MITSUBISHI ELEVATOR HONG KONG CO LTD v. MARRIOT ENGINEERING & CONSTRUCTION CO LTD

DCCJ 3970/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3970 OF 2011

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ASSESSMENT OF DAMAGES

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Introduction

1.  This is an assessment of damages arising from a breach of contract.  Leave was granted on 5 July 2012, interlocutory judgment was entered against the defendant leaving damages to be assessed; The defendant’s counterclaim was dismissed.  It was agreed interest of the damages assessed shall be paid by the defendant to the plaintiff from the date of this judgment at judgment rate.

2.  The issue in dispute is whether such damages shall be assessed by way of a contract for sale of goods as defined in the Sale of Goods Ordinance, Cap 26 (“the Ordinance”) or by way of contract for goods and services.

Background

3.  The plaintiff is a supplier of lift and elevator.  The defendant was the main contractor and engineer of a renovation works carried out in a premise located at 8 – 12 Peak Road, Hong Kong.  On 11 April 2006, the defendant awarded the plaintiff a sub contract to supply and install a Nexway S Model lift (“the Lift”) in the premise at a lump sum price of $598,000.

4.  The payment terms of the contract were as follows:-

(i)   20% on signing the letter of intent or award of sub-contract ($119,600) whichever is earlier;

(ii)   20% on receipt of shipping advice ($119,600);

(iii)   35% on arrival of equipment in Hong Kong ($209,300); and

(iv)   25% on completion of the installation and issuance of a lift certificate by relevant authorities ($149,500).

5.  The defendant had only paid $114,600, $5,000 short of the 1^st payment.  Subsequently, as the defendant was no longer engaged by the owner of the premise to carry renovation works, no payment was made to the plaintiff.

6.  On 14 December 2006, the plaintiff accepted the defendant’s breach of the contract.

7.  On 17 October 2011, the plaintiff commenced this action.  The plaintiff obtained leave to adduce expert evidence on the market value of the Lift in the assessment of damages.

What the plaintiff is claiming

8.  The plaintiff submitted the contract was a contract for sale of goods.  The plaintiff claim it has suffered loss and damages, which shall be assessed under section 52 of the Ordinance:-

“52. Damages for non-acceptance

(1) Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance.

(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.

(3)   Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the neglect or refusal to accept.”

9.  The plaintiff’s damages are particularized in the amended statement of claim filed on 17 July 2015 as follows:-

(i)   warehouse storage expenses of $119,265.80 (later revised as $104,785.80) ;

(ii)   disposing the lift as a scrap which was only valued at $4,125;

(iii)   giving credit to part payment of the contract price at $114,600;

(iv)   the aggregate damages at $598,000 - $114,600 + $104,785.80 - $4,125 = $584,060.80.

10.  The plaintiff pleaded an alternative calculation in its reply, where damages can also be assessed in accordance with the common law principles.  Mr Kwok, counsel for the plaintiff submitted, the computation of the damages would be essentially the same as those be assessed under the Ordinance. 

What the defendant is disputing

11.  The defendant said the plaintiff should be entitled to nominal damages only.  Mr Francis, solicitor for the defendant submitted, the nature of the contract is a contract for goods and services, which fell outside the ambit of the Ordinance.  This sub contract was not a contract relating to a “goods” as defined in section 2 of the Ordinance[1] because it  involved supply and installation of a complex and sophisticated lift device, including other tasks in substantive design, drawings, installation, testing and licensing.

12.  Mr Francis also criticized the plaintiff’s failure to plead specifically in the amended statement of claim the plaintiff’s claim for damages pursuant to section 52 of the Ordinance.  Be it the plaintiff had subsequently pleaded it in its reply, he invited the court not to consider it as the plaintiff’s pleaded case.

