GOLDEN LEAF INTERNATIONAL DEVELOPMENT (HONG KONG) LTD v. DURFFEE TOBACCO (HOLDINGS) CO LTD

DCCJ 18931/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 18931 OF 2001

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JUDGMENT

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1. In this case, the Plaintiff claimed for the $240,000 being the balance of the purchase price of a set of second hand cigarettes production equipments sold and delivered and damages for conversion of one extra set of equipments mistakenly delivered to the Defendant. The Defendant alleged that pursuant to a supplemental agreement the balance of the purchase price was not payable until the equipments were demonstrated to be capable of achieving the efficient and passing rate as agreed between the parties, or alternatively, in breach of express warranty or implied condition of contract the equipments were not of merchantable quality and not fit for its purpose, and counterclaimed for damages arising out of such breach. The Defendant's case on the claim for damages for conversion was that the extra set of equipments formed part of the goods purchased. The Defendant counterclaimed for loss of profit due to the Equipment being left idle, and for costs of testing and repair. No evidence was adduced to enable me to assess such losses and costs and damages for conversion.

2. Both Counsel for the Plaintiff and Solicitor for the Defendant agreed that the issues for determination were:

(1) Whether the performance of the equipments was up to the contractual quality and standard;

(2) Whether the extra set of equipments formed part of the goods under the purchase agreement.

The Agreements

3. There were all together three agreements dated 20 February 2000, 11 March 2000 and 8 September 2000. The two subsequent agreements (which will be referred to as "the March Agreement" and "the September Agreement" respectively) superseded the first agreement.

4. The first agreement contained no description of the equipments as being second hand equipments. It provided that the equipments should be in good working condition and that the standard of inspection and acceptance was to be based on "國標". The Chinese words could mean either international standard or Mainland standard, but probably the former.

5. Under the March Agreement the second hand equipments sold were (which collectively will be referred to as "the Equipment"):

(1) 2 units of MOLINS MK9 folding machine;

(2) 1 unit of SASIB 6000 packaging machine;

(3) 2 units of valve oven made in West Germany;

(4) 4 units of air-conditioners; and

(5) 5 units of air compressor made in Belgium.

6. The Plaintiff's business included buying and selling second hand cigarette production facilities. The Plaintiff bought the Equipment from Nanyang Brothers Tobacco Co. Ltd. and sold it to the Defendant for $2,200,000.

7. The terms of the March Agreement included that:

(1) The Plaintiff guaranteed that the Equipment was in good condition;

(2) The Plaintiff was to be responsible for installation and testing;

(3) The Plaintiff would collect the balance of the purchase price upon the Defendant issuing an inspection and acceptance certificate;

(4) The standard of inspection and acceptance was to be in accordance with the efficiency and function of equipments of same age capable of meeting the requirement of the production of rolled cigarettes;

(5) The party in breach should pay 30% (of what not stated presumably the price) as being money for breach of contract.

8. The terms of the September Agreement included that:

(1) The Plaintiff would arrange 2 technicians from Nanyang Brothers Tobacco Co. Ltd. to work in the Defendant's factory in Macau to enable the Equipment to reach the standard of function and efficiency;

(2) A list of all necessary parts to be changed and to be purchased by the Defendant would be provided by the technicians from Nanyang Brothers Tobacco Co. Ltd. within ten days after the signing of this agreement and would be signed by the Plaintiff for acknowledgment;

(3) The Defendant would provide meals and accommodation for the technicians for twenty days. $20,000 would be deducted from the balance of the purchase price as being the costs of such meals and accommodation.

