendant at pages 44 to 49 of the Agreed Bundle set out the breakage or damage to the various types of FG delivered and examined at the site. The surveys were conducted in the presence of the representatives from both the plaintiff and the defendant. The plaintiff's representatives were Mr Lee Wing-himm ("Mr Lee") who attended the survey on 28 and 29 June 1990, whereas Mr Raymond Wong ("Mr Wong") attended on 1 and 2 July 1990. However, only Mr Lee gave evidence, and the plaintiff did not even have a witness statement from Mr Wong, let alone calling him as a witness. Mr Lee challenged the classification of "broken products" meaning the broken panels as recorded in the surveyors' reports, because the description included FG which had cracks from one edge to the opposite edge, broken corners ranging from a missing bit of half inch cube or a corner piece of 6 to 8 inches breaking up from a panel, and broken edges such as a couple of dents of 1 to 2 inches width along the edges. Mr Lee felt that some of the panels so described should not have been treated by the surveyors as broken. However, looking at the record kept by him and Mr Wong, exhibit P3, the figures of broken pieces shown were even more than those shown on the surveyors' reports. I am of the view that the surveyors' reports show accurate figures of the broken panels.

16. Mr Chan of the plaintiff, when cross-examined by Mr Beaumont, accepted the figures on a table of breakage of each type of FG supplied to the site. Those figures were based mainly on projections from the samples surveyed by the surveyors and figures recorded by the plaintiff's said representatives. The total came to 539 pieces, which is around 221.86 square metres by measurement of the area of each type of the FG affected. Using Mr Bruno's total quantity under the contract being 1,721.79 square metres, the damaged pieces would amount to 12.88% of the total that should have been delivered under the contract. In paragraph 9 of the Amended Defence and Counterclaim, the defendant alleged that the number of blocks broken was 547 pieces. Using the number of blocks allegedly delivered as the denominator, i.e., 6,849 pieces, the defendant alleged that the percentage of breakage was 7.98%, being 547 pieces ÷ 6,849 pieces × 100. I am afraid that I cannot accept the defendant's basis, because each type of FG delivered was not of identical dimensions.

17. On the usability of the broken blocks, Mr Leung's evidence was to the effect that the total quantity of FG supplied under the contract was sufficient to enable the defendant to complete the job, with no spare left. This is not surprising. Where a panel was broken, there is no evidence from the defendant that it was entirely unusable. Mr Lee's evidence is to the contrary. Mr Bruno, being an expert in the field, described breakage of the materials like cracks on the panels and broken corners with the piece broken away from the panel still existing as causing no difficulty and no waste of materials in the laying of FG on a roof. If the figures in the defendant's table of breakage, as accepted by Mr Chan, were precise and correct as regards usability, the defendant would have been unable to complete the roof-laying job with the FG supplied, because according to my above calculation, 12.88% of the goods required under the contract was damaged and there was a short delivery of FG as I find. Despite the damaged FG and the uneven thickness to which I will refer later, the defendant did not return any of the FG delivered. There is no evidence that the defendant obtained other FG or similar material for completing the roof insulation work. The irresistible inference is that the FG delivered was sufficient to enable the defendant to cover the roof fully, as was admitted by Mr Leung.

18. There is no sufficient evidence of the precise quantity of the FG that was damaged as to be unusable when delivery was effected to the Building. Nor is there any evidence regarding the exact extent of wastage caused by handling, transportation to the roof or work at the job site after delivery. In all the circumstances, I am of the view that what the defendant was deprived of was the 5% spare that it wished to keep for future maintenance. This quantity of 5% of the FG could have been kept for future use if there had not been so much damage or defect in the goods delivered so that it was totally depleted for application to the laying of the roof. The total contract price was $483,000, and 5% of it is translated to be $24,150. This amount must be applied in diminution of the price owed.

