Wah Sun Hong Ltd v. Lee Tim t/a Tat Shing Co

HCA000307/1979

Coram: Garcia, J.

Date of Judgment: 21st January, 1980.

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JUDGMENT

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1. By a contract dated the 6th day of May 1977 the defendant agreed to buy from the plaintiff company a "Chi Changs" plastic straw manufacturing unit for the sum of $59,220.00. The unit was required by the defendant for the purpose of manufacturing plastic drinking straws and a sample of the drinking straw which the unit was to manufacture was annexed to the said contract. The date of delivery stipulated in the contract was sixty days after the signing of the said contract, that is sixty days after 6th May, 1977. Although it was provided in the contract that 30% of the purchase price should be deposited, the defendant paid the plaintiff a deposit of $10,000 (which was accepted), the balance of such deposit amounting to $7,766 being orally agreed to be paid only upon the unit operating successfully after delivery to the defendant's premises at 17 Haven Street, Ground Floor, Hong Kong.

2. There was a long delay in the delivery of the said unit to the defendant's premises and as far as evidence from the plaintiff's representative indicates that delivery took place some time in June 1978.

3. The manufacturing unit delivered under the contract consists of three sections: one, the extruder, two, the cooling section and lastly, the cutting section. There was also a "crimping" machine which was supplied together with the unit. The so-called extruder is the main section of the manufacturing unit, and as far as can be gathered from the evidence, plastic materials for the manufacture of drinking straws, mainly polypropylene, was placed in a hopper and the machine was then switched on. This activated a heating device inside the machine and after a certain temperature is reached plastic materials from the hopper would then be fed into the machine, and the motor which was an essential part of the machine would drive an axle to propel the molten plastic through the mouth of the extruder towards the cooling section. This latter section consists of a water tank bath on either side of which were air rings, and a die just before the bath. In the initial stages of the manufacturing process the extruded plastic material had to be pulled out manually towards the first air ring which provided the initial coolant for the molten plastic. As the extruded material passed through the first air ring the next step was towards the die which determined the diameter of the straws to be produced, and from there to the water tank bath which provided further cooling. The water tank bath was apparently rather a simple device consisting of a tank with an inlet and an outlet through which water was fed in to be circulated and let out to provide a constant temperature, and the inlet was connected to a water pipe or a hose attached at the other end to a water tap. After the plastic straw has been through the water tank bath, and it should be sufficiently cooled by then, the straw goes through the other air ring to remove any water particles which may adhere to it and the product then goes through a cutter placed at the end of the air ring. The third section is the cutter and the finished product is then cut into desired lengths to make the final product. To make the straws flexible, the lengths are manually crimped about 1/3rd way down the straw, with the machine provided for this purpose.

4. Unfortunately, no actual or correct representation of the manufacturing unit has been produced in evidence but the products from the machine delivered to the defendant have been exhibited. The first products, Exhibits PlA, 1B and 1C, were so disappointing both to the defendant and the plaintiff's representative when the machine was installed that they were a far cry from the sample of the straw annexed to the contract as they did not by any stretch of the imagination resemble any drinking straw that one readily associates with those supplied in restaurants or cafes in Hong Kong. They were thick, of an uneven diameter, and moreover curved, and the defendant says in evidence that the exhibited lengths had been cut from the choicest specimens of the machine's products.

5. Paragraph 11 of the Statement of Defence and Counterclaim best describes the first operation of the machine-

"11. On the testing of the said machine, it was discovered that the said machine could not even make a common non-flexible plastic drinking straw, let alone a flexible one or a flexible one corresponding with the said sample."

6. The reasons which the plaintiff's representative, Mr. Kwok Hing-sin, assigns for the failure was firstly the plastic materials were fed into the machine before the heat in the extruder reached the desired temperature; secondly, there was a defect in the cooling section because the water tank bath was not connected directly to the water supply, and thirdly the lack of expertise on the part of the defendant's workmen. These are only reasons given by him and no technical evidence has been called to support his assertions, and later tests to operate the machine satisfactorily belie those statements. Since the machine operated so unsatisfactorily, the manufacturers of the machine sent a representative, an engineer, to Hong Kong from Taiwan to make adjustments to the machine but according to Mr. Kwok "they did not know how to improve the machine" after having it tested for one or two days. He says that the representative "suspected" that there was something wrong with the materials and some were taken away for examination. Nothing further was heard from either the manufacturers or their representative since. Several technicians from the plaintiff company also took part in operating and adjusting the machine after that test but to no avail.