The Plaintiff's evidence

9. The Plaintiff called Poon Siu Bun, one of its directors, to give evidence. He adopted his witness statement dated 30 July 2002. He said that the reason for signing the March Agreement was to set out that the Equipment was second hand equipment. After the Equipment was delivered on 13 March 2000 the Plaintiff cashed the Defendant's post-dated cheque of $660,000. On 20 March 2000 the Defendant issued a cheque of $1,540,000 post-dated 28 April 2000 for the balance of the purchase price. During testing the MOLINS MK9 machine could operate at low speed and the SASIB 6000 machine at high speed. The unsatisfactory aspects discovered during testing were due to application of wrong glue and the fact that Defendant's workers were not familiar with the Equipment. The MOLINS MK 9 and SASIB 6000 machines were above or within the basic standard. On the Defendant's request the Plaintiff signed the September Agreement to help achieve better function. After the signing of the September Agreement the Defendant issued a cheque of $1,300,000 in exchange for the previous cheque of $1,540,000 leaving the balance of $240,000 outstanding. When the list of a set of parts was available, the Defendant did not make purchase because the price was too high. He explained that because Nanyang Brothers Tobacco Co. Ltd. was not a trader of spare parts they would sell the whole set of spare parts as stated in their list of spare parts and that the Defendant could look elsewhere if they wished. Because the Defendant did not make available the parts the technicians could not carry out installation in Macau. At the time of delivery a set of equipments described as MOLINS-TUDOR MC No.57813, TUDOR煙支輸送帶槽and TUDOR機身圍板(2)轉90°煙道 (which collectively will be referred to as "the Tudor Machine") was mistakenly included in the packing list and delivered. Upon realizing the delivery by mistake the Plaintiff demanded its return but the Defendant refused. On 11 August 2001 the Plaintiff wrote to the Defendant stating that if they refused to pay the balance within one week they could return the Equipment and the money previously paid would be returned. The MOLINS MK9 and SASIB 6000 machines had been used for over ten years. The four units of air-conditioner had been used for many years. The five units of air compressor had been used for two to three years. The Defendant had visited the factory of Nanyang Brothers Tobacco Co. Ltd. to see the Equipment so they knew well about the age of the Equipment. The new price of the MOLINS MK9 machine was around UK￡260,000. He referred to an invoice from the manufacturer to Nanyang Brothers Tobacco Co. Ltd. stating the new price of the MOLINS MK9 machine was UK￡237,164.40. The price for the whole set, i.e. the Equipment, would be around $20 million. The Plaintiff told the Defendant that the Equipment was fit to produce rolled cigarettes but made no representation of the standard of production rate. There was no clear standard because it was a set of second hand machines. During shipment the Equipment was stuffed in five containers. During installation it was discovered that the Tudor Machine, which was designed for making hard packets, was delivered by mistake. There were written demands for the return of the Tudor Machine but the requests were made mostly verbally, to which the Defendant gave no response. No written demand for the return of the Tudor Machine was produced. In cross-examination, he said the phrase "guarantee good condition" as stated in the March Agreement meant that the Equipment could manufacture and was in working condition. When bought from Nanyang Brothers Tobacco Co. Ltd. he knew that the Equipment was functioning but did not know its production rate. The Defendant requested a higher level of efficiency which he thought was too high. The Plaintiff bought 53 containers of machines from Nanyang Brothers Tobacco Co. Ltd. at the price of $19 million. The Equipment was part of that purchase. It was the Defendant who offered the price of $2.2 million for the Equipment. If the worn out parts were replaced the Equipment could function at high speed but still it had to match the right glue. Neither the Plaintiff nor the Defendant knew about the speed which the Equipment could operate. The Plaintiff could cash the cheque of $1,540,000 before the September Agreement.

