RAYMOND T.K. NG t/a NGAI FUNG INDUSTRIAL CO v. BETA MACHINE TOOL CO LTD

1990, No. A7742

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. The Plaintiff is suing the Defendant for the breach of a contract dated 25th April 1990. Under the contract the Plaintiff purchased a CNC 330 Milling Machine.

2. He experienced a number of problems concerning the operation of this machine and eventually sold it to another party at a loss.

3. The Plaintiff has had extensive experience in his business which basically involves working on moulds with a milling machine so that the moulds meet the requirements of his customers.

4. Prior to the matters which were the subject of the present action, the Plaintiff's experience had been confined to the operation of manual drilling machines. Indeed he had previously purchased such machines from the Defendants.

5. In the early part of 1990, he had attended at an Exhibition where the Defendants had displayed an automatic milling machine. The difference between an automatic and a manual machine is that the former has a computer attached to it and once it has been programmed for the work required, it can be operated automatically.

6. When he had attended at the Exhibition Mr. Daryl Chang, who was known to him, had suggested that he might like to consider acquiring a computer operated milling machine. Besides its automatic operation, it was also able to work with higher precision than a manual model. A consequence of this was that the range of jobs which could be performed by an automatic machine was more extensive than was the case for a manual model.

7. The Plaintiff gave evidence concerning all these matters. He made inquiries of his friends and was told that they had received so many orders for work to be undertaken on their automatic machine that they had to turn work away.

8. The Plaintiff had had several discussions with both Mr Chang and one of his colleagues a Mr Kwong and had decided that he was definitely interested in the idea of getting an automatic machine. Shortly before he finally committed himself he was informed that a similar type of machine could be purchased for $350,000 which was $30,000 less than the purchase price of the Defendant's model The machine parts of both models were similar and were manufactured in Taiwan. However, the computer part of the Defendant's model was of United States manufacture whereas the computer as the other model had been manufactured in Japan.

9. The Defendants, however, succeeded in persuading him that their model was superior to the Japanese model. They had also advised him that they could introduce him to a Finance Company and that the machines could be purchased on Hire Purchase terms.

10. He could even effect payment of the down payment by instalments.

11. After negotiation, a contract was signed on the 25th April 1990 between the parties. The Plaintiff also entered into a Lease Agreement with Inchroy Finance Ltd. for the financing of the machine.

12. Arrangements were made for the Plaintiff to attend a 2 day course at Allen-Bradley who were the suppliers of the computer equipment. In addition to this Mr. Kwong of the Defendant's attended at the Plaintiff's premises for the purpose of training him and members of his staff on the use of the mechanical part of the equipment.

13. It is perhaps significant to note that during this training period the machine was not used for production purposes and its operation was limited to what was described as being dry runs.

14. Almost immediately after the expiration of the training period problems started arising. The first difficulty was that the cooling system failed to operate automatically. Attempts were made by Mr. Kwong to rectify this but without success. One of the consequences of this was that when the spindle worked up and down its operation was jerky. This militated against precision production.

15. On one occasion when an inspection was made one of the Defendant's representatives had claimed that the reason for the jerky movements was that the oil container attached to the mounting to the machine was empty and the spindle had not been lubricated. The Plaintiff denied that this was so. An alarm had been attached to the container to warn operatives when the level of the oil sank beyond a certain point. The alarm had not sounded.

16. The Plaintiff described in some detail all of the various problems which still had arisen. It is fair to say that certainly initially the Defendants appeared to have taken measures in an attempt to resolve the problems.

17. It had though been necessary to modify the software programme of the computer so as to provide for the incapacity of the machine to work within the tolerances referred to in the catalogue which had been provided.

18. The machine continued to give trouble. The main problem was the jerky operation of the spindle. This created difficulty for the Plaintiff as they had taken substantial orders from customers on the basis that they would be fulfilled by the Plaintiff by using the machine.

19. Matters came to a head on the 8th July. This was a Sunday. The Plaintiff was working on orders when the machine malfunctioned in the manner I have described. The Plaintiff telephoned Mr. Kwong and was told that he had left the Company. He was advised to contact Mr. Chang for assistance.

20. Mr. Chang had attended on the next day but it had become clear that the Defendants were unable to provide a lasting solution to the various problems. The Plaintiff said that in such circumstances the machine was of no use to him.

21. He had by that time realised that he would have no alternative but to advise his customers that he was unable to fulfil their orders and return their materials to them.