Evidence

13.  The plaintiff called (i) Lee Kwok Li (“Lee”) the senior manager of its Hong Kong Projects Division, (ii) Leung Yuk Kum (“Leung”), the deputy senior manager of the plaintiff and (iii) Yu Po Leung (“Yu”), the chief engineer of Techfaith Engineering Limited, the plaintiff’s expert to give evidence.  The defendant has no witness to call.

The plaintiff’s evidence

14.  Lee said, the plaintiff is and was a company specialized in supplying vertical transportation systems, i.e. lifts and elevators.  Apart from manufacturing, to ensure quality of its products, which is different from other lift retailers, the plaintiff was responsible to install and maintain its end products.   

15.  Lee explained, the Lift was one of “Mitsubishi”, all computer controlled passenger lift.  It was a kind of tailor made lift. The plaintiff submitted the layout drawing of the design of the Lift to the defendant. It was only after the defendant’s approval on 5 July 2006, the plaintiff proceeded with its manufacturing. The design of the lift was unique and one of a kind.   It was oval in shape with an oval liftwell, oval machine room, specified finishes and semicircular glass rear car wall.  Most components were tailor-made to suit the design. For this reason, the lift itself and the components were not capable to be resold to other end users, it has no second hand market.  The components would not be dismantled for sale because of high costs which included in investigating the adaptability of each component with other users.  Lee further clarified, if one component were capable to be reused, it required modification before applying it in the new lift. When it involved a substantive amount of expertise in carrying it out, the costs of examination would be disproportionate to dispose it as a scrap.

16.  As an alternative, to be more practical, the plaintiff intended to mitigate loss by seeking potential purchaser for the Lift.  The plaintiff made three attempts to resell the Lift.  In January 2007, the plaintiff approached Woon Lee Construction Co Ltd, no deal can be closed because this potential purchaser required addition and variation of the Lift.  In July 2010, the plaintiff enquired Eric Chih of Chih Design Ltd with a view to sell the Lift.  Then in 2011, Lee paid visits to Ng Chao Elevator Company Limited in Macau.  Unfortunately, all attempts failed.

17.  The evidence of Leung related to the storage expenses of the warehouse.  She said the actual total storage charges of the Lift have reached $119,265 at time of deposing the witness statement on 19 November 2015.

18.  The plaintiff engaged Yu of Techfaith Engineering Limited (“Techfaith”) as his expert. Techfaith was a qualified lift and escalator contractor registered with the Electrical and Mechanical Services Department (“EMSD”).  Yu examined the Lift in the warehouse on 14 November 2013 and had compiled an expert report on 21 December 2013.  Yu explained, the Lift and its components would not have a second hand market usually.  The sale of a Lift itself could be considered as a commodity, the plaintiff provided labour for installation and testing, and was responsible to obtain approval from the EMSD.  The plaintiff, as a lift manufacturer, has necessary resources and technical means to do so.  As a result, it was unlikely for a person to engage another company, not the manufacturer of the lift, to provide maintenance of the lift.  Be it there are common design for the same model, the installation of lift required a substantial customized parts so as to meet the requirement and usage of the particular owner.  The design of the building could hardly be identical, the components to install the lift would therefore be different.  Practically, the plaintiff’s customers would normally be property developers and building owners, they would engage their own designer and architect in constructing the building and chose not to purchase a lift from the second hand market.

19.  As for the spare parts of the Lift, Yu was in the opinion that only the original supplier could manufacture its spare parts.  In Hong Kong, around 85% of the lifts belonged to high end market, for instance, the plaintiff.  These companies would only supply spare parts to their own lifts and elevators.  The remaining 15% of the lifts in Hong Kong would be under the maintenance of independent lift contractors and usually they would be categorized within low end market.  Such contractors would only keep critical parts or component of lift.  In this regard, no spare parts of a customized lift could be capable to be resold in a second hand market.

20.  Yu said it would be possible to return the Lift to the plaintiff’s manufacturer in Japan.  The plaintiff could have re-customized the Lift to meet the requirement of another purchaser.  Yu said the feasibility of doing it is extremely low because the costs outweighed those to manufacture a new one.  Yu estimated the costs to restore the car cage from oval shape to original shape to be $55,000 and the costs of shipping the lift to overseas at $15,000.