The Defendant's evidence

10. The Defendant called its staff Ms. Lo Pik Ki, the assistant to the general manager, to give evidence. She adopted her witness statement dated 30 August 2002. She said that at the time the Plaintiff sought to vary the first agreement the Defendant had already made an application to the Macau Customs and Excise Department for importing the Equipment and had made arrangement for shipment. Due to the potential waste of costs of the application and shipment the Defendant was forced to make a concession and to sign the March Agreement. On or about 15 March 2000 the Defendant took delivery of five containers and two large wooden cartons containing the various components of the Equipment. On or about 20 March 2000 the Defendant delivered a cheque of $1,540,000 post-dated 28 April 2000 for payment of the balance of the purchase price pursuant to the March Agreement. The Equipment was installed on 17 May 2000. The result of the testing and adjustment indicated that the MOLINS MK9 and SASIB 6000 machines were far below satisfaction and failed to achieve the standard of efficiency and passing rate as agreed between the parties as set out in the Defendant's letter dated 8 June 2000. The replacement of some component parts by new parts was necessary to make the two machines function properly. The Plaintiff was aware of the defects found in the two machines. The Plaintiff's allegation that the problems of gas ejection, dislocation and blurred metal mould were caused by the machines not having been properly adjusted or adapted by the Defendant's workers and the application of wrong glue was groundless. The glue applied to the Defendant's other machines was the same as that applied to the Equipment. At a meeting on 4 September 2000 the Plaintiff suggested replacement of certain component parts to help achieve the agreed standard and further promised to arrange two technicians from Nanyang Brothers Tobacco Co. Ld. to Macau. In early September 2000 Mr. Cheng, a director of the Plaintiff, told the Defendant that the Plaintiff was in need of cash and asked for release of part of the balance of the purchase price despite further adjustment and testing was depending. The Plaintiff indicated that it would fulfill its contractual obligation in adjusting and testing the Equipment and would contribute $20,000 towards the costs of food and accommodation for the technicians to be deducted from the balance of the purchase price of $240,000. Relying on those matters and to assist the Plaintiff to solve cash flow problem the Defendant delivered a cheque of $1,300,000 to the Plaintiff in exchange for the previous cheque of $1,540,000. Pursuant to the September Agreement the remaining balance of $220,000 was to be paid after the completion of adjusting and testing of the Equipment. The Defendant discovered that the list of component parts supplied by the technicians contained a large number of accessories which were not spare parts and stated that the price was $633,273.49. The Plaintiff never asked the Defendant to purchase the spare parts from any other source. It was the Plaintiff's obligation to provide a list of necessary spare parts. As the Equipment had never been adjusted to achieve the agreed standard the obligation to pay the remaining balance had not arisen. The Tudor Machine was included in the packing list and the quotation, and was part of the purchase under the March Agreement. The Defendant had never received any written request for the return of it. The Tudor Machine had not been assembled because the Equipment had not been adjusted properly. The Tudor Machine was responsible for receiving rolled cigarettes and then transporting them to the packing machine i.e. the SASIB machine. The Equipment had never been used for production. The Defendant bought second hand machines and expected second hand standard. 98% efficiency rate was normal and would produce 4,000 cigarettes. 94.8% efficiency rate was regarded as slow speed and would only produce 1333 cigarettes. Under cross-examination she disagreed to the suggestions that the reason why the Tudor Machine was not installed was that it was a machine manufacturing hard packets and therefore did not constitute part of the Equipment, and that the reason why the Equipment had not been returned and why the Defendant did not seek to claim 30% compensation was because it reached the agreed standard. She agreed that the standard to be applied was that of good condition of second hand machines. The Plaintiff induced the Defendant to pay for the spare parts to help the Equipment achieve the agreed standard. The return of the Equipment involved complicated procedure and the Plaintiff would not pay for it. The Defendant asked for further testing as it elected to keep the Equipment.

The Documentary evidence

11. The Equipment was shipped in 5 containers and was set out in a container list. The container No.339031(4) included the three parts of the Tudor Machine in three boxes. Box 13 contained MOLINS Tudor, Box 14 contained MOLINS Tudor conveyor and Box 15 contained Tudor units.

12. On 10 December 2001, Nanyang Brothers Tobacco Co. Ltd. supplied the Plaintiff with the "Old Factory Machine List 1". In cross-examination, Mr. Poon explained that as indicated in the "Old Factory Machine List 1" five items of machine were sold to the Plaintiff. They were SASIB 6,000 no.6325, CK1 no.1249, 3-C154 no.354, T-20 no.218/20/11 and Tudor no.57813. He said that the Plaintiff's clerk included the Tudor Machine in the packing list by mistake. He further said that the Tudor Machine cannot be used with the SASIB 6000 machine.

13. After the Equipment was delivered on 13 March 2000 the parties exchanged correspondence regarding delays in carrying out testing and inspection.

14. On 8 June 2000, the Defendant sent a fax to the Plaintiff. It stated that after the meeting on the previous day the Defendant had come up with a set of testing timetable and standard for inspection and acceptance. The standard was that both quantity and quality should match 95% of the Defendant's current products and that of a function rate of 70% of 4000 pieces per minute and 300 packets per minute.