22. Arrangements were made for the machine to be surveyed by a firm of Surveyors Pierre Leong & Co. A meeting was set up on the 11th September which was attended by representatives of the computer company and the Defendants and the Surveyors and the Plaintiff.

23. It was then realised that additional mechanical engineering expertise was required and instructions were given to Mr. Ho of Theta Engineering Consultants Ltd. for him to prepare a report.

24. The Plaintiff estimated that the profit that he would have anticipated making on his orders with his customers would have amounted to 70% of the contract prices. Adopting round figures, he estimated his loss of profits on these contracts at $70,000.

25. On the 29th December 1990, he had entered into a Sale Agreement with a Mr. Ma for the sale of the machinery. The basis of the Agreement was that Mr. Ma would acquire the machinery if he took over the Plaintiff's outstanding obligations under the Hire Purchase Agreement. At the time of the Agreement 28 instalments remained outstanding. This transaction was undertaken in an attempt to mitigate damages.

26. The Plaintiff was cross-examined at some length. One of the matters which was put to him was that it was clear from the particulars in the catalogue that the cooling system was not automatic. It would, however, seem to me that it would be by no means obvious that significance would attach to whether a cooling system was stated to be automatic. It may be said that in the normal course of events this would be assumed.

27. It was also put to the Plaintiff that he never expected a degree of accuracy of .001 mm which had been referred to in his evidence in chief. What had been in the contemplation of the parties had not been the overall tolerance but the sensitivity for the calibration of the computer in differentiating commands given to the machine.

28. However, the main line of attack on cross-examination was directed towards his financial position and his motives when deciding not to continue using the machine. Mr. Wong, for the Defendants put it to him that his decision had been made solely on the grounds of impecuniosity. He had realised that he had not been able to make as much profit as he had anticipated and had been unable to keep up with the payments of the instalments which were due to Inchroy Finance.

29. The Plaintiff rejected this. He conceded that the failure of the machine to operate in accordance with the specifications given had occasioned him financial loss. Notwithstanding this he had at all relevant times been in a financial position to meet his commitments. In this connection he said that he had owned the Factory premises he worked out of.

30. The reason for his default in the payments of instalments was that he could see no reason why he should be required to continue to make payment of instalments in respect of the machine when it was unusable.

31. In general terms I found the Plaintiff to be a truthful witness. He did not exaggerate his evidence and was prepared to admit that the Defendants had gone to considerable lengths in an attempt to resolve the problems which existed.

32. Throughout a lengthy and searching cross-examination, he maintained his version of events and I believe that he was telling the truth.

33. Mr. Ho of Theta Engineering Consultants Ltd. was the expert called by the Plaintiff to give evidence on his behalf. Mr. Ho is a mechanical Engineer by Training. The main function he performs is to inspect boilers on the instructions of the Hong Kong Government. He did, however, have specific knowledge and expertise with CNC Milling Machines as he sold a number of these machines to China.

34. He had initially received instructions from Pierre Leong & Co. for whom he undertook commissions from time to time. He adopted the Report he had prepared. The crucial part of his Report was in these terms.

"FINDINGS

Due to there was no lubrication or cooling to the spindle slide and spindle housing. The spindle slide would heat up by the milling spindle and expand slightly. The clearance between the spindle slide and spindle housing was very minimal once the spindle slide had expanded slightly, this minimal clearance would reduce further; sizing did result. Even though lubricating point was added to the spindle housing, such type of problem would still exist due to the end of the housing was fitted with oil seal; no oil circulation would be possible.

The problem for coolant system could be fair easy to solve by reconnecting the coolant motor control back to M03 of the controller.

CONCLUSION

The design of the spindle slide and spindle housing considered not suitable for CNC operation as the slide need to move up and down by the rectified command signal from the controller during operating period. Based on above analysis, this problem cannot be modified by adding lubrication point. Unless the machine sent back to the manufacturer and redesign the spindle system in order to eliminate this problem."

35. In his evidence he was adamant that the problems which had been encountered in the operation of the machine had been attributable to a basic flaw in its design. This was the failure to ensure that the spindle was adequately lubricated. It was also clear from his evidence that this was a defect which did not lend itself to any simple solution.

36. Mr. Daryl Chang gave evidence for the Defendants. He was the Sales Representative mainly concerned with the transaction.

37. His evidence concerning the background to the matter was not dissimilar to the Plaintiffs. He described the circumstances surrounding the sale. It was clear from what he said that the purchase was by no means an impulse purchase. Clearly the Plaintiff had a pretty fair idea what he was getting into.