21.  Finally, Yu opined the remaining option to dispose of the Lift as a scrap in an estimated sum of $4,125 ($1,250 per ton).

Discussion

22.  I accept the evidence of the plaintiff’s witnesses.  I find they are all credible witnesses.

Contract for sale of goods or contract for work and labour

23.  To determine the nature of the contract is best to revisit the basic principles.  The relevant paragraphs in Halsbury Law of Hong Kong, paragraph 603 is reproduced as follows:-

“A contract of sale of goods must be distinguished from a contract of work and labour. The distinction is often a fine one. A contract of sale is a contract of the main object which is transfer of the property in, and in the delivery of the possession of, a chattel as such to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel as such, the contract is one for work or labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale. Neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining in the circumstances of a particular case whether the contract is in substance one for work and labour or one for the sale of the chattel.”

24.  Mr Francis attempted to argue the contract was one of labour and services, he relied on an Indian case Kone Elevator India Pvt Ltd v. State of Tamil Nadu & ors (2010) 14 SCC 788 (“Kone Elevator”). The principle extracted from this case was to apply a “dominant nature test” to determine the nature of the contract.  Mr Francis’ argument was misconceived. Kone Elevator was decided on a very specific statutory tax law context.  It involved the interpretation of the statutory phrase “works contract” and was held the dominant nature test was inapplicable.  The nature of the contract was important in that if it were a sale contract, the entire contract sum would be taxable. If the contract were to be a works contract involving the transfer of property then only the price of the property would be taxable leaving the part of the consideration involving labour and services tax free.  The interpretation was confined to tax legislation in India but not the legislation relating to sale of goods.  The case has no relevance and was inapplicable in assessment of damages flow from a breach of contract by private parties.

25.  The plaintiff relied on Mak Ping Kui trading as Yet Hing Knitting Garment Factory v Millionice Limited trading as Blessings Trading Company, HCA 940 of 1998, Cheung J (as he then was), 25 April 2001, unreported.  In this case, the defendant has asked the plaintiff to manufacture garments.  The fabric for the garments were to be supplied by the defendant.  The garments were to be sold to the customer in Brazil.  The garments were not directly manufactured by the plaintiff but its subcontractor in the mainland.  The dispute arose because the quality of the garment was not satisfactory.  The plaintiff claimed damages.  The issue relevant here was determination of the nature of the contract.  The defendant in this case likewise attempted to argue as Mr Francis did that the contract was for labour and services.  Apart from the classic paragraph in Halsbury Laws of England (equivalent to paragraph 25 above), the learned judge relied on the following authorities to illustrate,

“It is sufficient to refer to five cases:

In Clay v Yates (1856) 1 H. & N. 73, the printer of a book sued the customer who left him the manuscript for printing. It was held that it was a contract for work done and not for goods bargain and sold.

In Lee v Griffin (1861), 1 B. & S. 272; 121 E.R.716; [1861‑73] All E.R. Rep. 191, the plaintiff B had contracted to make for A a set of artificial teeth and to fit them to A’s mouth. A died after the teeth were made and after A had rejected an appointment for a fitting, and B sued A’s executors for goods bargained and sold, for goods sold and delivered, and for work and labour done and materials provided. The defendant relied on the Statute of Frauds as applicable to a contract for the sale of goods, and succeeded both at first instance and on appeal.

Crompton J held that “Where the contract is for a chattel to be made and delivered, it is clearly a contract for the sale of goods.  There are some cases in which the supply of the materials is ancillary to the contract, as in the case of a printer supplying the paper on which a book is printed.  In such a case an action might perhaps be brought for work and labour done and materials provided, as it could hardly be said that the subject matter of the contract was the sale of the chattel; perhaps it is more in the nature of a contract merely to exercise skill and labour.  Clay v Yates (1856), 1 H.& N. 73 turned on its own particular circumstances.  I entertain some doubt as to the correctness of that decision; but I certainly do not agree to the proposition that the value of the skill and labour, as compared to that of the materials supplied, is a criterion by which to decide whether the contract be for work and labour or for the sale of a chattel.”