15. On 13 June 2000, the Plaintiff replied by fax stating that they could not accept the Defendant's proposed standard and that the standard should be the standard set out in the purchase agreement.

16. On 14 June 2000, the Defendant wrote pointing out that testing and inspection and acceptance were two different concepts and that they had not received the Plaintiff's acknowledgement of the standard of inspection and acceptance.

17. On 14 June 2000, the Defendant wrote stating that the four kinds of glue requested by the Plaintiff at the meeting on 7 July 2000 would be ready at the time of the testing and inspection.

18. On 21 June 2000, the Defendant sent a fax stating that according to the test and inspection done on 16 June 2000 the Equipment was not up to standard.

19. The Plaintiff sent a letter stating that the standard should be 1330 pieces per minute and 170 to 270 packets for minute.

20. On 29 June 2000, the Defendant sent a fax stating that they had revised the standard set out in their fax dated 8 June 2000. The revised standard was that the Equipment should be capable of running four hours consecutively, 2500 pieces per minute and 200 packets per minute. On the same day, the Plaintiff sent a fax counter proposing a standard that the Equipment should be able to operate four hours consecutively but allowance should be made to the quality of the materials applied, 1333 pieces per minute and 200 packets per minute. Later on the same day, the Defendant sent a second fax repeating the earlier revised standard.

21. On 15 July 2000, the Defendant sent a fax setting out the date of the inspection on 16 July 2000 and the standard of 4000 pieces per minute equivalent to 75% efficiency and 95% passing rate, four hours continuous operation, 200 packets per minute equivalent to 75% efficiency rate and 95% passing rate, and requesting for confirmation.

22. On 24 July 2000, the Defendant sent a fax enclosing a record of inspection. The fax stated that according to the inspection, which lasted for five days from 12 July to 16 July, the passing rate of the MOLINS MK 9 machine was 94.8% and some parts were missing.

23. On 8 September 2000, the parties signed the September Agreement.

24. On 28 September 2000, the Plaintiff sent a fax stating that all the parts for the SASIB 6000 machine had to be bought from Nanyang Brothers Tobacco Co. Ltd..

25. On 17 October 2000, the Defendant sent a fax asking for the quotation of the whole set of parts.

26. On 3 January 2001, Nanyang Brothers Tobacco Co. Ltd. wrote to the Plaintiff stating that the set of parts was $633,273.49 after a special 50% discount.

27. On 23 July 2001, the Defendant sent a fax stating that it was unreasonable to ask them to purchase the whole set of parts and insisted that the Plaintiff should ensure the Equipment to function properly.

28. On 11 August 2001, the Plaintiff sent a fax stating that if the Defendant was not satisfied with the function of the Equipment they could return it and the sum of $1,960,000 would be returned or pay the balance of $240,000 within one week.

Evaluation

29. I shall deal with the Tudor Machine first. The Plaintiff's case was that the Tudor Machine was wrongly included in the packing list and delivered. The Defendant's case was that since this machine was in the packing list and shipped to Macau it formed part of the purchased goods.

30. The March Agreement contained a description of five sets of machine without reference to any Tudor Machine. Mr. Poon said that the Tudor Machine was for manufacturing hard packets and was usually deployed by large factories whereas the SASIB 6000 machine was for production of soft packets. He further said that the Tudor Machine could not be used with the SASIB 6000 machine. According to Miss Lo, the Equipment should be installed in this Order : MOLINS-OSCAR-TUDOR-SASIB, and the Tudor Machine was responsible for receiving rolled cigarettes and transport them to the packing machine. Mr. Poon claimed that there were written requests for the return of the Tudor Machine but no document was produced. I am unable to accept that there were written requests for the return of the Tudor Machine. It was common ground that the Tudor Machine was not installed. Mr. Poon explained that the Plaintiff's technicians found out that it was delivered by mistake and therefore did not carry out installation. Miss Lo, on the other hand, said that the Tudor Machine was not installed because the Equipment had not been properly adjusted. However, she did not explain why the Tudor Machine, being a necessary component of the Equipment, had to wait for final adjustment and inspection before it was put in place. If the Tudor Machine was part of the production line or system, no evidence was adduced to explain why it was not installed for the purpose of testing and inspection and acceptance. If the Tudor Machine was one of the four major parts of the production facilities, it would appear likely that the March Agreement would have made mention about it. I do not think the "Old Factory Machine List 1" helped the Plaintiff to prove that the Tudor Machine was not the part of goods purchased for the governing document should be the March Agreement. Having heard the evidence, I resolve this issue in favour of the Plaintiff. I accept Mr. Poon's evidence relating to the Tudor Machine delivered by mistake except the contention that there had been written requests for its return. I accordingly find that the Tudor Machine was included in the packing list and shipped to the Defendant's factory by mistake, and that the Plaintiff had made verbal demands for its return but the Defendant had failed to either return it or make it available for collection by the Plaintiff.