7. About the 15th November, 1978, Mr. Kwok enlisted the services of Mr. Chan Chi-fong, the Deputy Manager of the Polypropylene Alliance Ltd. as the latter has had experience with machines similar to the one supplied to the defendant. When Mr. Chan first tested the machine, the resulting straw produced was brittle and easily broken and he states that after adjusting the distance between the air rings and the water tank bath, he was able to produce the length of plastic tubing exhibited as P2. He had tested the machine only once and his explanation for not making drinking straws of the same diameter as the one in the sample was that (1) he had gone to the defendant's premises gratuitously; (2) the water tank bath was not properly connected to the water supply hence the water supplied to the tank was only sprayed on the Plastic tubing; (3) he was not asked nor had he any authority to conduct further tests and (4) there was insufficient space in the defendant's premises to place the cutting section of the unit so that there was no opportunity of having the desired lengths cut from the length of plastic tubing produced that day.

8. All of these explanations, in my view, and in the light of the evidence given by the defendant, do not bear the mark of logicality or truth. Mr. Chan had been asked by Mr. Kwok to go to the defendant's premises to carry out tests on the machine and had been allowed to do so and for him to say that he was not asked to produce something from the machine similar to the sample or that he had no authority to do so is simply untenable. The truth appears to lie in the product itself - Exhibit P2 - he could not do any better with the machine supplied by the plaintiff company than the previous attempts made by the Taiwan engineer or by technicians of the plaintiff company - the product would be curved no matter what he did with the machine and the straw would have the same characteristics as that produced as Exhibit P2.

9. So far as the defendant was concerned the plaintiff had agreed to supply him with a manufacturing unit capable of producing the straw annexed to the contract though not necessarily of the same colour but of a thickness and diameter and quality similar to it, but the machine delivered by the plaintiff was incapable of producing even the basic product satisfactorily.

10. Of the products which the machine was capable of manufacturing, none were even near the sample and in my judgment was not even capable of producing a drinking straw of the common variety let alone the straw which it was contracted it would produce. The defendant conveyed his rejection of the machine to Mr. Kwok after the tests on or about 15th November 1978 because it did not fulfil his requirements or expectations as the machine supplied does not comply with any of the implied terms as to fitness merchantability or that the machine would be capable of producing drinking straws of the sample annexed to the contract.

11. On the issue as to whether the plaintiff had committed a fundamental breach of the contract or a breach of a fundamental term of the contract, I would refer to the evidence of the defendant where he states the engineer from Taiwan had indicated that (1) two screws which were used for securing the bushing to the extruder head had been damaged by one of the technicians of the plaintiff company, and (2) the axle which propelled the molten plastic material from the mouth of the extruder had likewise been damaged because the motor had been switched on before the requisite temperature required to heat the plastic materials had been reached. Two days were spent by the said engineer to repair the machine but, unhappily, without any success and further attempts by Mr. Chan to put the machine in order have not produced the required result. The defendant who is no newcomer to the manufacture of plastic drinking straws says that because of the damage to the machine the product manufactured by the machine would be crooked. I think, from these circumstances, the plaintiff company has supplied a machine which was of no use at all to the defendant, and it was guilty of a fundamental breach of the contract. In view of the decisions in Wathes (Western) Ltd. v. Austins (Menswear) Ltd.⁽¹⁾ and Croudace Construction Ltd. v. Cawoods Concrete Products Ltd.⁽²⁾, Mr. Lane does not rely on the exemption clause in paragraph 8 of the Conditions of Sale of the Contract: "8. The Company shall not be liable for any claims for consequential damage."

12. Further, it is quite clear from the evidence that the defendant communicated his rejection of the machine orally to Mr. Kwok of the plaintiff company on 15th November, 1978 and had not from the date of delivery of the machine to his premises to the latter date given any indication whatsoever of his acceptance thereof, as alleged in paragraph 14 of the Plaintiff's reply to Defence and Counterclaim.