Not in accordance with Specifications - Uneven Thickness

19. In the surveyors' reports, measurements of the thickness of the panels examined were recorded, and many of them showed discrepancies between the goods delivered and the contract specifications, even taking into account the commercially accepted tolerance level of 1/16 of an inch for a panel and therefore 1/8 of an inch for two panels put adjacent each other, as deposed to by Mr Bruno. Mr Bruno challenged the method of measurement of the thickness by the surveyors in that they used merely a tape measure put against the side of a panel and took the measurements by naked eye. Mr Bruno also challenged some of the measurement figures to say that perhaps the surveyors made a mistake as to the type of panel inspected. Mr Chan was even more dogmatic. He said that it was not possible for the thickness of panels of type A8 and 1½ inches to have been over the tolerance level, for the cartons containing them were of a standard size and could not have held the same number of panels with much added thickness. I find Mr Chan's argument unacceptable, because it is based on a presumption that no mistake would be made regarding the goods delivered. For instance, it was very clearly stated in the survey reports that the 1½ inch flat blocks were all of thickness of 1 and 7/8 inch. I see no reason to suspect that that measurement is wrong. Mr Chan received the survey reports at the latest on 15 August 1990, but he did not go down to the site to check any item whose thickness he considered to be impossible. In the circumstances of the case, despite much more accurate measurement methodology could have been devised and used, I am of the view that in the light of the large quantity of the goods involved and the urgency of the installation at the time, the measurement method used by the surveyors is acceptable. Anyhow, the representative of the plaintiff, Mr Lee, seeing the method being adopted, did not raise any objection. His attempt to raise objection at the stage of giving his testimony in court was, I think, but an afterthought. I accept the measurements shown in the surveyors' reports.

Expenses for Remedial Work

20. Now I turn to the question of the expenses claimed to have been incurred by the defendant for the remedial works allegedly done because of the breakage of the goods delivered to the site and the goods not being in accordance with contract specifications as to dimensions, i.e., the uneven thickness, both of which I have found.

21. By reason of the breakage and the uneven thickness, it was reasonable, in my judgment, for the defendant to take remedial measures. The defendant employed one Tricosal (China) Limited ("Tricosal") to install the roofing. Tricosal was a water-proofing specialist, according to Mr Chan. In view of the various complaints about the FG delivered to the site, Tricosal insisted that it would require remedial work to be done, such as grinding the uneven edges of FG, filling in edges and damaged corners with bitumen and cutting and trimming damaged FG. Eventually the defendant agreed to pay Tricosal $70,000 for the remedial work. Mr Bruno told me that breakage of the materials like cracks on the panels and broken corners with the piece broken away from the panel still existing as causing no difficulty and no waste of materials in the laying of FG on a roof. The laying of FG was done with molten or hot bitumen, which would compensate all such defects by bonding all loose pieces together. If a certain part covering the whole thickness of the panel is missing, then a tailor-made piece to fill in the void would be necessary, and the molten bitumen would stick the piece to the panel. He also told me that the discrepancies in thickness of the materials would not cause too much problem in laying them on a roof. Any minor discrepancy in thickness could be safely ignored as the FG would be covered with water-proofing membrane and then with reinforced concrete or tiles on top. For more noticeable cases of uneven thickness of the FG, the workmen should anyhow lay the FG panels first, and any material difference in height between panels after being laid could be cut or scraped away by a flat shovel or even brushed away by the workmen using their feet. I have little doubt what Mr Bruno said is correct, because he is an expert in this very special material. However, even Mr Bruno would not go beyond the manufacturer's recommended commercial tolerance of thickness being 1/16 of an inch for each panel. Mr Chan's evidence in this regard is similar to Mr Bruno's. He suggested to use a piece of FG to scrape the surface of the laid boards so as to remove the excess molten bitumen coming out of the joints between two adjacent panels and at the same time scrape even the uneven joints or edges.