31. I shall now deal with the issue of the standard of performance of the Equipment. According to the March Agreement, the agreed standard was "good working condition". More specifically, the standard of inspection and acceptance was to be matched against the level of function and efficiency of equipments of similar age capable of producing cigarettes as commodities. After the March Agreement was signed, there were attempts by the parties to put forward what they perceived to be the appropriate or agreed standard of performance. But in the end, nothing was achieved, instead a dispute ensued. In respect of the spare parts that were required for enhancing performance, the correspondence indicated that the Defendant was at some stage willing to pay for those spare parts from Nanyang Brothers Tobacco Co. Ltd. but they later insisted that it was the Plaintiff's responsibility to ensure the Equipment to function up to the standard. The fact that the Equipment could produce cigarettes as commodities was not disputed by the parties. The question for determination is the level of production rate. The evidence before me was simply allegations from the parties. The Plaintiff said that the Equipment was up to standard and the Defendant said that the Equipment achieved 94.8% production passing rate but not yet up to the agreed standard. Expert evidence would have been relevant but no such evidence was adduced. No evidence was adduced to show whether Mr. Poon or Miss Lo had practical and working experience so as to be able to say what level of performance would have been acceptable in the cigarette production industry. I find the evidence on this aspect of the case, either from the Plaintiff or the Defendant, wholly unsatisfactory. I am unable to accept and act on the evidence. In the result, I find the Defendant's case not proved, and they should pay the balance of the purchase price of $240,000.

32. The relief pleaded in the Statement of Claim regarding the Tudor Machine was damages for conversion. However, no evidence was adduced to prove the value of the Tudor Machine or other damages. Counsel for the Plaintiff therefore applied for the alternative relief of return of the Tudor Machine. He submitted that in the circumstances of this case no prejudice was caused to the Defendant and that the relief could be given under the Prayer "further and/or other relief".

33. The Court has jurisdiction to grant further or other relief on the facts proved (see paragraph 18/15/4 of the Hong Kong Civil Procedure 2002). Damages for conversion and return of the Tudor Machine are not inconsistent reliefs and could have been pleaded together in the Statement of Claim. If the relief of return of the Tudor Machine was pleaded, I cannot see how the Defendant's case could have been conducted any differently. I do not find the Defendant prejudiced by this alternative relief on the facts found proved. Accordingly, I exercise my discretion to grant the Plaintiff the relief of return of the Tudor Machine under the Prayer "further and/or other relief". Since the Tudor Machine was delivered by mistake, the Plaintiff should bear the cost of its return. In his closing submission Counsel for the Plaintiff did not dispute that the Plaintiff should pay such cost. There will be judgment for the Plaintiff for the relief of return of the Tudor Machine on the basis that it pays the cost of the return.

Order

34. I shall make the following orders:

(1)There will be judgment for the Plaintiff for the sum of $240,000 with interest at present judgment rate at 8% from 11.8.2001 until date of judgment and thereafter at judgment rate until payment;

(2) The Defendant shall return the set of machines described as MOLINS-TUDOR MC No.57813, TUDOR煙支輸送帶槽 and TUDOR機身圍板(2)轉90°煙道 to the Plaintiff upon payment by the Plaintiff for the cost of the return;

(3) The counterclaim is dismissed;

(4) There be an order nisi that the Plaintiff is to have costs of the action including costs of the counterclaim with a certificate for counsel.