13. As to consequential damage arising from the breach, the defendant counterclaims damages for loss of profits, expenditure incurred in the purchase of an auxiliary machine for crimping plastic drinking straws to render them flexible, and a proportion of rent for storage space utilized for keeping the said manufacturing unit in the defendant's premises.

14. Following the defendant's rejection of the machine on 15th November, 1978, the plaintiff company, despite requests to that effect, made no effort whatsoever to remove the said machine from the defendant's premises and he has had to use part of his premises for storing the machine. The defendant explains by saying that because he was aware of his legal responsibilities under the contract, after rejection, he took the precaution of not touching the machine at all and left all the sections of the unit in situ, which occupied some 150 square feet of his premises at 17 Haven Street, Ground Floor, for which premises he was paying a monthly rental of $1,700 for a 450 square feet area. He has claimed under this head the sum of $566 per month from June 1978 to May 1979, and from June 1978 to May 1979 and continuing he claims the sum of $266 per month. The reason for the reduced figure is that he had moved out of the premises at Haven Street to more spacious premises of an area of 4,000 square feet, plus a car parking space for which he pays the monthly rental of $7,100. The defendant was asked as to what area all the sections of the machine would occupy if they were moved to a corner of the premises, and he accepted the suggestion that the area would be between 35-40 square feet. In my view, the lower estimate of 35 square feet would be the more reasonable taking into account the combined length of all the sections of the machine indicated in the sketch drawn by Mr. Kwok. I think there is also a duty cast upon the defendant to mitigate this damage and his explanation which he gave as to why he could not touch the machine after it had been delivered to him, I consider to be unreasonable, having regard to the fact that he did move the machine to his new premises and it would have been absurd that after such a move he would place the various sections of the machine in the same position as they occupied in the Haven Street premises if he had no mind to use the machine at all. The claim under this head will be allowed as follows-

15. Before the subject machine arrived from Taiwan in June 1978, (after a very long delay in delivery), the defendant bought an "Autoflex" machine from a Japanese manufacturer for the purpose of making corrugations in the drinking straws to be produced by the subject machine, in order to render them flexible. The autoflex machine was delivered at about the same time as the subject machine, according to the defendant, although from the documents exhibited in respect of the autoflex machine, the machine should have arrived here in Hong Kong about the last week of May 1978. According to Mr. Mo, the ex-sales representative of the plaintiff company, who was instrumental in selling the subject machine to the defendant, the subject machine would include an autoflex machine, albeit a manually operated one Mr. Mo says further, that the rate of production of flexible straws would be about 1/3 of the rate of production of the non-flexible variety, so that if a faster rate of production was required, more autoflex machines would be needed. It has been argued on behalf of the plaintiff that the defendant, in order to mitigate his damages under this head, ought to have ordered a drinking straw manufacturing unit from Japan in order to make use of the autoflex machine which was delivered in May 1978. The defendant says that since he had ordered the subject machine he was not financially capable of doing so at that time and, moreover, he had paid for the autoflex machine, and he was unable to make use of the said autoflex machine because of the failure of the plaintiff under the contract, nor would he now be able to use the said machine since he has ordered a fully automated machine from Japan to manufacture flexible plastic drinking straws which does not require an additional crimping machine. In my judgment, the defendant is entitled to his claim for the amount he had expended on the autoflex machine and his claim for $88,230 under that head is allowed.