Hill J held that “Wherever a contract is entered into for the manufacture of a chattel, there the subject matter of the contract is the sale and delivery of the chattel, and the party applying it cannot recover for work and labour.”

Blackburn J held that “If the contract be such that, when carried out, it would result in the sale of a chattel, the party cannot sue for work and labour; but, if the result of the contract is that the party has done work and labour which ends in nothing that become the subject of a sale, the party cannot sue for goods sold and delivered. The case of an attorney employed to prepare a deed is an illustration of this latter proposition. It cannot be said that the paper and ink he uses in the preparation of the deed are goods sold and delivered ... I do not think that the test to apply to these cases is whether the value of the work exceeds that of the material used in its execution; for, if a sculptor were employed to execute a work of art, greatly as his skill and labour, supposing it to be of the highest description, might exceed the value of the marble in which he worked, the contract would in my opinion nevertheless be a contract for the sale of a chattel.

In Robinson v Graves [1935] 1 KB 579, a portrait painter sued on a contract whereby the defendant orally commissioned him to paint a portrait.  It was held that this was not a contract for the sale of goods, but a contract for work and labour.  Greer LJ held that “If you find, as they did in Lee v Griffin, that the substance of the contract was the production of something to be sold by the dentist to the dentist’s customer, then that is a sale of goods.  But if the substance of the contract, on the other hand, is that skill and labour have to be exercised for the production of the article, and that it is only ancillary to that that there will pass from the artist to his client or customer some materials in addition to the skill involved in the production of the portrait, that does not make any difference to the result, because the substance of the contract is the skill and experience of the artist in producing the picture.”

The Australian case of Deta Nominees v Viscount Plastic Products [1979] V.R.167 and the Hong Kong case of Tin Tsun Lithographers v United Battery Service and Oversea Battery Factory (1937), Vol.29, HKLR 16 contained a review of the authorities.

In the present case, the final products that were supplied by the plaintiff to the defendant, were the garments.  The work they had been done had ended in something that obviously can be the subject of sale.  The defendant’s emphasis is on the material supplied by it to the plaintiff to make the garments.  However, the ownership of the materials is not conclusive in determining the nature of the sale.  I think Mr Yau was clearly right when he said that what the defendant was interested in this case was not the fabrics or processed fabrics but the finished garments.  It was not interested in how or the sequence in which the sewing or cutting work was performed but in the final product and its finished quality.  This is very different from the contract of painting a house or dry cleaning a suit.  In my view, this is clearly a contract for sale of goods.” [emphasis added]

26.  In the present case, the final product contained in the “Letter of Award” was the Lift.  The “Letter of Award” made no reference to the labour costs but a lump sum price.The labour and service rendered by the plaintiff will be ended with a lift installed in the premise.  This must be the subject of sale.  

27.  More importantly, the overriding subject matter of the contract is the Lift. The defendant agreed to purchase the Lift by way of a lump sum contract for the price of $598,000 including installation of the Lift.  The Lift was to be manufactured in accordance with the defendant’s specifications and drawings.  The distinct character of the Lift makes the identity of the subject of sale peculiar to the defendant’s requirement, a tailor made product.  The contract for transfer by the plaintiff to the defendant must be the Lift itself, the work and labour are ancillary to the successful transfer of the chattel.  I accept and it must be the case that the contract falls within the category to sell future goods within section 2 and 3 of the Ordinance.

The remedies of non-acceptance

28.  The remedies of a seller under the Ordinance would be the price of the property in the goods having passed to the buyer, the applicable measure shall be section 52(2) which is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.  It was well established the measure of damages under section 52(2) of the Ordinance was normally the difference between the price and value of the goods at time of breach.