38. The main difference between Mr. Chang's evidence and the Plaintiff was the amount of dialogue which had occurred before communications broke down between the parties. In this connection it seemed to me to be significant that there was a surprising paucity of records concerning complaints procedures in the Defendant Company.

39. Mr. Chang said that if a complaint was made, a note would be passed to the Service Department and they in turn would arrange for someone to attend the client and deal with the complaint.

40. On one occasion, a job sheet was produced which referred to "Noise from spindle - lubricant oil tank exhausted". That was according to the uncertified translation. It was, however, mutually agreed by the parties that this translation was defective and that the Chinese characters were not indicating that the tank or reservoir was depleted of oil but that it referred to the cylinder immediately above the spindle. This Job Sheet was dated the 9th July 1990.

41. No other "Job Sheets" were produced in support of other attendances by the Defendant.

42. Another important disparity between Mr. Chang's evidence and the Plaintiff's was the manner in which matters came to a heard. While the Plaintiff had been adamant that no maintenance had been undertaken after the 9th July visit, Mr. Chang was definite that the alarm system to give warning that the oil was running out had been installed after that date.

43. I found this evidence difficult to reconcile with Mr. Chang's evidence to the effect that an offer was made to instal an additional pump to supply oil to the spindle. According to Mr. Chang, the Plaintiff had not accepted this offer. It seemed surprising in these circumstances if the Defendants had notwithstanding this refusal gone ahead and installed the warning system.

44. An explanation was, however, eventually forthcoming. In response to questions put by me, Mr. Chang admitted that he had no personal knowledge concerning the installation of the alarm system. He had only learnt this from one of his colleagues. He went on to say that he had not realised that it was necessary for him to give evidence of matters directly known to him. He thought that it would be sufficient if he gave evidence concerning matters which he only knew about indirectly.

45. I regret that it was definitely my impression that Mr. Chang was an unsatisfactory witness. Initially he purported to give evidence on the basis that he had an extensive knowledge of the matters which were being canvassed in this litigation. As his evidence proceeded, it became increasingly clear to me that the contribution he was able to make on matters which are germane to the important issues in this case would be extremely limited.

46. I say this partly on account of Mr. Chang's evidence to the effect that he has very little knowledge concerning the operation of the machinery. In addition to this, his own direct knowledge of what happened when it became evident that the Plaintiff was unhappy with the machine was also very limited. Certainly he was unable to deal in any sensible way with the case made out by the Plaintiff to the effect that the machine did not operate in a satisfactory manner.

47. Mr. Chang was able to give some evidence which was of assistance to the Court. It appears that the machine in question was unique. A similar milling machine had never before been coupled to an Allen Bradley Computer and apparently no attempt was made subsequently to make such a coupling. The decision to match the machine to an Allen Bradley computer had been made by the Defendants but Mr. Chang, on account of his lack of expert knowledge had made no contribution personally towards this idea. All of this would appear to me to throw some light on the possibility of there being some design deficiency concerning the machine.

48. In any event, Mr. Chang was quite unable to give any detailed evidence concerning Mr. Ho's expert report. Certainly, there was nothing in what he had to say which cast any doubts upon the validity of the findings made by Mr. Ho.

49. Mr. YIU Chan-kong a mechanic in the Service Department gave evidence concerning visits he had made to the Plaintiff's premises in response to complaints which had been made.

50. Perhaps the most notable aspect of Mr. Yui's evidence was the paucity of the records maintained by the Defendants.

51. He agreed that he attended different customers premises on approximately a daily basis. So far as this case was concerned job sheets had not been issued on a regular basis. Whether a job sheet was issued depended upon factors outside his control. One of the factors would be whether it was intended that a charge would be made for his services. This was apparently not a conclusive factor as no charge had been levied in connection with the job sheet exhibited at p.24 of the Agreed Bundle.

52. Mr. Yiu claimed to have made 5 visits to the Plaintiff's factory. He had initially attended at the request of Mr. Kwong who was no longer with the Defendants. The first visit had been in connection with the complaint that the cooling system did not operate automatically. He had appreciated that this was a problem which fell outside his competence and expertise as the operation of the system was dependant upon electronic instructions emanating from the computer. Arrangements were made for personnel from Allen & Bradley to attend to this. He did not know anything about the outcome.

53. The next visit had been made as a consequence of the complaint that scratch marks had appeared on the X Axis of the machine. He remedied this defect by attaching metal shields to protect the slide way from particles falling on it. The shields were attached on the third visit.