16. With regard to the claim for loss of profits, the defendant produced an agreement (Exhibit D.4) which he entered into with Tosyo Enterprises Company, of which Mr. CHAN Ping Shan is the sole proprietor on the 21st August, 1977, whereby the latter company was appointed the sole agent and distributor for Hong Kong and Macao of the defendant's flexible plastic drinking straws "with an annual quota of not less than $500,000." The agreement could be observed as from the date of its execution because it appears from paragraphs 9 and 10 of the Statement of Defence and Counterclaim that the likelihood of having the subject machine delivered by August 1977 was rather remote and it must have been clear to the defendant that that agreement could not be carried out on that date. There was, of course, no date mentioned in the said agreement as to when deliveries by the defendant would commence, nor was there any indication as to the number of straws to be delivered under the said agreement. The defendant, in claiming the large amount he does under the heading of "loss of profits" says that Mr. Mo had represented to him at the time of the execution of the contract with the plaintiff that the rated capacity of the subject machine was similar to the one the defendant was then using for making the non-flexible type of drinking straw, that is 400-450 per minute, and on this hypothesis and the fact that such flexible straws would be sold for two cents each, his turnover per month would amount to $80,000. He claims a figure of $55,000 as net profit per month after deducting labour charges, cost of materials and cost of distribution. Mrs. Wong Yuen Hing, the wife of the proprietor of Tosyo Enterprises Company gave evidence to the effect that because of the defendant's failure to supply drinking straws under the agreement, she has had to resort to buying such straws from Korea in 1978 and that the annual turnover was in the region of approximately $960,000, and that "since we started business in 1978" it has gone bigger. She said earlier that "at the beginning the straws (flexible drinking straws) should come from America. At present we are buying from Korea. In 1977, our firm purchased from U.S.A. through Hutchison, but whether it was in 1977 or not I cannot remember". In her capacity as Assistant General Manager of the company, she was responsible for purchasing and for the accounts and Mr. Lane rightly complains that there is a singular lack of documentation relating to the claim for loss of profits. It should not have been difficult for either the defendant or Madam Wong to have produced some records for an assessment to be made of what profits, if any, were earned firstly by the defendant in making non-flexible straws and secondly, by Tosyo Enterprises Company in selling flexible drinking straws imported from Korea. Moreover, Madam Wong says that despite what the defendant had stated in evidence, Tosyo never contemplated taking any proceedings against him under the agreement.

17. Mr. Eddis, in submitting his claim for the defendants, relies on the dissenting judgment of Lord Justice Morris in Cullinane v. British "Rema" Manufacturing Co. Ltd.⁽³⁾ where Lord Justice Morris held that the plaintiff was entitled to the capital loss suffered and in addition to the net profit which he would have earned over those years to which his claim was limited, less an amount representing the appropriate allocation which would have been made year by year so as to wipe out the purchase price of the plant over the estimated life.

18. On the other side, Lord Evershed, M.R. says at page 302 of the report-

"It seems to me, as a matter of principle, that the full claim of damages in the form in which it is pleaded was not sustainable, in so far as the plaintiff sought to recover both the whole of his original capital loss and also the whole of the profit which he would have made. I think that that is really a self-evident proposition, because a claim for loss of profits could only be founded upon the footing that the capital expenditure had been incurred."

19. Further on at page 306 of the report, he says-

"But whatever may be the answer to these problems, I come back to the point which I left a little time ago. I think that the plaintiff could choose to claim on the basis that he had wasted capital, and that he ought to be put in the position he would have been in if he had never bought this machine; or, alternatively, he was entitled to say: 'I have got the machine: what I am claiming is the loss I have suffered because its performance falls short of that which was warranted; therefore I have not made profitable sales which I would have made, and I claim, accordingly, the loss of such profits.' The second alternative being the larger, he was entitled to choose that; but, in my judgment, he should be limited to it."

20. I respectfully agree with what has been said by Lord Evershed, and I think his judgment applies more forcefully to the present case because of the rejection by the defendant of the machine as delivered, that is, he is put in the same position as if he had never bought the machine. Due to the unsatisfactory nature of the evidence adduced by him and on his behalf with regard to this portion of his claim, I agree that the claim of loss of profits, if any, would be limited to only a nominal amount. The defendant's claim for loss of profits therefore fails but he will have judgment for the return of the $10,000 deposit which he paid to the plaintiff company on the 6th May, 1977, and which he now claims in his counterclaim.

21. Accordingly there will be judgment for the defendant on his counterclaim in the sum of $100,251.84 with interest thereon at 8% per annum and costs.

Representation:

Mr. William Lane (Samuel Soo & Co.) for Plaintiff.

Mr. F.A.L. Eddis (Lau, Wong & Chan) for Defendant.

(1) (1976) 1 Lloyd's Rep. 14.

(2) (1978) 2 Lloyd's Rep. 55.

(3) (1954) 1 Q.B. 292 at 313.