22. Mr Yim suggested that because Tricosal knew that the defendant was eager to have the FG laid as soon as possible so that the construction works would as a whole not be delayed, Tricosal seized the opportunity to charge $70,000 for the so-called remedial work. Mr Yim also argued that the sum was unreasonable, based on the nature of the slight remedial work that would be required as described by Mr Bruno and as compared with the price agreed to be charged by Tricosal for laying the FG on the whole roof. I am afraid that I cannot accept his arguments. I find in all the circumstances at the time, it was reasonable for the defendant to have agreed to pay Tricosal for the remedial work seen by everyone concerned, perhaps except the plaintiff, as being required by reason of the defects and in order not to cause delay in the construction of the Building. The enormous sum of liquidated damages of $150,000 per day for delay provided in the main construction contract must have held the defendant in terrorem. The delay in delivery, the last batch being delivered on 1 September 1990 instead of the agreed end of June 1990, is relevant in this context. Even Mr Bruno's evidence points to additional work being necessary for curing such defects, like tailor-making missing pieces, using more bitumen to bond loose pieces, and using flat shovels and the foot to flatten uneven edges between panels with uneven thickness. All these require more work and expense. The defendant agreed to pay Tricosal a lump sum of $70,000 for the extra work and material. Although the documentation regarding the payment of the sum of $70,000 is not as pellucid as would be desirable, I am satisfied that the defendant has paid it to Tricosal. I am of the view that the defendant is entitled to claim this sum in reduction of the price for the goods.

The Counterclaim and the Claim

23. At the commencement of the trial, the defendant dropped its counterclaim which was based on liquidated damages of $150,000 per day for the delay in the construction works, as apparently provided for in the main construction contract. The defendant was not able to prove any damages apart from the short delivered quantity, the damaged goods and the $70,000 for the remedial work. In the circumstances, I hold that the plaintiff is entitled to a sum of $50,750, made up as follows :

$144,900 (the unpaid balance of price) - $24,150 (5% spare which had been used due to damage to the goods upon delivery) - $70,000 (for the remedial work) = $50,750.

24. I have not forgotten about the price of the short delivered goods, i.e., $3,389.16. It would have been allowed for diminution of the contract price but for the fact that the reduction of the price by the 5% spare that I allow must be treated as having covered it. Despite the short delivery, what the defendant was deprived of was the 5% spare that it wished to keep for future maintenance.

Conclusions

25. The defendant therefore only succeeds to the extent as I have indicated above in reducing the price, and its counterclaim is dismissed.

26. I give judgment for the plaintiff in the sum of $50,750 with interest from the date of the writ at the court judgment rates applicable to various periods from that date to payment.

Costs

27. Mr Yim complained that as the defendant had raised an enormous counterclaim based on $150,000 per day for delay, this action which was originally brought in the District Court was transferred to the High Court. In fact, the claim was originally brought in the District Court for $112,056 within the jurisdictional limit of $120,000 of that Court. The sum of $112,056 was reached by reducing the present claimed amount of $144,900 by a sum of $32,844 which was stated to be an "amount to be negotiated". It is quite clear that the plaintiff had not given up the $32,844 in order to get its original claim within the limit of the jurisdiction of the District Court. The Particulars of Claim was amended on 31 May 1991 to revert to the sum of $144,900 by simply deleting this amount to be negotiated. The Defence and Counterclaim was filed on 16 November 1990 with the counterclaim based on the $150,000 per day for delay, and its amendment on 16 September 1991 made no alteration to this counterclaim. The defendant did not request the action to be transferred to the High Court. The transfer was caused by the plaintiff amending its claim to raise it to the present level beyond the jurisdiction of the District Court. Mr Yim's complaint can only be viewed in this light, that because the defendant raised a large counterclaim, the plaintiff reverted to its larger claim and caused the action to be transferred to the High Court. It is, however, very different from the case where the defendant compelled the plaintiff to apply for transfer. The defendant did not apply for transfer despite its possibly huge counterclaim. If the action remained in the District Court, the defendant's possibly huge counterclaim must be limited by that Court's jurisdictional limit, and the risk of the plaintiff facing a judgment of anything over $120,000 would be nil. The transfer was purely caused by the plaintiff itself, and ergo Mr Yim's complaint is unfounded. In the circumstances, the plaintiff should only be entitled to costs on the District Court scale at the level applicable to the judgment amount, i.e., $50,750, that I award to it. I think it is proper and reasonable for counsel to have been briefed to conduct the trial, and I grant a certificate for counsel. I make an order nisi for costs accordingly.