54. The fourth visit had been made on the 9th July. This visit had been made to attempt to rectify the jerky operation of the spindle. He accepted that this spindle had been operating in a 'jerky' manner when he had first examined the machine. He had, however, solved the problem by applying lubricating oil to the outside of the spindle. After he had done this he noticed that the oil tank was empty. He seems to have thought that this was the reason why the oil had not found its way-onto the spindle.

55. The final visit was to attach an alarm system to the oil tank so that a warning would be sounded if the oil was depleted. He said that he had installed the alarm at the request of his colleague, Mr. Law. He did not say that he had done it on the instructions of the Plaintiff.

56. I did not find Mr. Yiu to be a convincing witness. My main concern related to the almost total absence of any contemporaneous records to assist him in remembering details of what had transpired.

57. Where his evidence contradicts the Plaintiff's evidence as in the case of the installation of the alarm system I much prefer the Plaintiff's version. Having observed Mr. Yiu as a witness, I am not prepared to accept that he would be able to remember the sequence of events in the detail he did without some form of supporting documentation.

58. Also it was quite clear to me that nothing which was said by Mr. Yiu dealt with the details of Mr. Ho's expert evidence. There was no basis for concluding that when Mr. Yiu had attended at the Plaintiff's premises and worked on the machine that all of the problems which had been encountered had been resolved.

59. Mr. Daniel Lo, Mr. Yiu's supervisor also gave evidence. He only attended at the Plaintiff's premises on 2 occasions. The first had been the visit on the 9th July and the second sometime thereafter when he had only been concerned with a question relating to the accuracy of the X Axis.

60. So far as the first visit was concerned, his evidence was fairly similar to Mr. Yiu's. What was of significance though was that as the man in charge he had been the person to diagnose the problems which had been complained of by the Plaintiff.

61. He accepted that the spindle did operate in a jerky manner when he first inspected the machine. After examination of the spindle he found that there was no oil on it. He had then removed the cover from the mounting. It was at this stage that he noticed that there was no oil in the reservoir. He immediately assumed that the reason for the malfunctioning of the machine was attributable to the fact that the person operating the machine had allowed the reservoir to run dry. He did not, therefore, perform more than a perfunctory external examination of the machine to see whether there was any other underlying problem.

62. He had then suggested that an additional tank or pump should be added to the machine so as to ensure that there was no repetition of this problem. He had suggested this to Mr. Chang. He subsequently learnt that the Plaintiff would not agree to this solution. He had then conceived of an alternative idea that an alarm or warning device should be attached to the reservoir so that the operative of the machine would be warned if the supply of oil became depleted. He had gone ahead and instructed Mr. Yiu to fit the alarm although he had not obtained the consent of the Plaintiff to this course being adopted. It may be thought that this was perhaps surprising having regard to the fact that the Plaintiff had already rejected the solution of having the additional tank installed.

63. Mr. Lo was pressed on how he could remember the date of the 9th July so clearly particularly having regard to his evidence that often numerous calls were made each day to customers. He said that he was able to remember the date by reference to the Job Sheet previously referred to being the note at p.24 of the Agreed Bundle. He said that he was sure that the alarm system could not have been installed at the time of the visit as the alarm system would have been activated and the tank would not have been allowed to empty.

64. I find this reasoning to be somewhat facile. Certainly I regard Mr. Lo's evidence as insufficiently compelling to persuade me that the Plaintiff was wrong when he stated that the alarm had been fitted prior to the 9th July.

65. There was further evidence given by Mr. Lo which was of assistance.

66. Paragraphs 8, 9 and 10 of the Defence are as follows:-

"8. On or about 9th July 1990, the Defendant's service supervisor Mr. Daniel Lo inspected the Machine and found the following:-

(a) lubrican oil was exhausted (the lubrican oil tank was transparent);

(b) scar on the spindle caused by functioning without lubrican oil; and

(c) scar on the X-axis caused by metallic particle fell onto it carelessly.

9. However, despite the aforesaid findings, the Machine could still work properly if lubrican oil was refilled. Furthermore, at the request of the Plaintiff, the Defendant later installed a pair of shield on the Machine for guarding metallic particles falling onto the x-axis of the Machine.

10. At the time of the aforesaid inspection, the Plaintiff also enquired the said Mr. Lo about the cooling system. The said Mr. Lo told the Plaintiff that the original design of the machine did not include automatic cooling system and that if the Plaintiff required the same, the Defendant would at the Plaintiff's cost alter the circuit of the computer attached to the Machine to meet this requirement. However, the Plaintiff did not give any instructions to the Defendant to do so. Save as aforesaid, paragraph 10 of the Statement of Claim is denied."