29.  I accept the plaintiff’s evidence on the value of goods at time of breach.  Yu gave his opinion that the Lift has no available second hand market in Hong Kong.  I accept his analysis for the distinct nature of this industry.  Once the Lift has been manufactured and shipped to its customer, it would be very costly and impracticable to seek the manufacturer to take back the Lift for the purpose of resale or undergo adaptation to resell.  I appreciate the distinct nature of the plaintiff’s industry and its company policy to maintain of goodwill of its company, the supply of lift, installation and its maintenance are inseparable.  I could expect the viability of resell a customized lift would be extremely low.  I also accept the plaintiff has tried their best endeavour to resell the Lift but of no avail.  

30.  In this circumstance, the relevant principles can be found in paragraph 16 -077 of Benjamin’s Sale of Good, 9^th edition (2014),

“Damages where there is no available market. If section 50(3)[2] does not apply because there is no available market, the court is thrown back on the general principle enunciated in s50(2): “… the estimate loss directly and naturally resulting in the ordinary course of events, from the buyer’s breach of contract”. The main rule should be that the seller’s loss is the difference between the contract price and the value of the goods to the seller at the time and place of the breach…”

31.  In that, the value of the Lift must be taken as scrap value, i.e. $4,125.

Storage charges

32.  Mr Kwok submitted storage charges were recoverable as a consequential loss.  The plaintiff relied on McGregor on Damages, 19^th edition (2014) at paragraph 23- 128.

“Consequential losses are as infrequent in actions by the seller for non-acceptance as they are common in actions by the buyer for non-delivery, delayed delivery or breach of warranty. This is because a person is less likely to incur consequential loss where goods are not taken off his hands under a contract than where he does not receive goods as contracted. Illustrations are however to be found.

Thus where the claimant incurred storage charges during the period before he succeeded in selling the goods to a third party, such charges were held recoverable in Harlow and Jones v. Panex (International).[3]”

33.  Whilst it is on common ground that the plaintiff ought to mitigate loss, to facilitate the plaintiff to resell the Lift to other customer, it is not surprising that storage charges be incurred.  The lift has to be retained somewhere and therefore storage charges are inevitable.

34.  I also take into account the conduct of the defendant which  has a bearing on storage charges.  On 19 June 2012, the defendant made an application for a preservation order and such order was granted on 5 July 2012.  Interlocutory applications on commissioning expert report was heard and leave was granted to for parties to engage experts to examine the Lift.  For reason the defendant’s default in instructing an expert and an unless order was so granted on 4 October 2013, the defendant still failed to instruct its own expert.  Both reasons rendered the storage of the Lift necessary. It is reasonable to keep the Lift in the warehouse since the breach in September 2006 as matter of mitigation and obligation under the directions given by court.

35.  The plaintiff only claimed storage charges from September 2006 until December 2013 in sum of $104,785.80.  I find this sum is reasonable and therefore should be allowed.

Pleadings

36.  The pleading point. I find the plaintiff has sufficiently pleaded their case in the amended statement of claim. I do not see Mr Francis’ argument that the plaintiff has failed to plead their claim pursuant to section 52 of the Ordinance could stand.

Conclusion

37.  I have no hesitation to conclude the damages assessed should be those as claimed by the plaintiff as follows:-

(i)	Contract sum	$598,000.00
(ii)	Storage charges Less	$104,785.80
(iii)	Partial payment	$114,600.00
(iv)	Residual value	$ 4,125.00
		$584,060.80

38.  I so order the defendant do pay damages to the plaintiff in sum of $584,060.80 together with interest at judgment rate from the date of this judgment until payment.  I make a costs order nisi that the defendant do pay the plaintiff the costs of the assessment of damages, with certificate for counsel, to be taxed if not agreed. The costs order nisi shall be made absolute in absence of application to vary by way of an inter parte summons within 14 days from the date of judgment.