67. Mr. Lo denied that there had been any discussion concerning the cooling system on the 9th July. He also gave evidence that the metal panels which had been attached to the machine by Mr. Yiu had been attached to the machine prior to his visit on the 9th July.

68. Although these are not by any means critical matters in their own right, I consider that they do have some bearing on the general reliability of the Defence case. It reinforced the impression I had already gained that it was unsafe to place undue reliance upon the contentions being advanced by the Defendants.

69. The final witness to give evidence for the Defendants was Mr. Ng. He was an employee of Allen Bradley at the time in question and was now in the Defendant's

employment.

70. He said that he had attended at the Plaintiff's factory and examined the machine in June 1990. His attendance had not been in response to any complaint. He had gone there on a routine visit with Mr. Kwong just to check that the machine was working properly. He had confined his attention to the computer part of the equipment.

71. He had made some adjustment to the computer to make it more compatible to the machine. He rejected the suggestion which was put to him that this had been done in an endeavour to meet complaints made by the Plaintiff.

72. I am inclined to think that there may have been some misunderstanding between Mr. Ng and the Plaintiff, and having regard to the complexity of the issues being considered am prepared to accept that there may have been a genuine misunderstanding between these 2 gentlemen.

73. Be that as it may, the question of the accuracy of the performance of the machine is very much a peripheral issue having regard to the manner in which this case has been both pleaded and conducted.

74. I am satisfied that in the final analysis the question which I have to determine is whether the Plaintiff has been able to prove that the machine was sufficiently defective to justify him in taking the action he did.

75. I have no doubt that he has succeeded in this.

76. In my view the most critical matter in this litigation is the fact that Mr. Ho in his expert evidence and in his report has made reference to a serious design deficiency in the machine. I refer to the inability of the system to properly lubricate the spindle. His evidence has not been satisfactorily met. There is no expert evidence to contradict this important part of the Plaintiff's case.

77. So far as it goes, the Defence case is not necessarily inconsistent with Mr. Ho's opinion. Mr. Lo agreed that he only examined the machine externally and no where does he say that he tested the machine and was satisfied that oil could flow from the tank to the spindle. Indeed all his actions tend to show that this was not the case.

78. No plausible explanation has been forthcoming to show why the Defendants saw fit to suggest that an additional tank or pump should be installed to provide oil for the spindles. This suggestion seems to be consistent with the Plaintiff's contention that oil was not being supplied to the spindles. I believe that this was the reason for the jerking operation of the spindles and the deficient functioning of the machine.

79. For the reasons I have given, I am satisfied that the Defendants are in breach of the terms of the contract entered into between the parties.

80. I will now consider the question of damages.

81. Paragraph 11 of the Statement of Claim reads as follows:-

"11. In consequence of the matters aforesaid, the Machine delivered by the Defendant was worthless or alternatively worth far less than the purchase price for which the Plaintiff had procured InchRoy Credit to pay and accordingly the rentals which the Plaintiff has committed itself to pay were in excess of the true value of the Machine. Further, the Plaintiff was unable to use the said Machine for high precision drilling and cutting purpose and has lost the profit he would otherwise have made on the sale of the processed mould, and has been rendered liable to his said customers for non-deliveries of the said processed mould. By reason of the aforesaid, the Plaintiff has suffered loss and damage.

Particulars

1. Loss of profit that would

otherwise have made .......................................................... $70,000.00

2. Deposit .......................................................................... $76,158.00

3. Instalment paid ............................................................... $25,386.00

Total : $171,544.00"

82. I accept that damages which are reasonably foreseeable are recoverable.

83. Here it is common ground that the Defendants knew 1. That the Plaintiff was obtaining finance for the purchase and 2. That the machines would be used for the type of work for which the present claim is being made.

84. Therefore, in my view the claims being made in paragraph 11 are sustainable in principle.

85. As to the claim for loss of profits I was not satisfied with the Plaintiff's evidence that 70% of the price of the contract would be received by him as profit. I consider a figure of 50% would more fairly reflect the situation. I accordingly assess this head at $46,500. As it has been stated Mr. Ma who purchased the machine took over the instalments remaining outstanding. That was an eminently reasonable arrangement. I consider that the Plaintiff is entitled to recover the deposit which in fact was comprised of instalments and the 2 instalments which were paid. The damages recoverble amount to $148,044.

86. I will hear the parties on costs.