SEAPOWER RESOURCES COLD STORAGE & WAREHOUSING LTD. v. ASSURE CO. LTD.

HCA 7508/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7508 OF 1997

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J U D G M E N T

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1. This is a claim for the balance of storage charges due but unpaid to the plaintiff, a coolstore operator, under a contract to store a consignment of garlic supplied by the defendant as agent for the owner of the garlic.

2. The defendant denies liability and counterclaims for the loss suffered as a result of the garlic's deterioration, it having been stored at a temperature higher than that stipulated in the contract.

History

3. The plaintiff is a company incorporated in Hong Kong and is and was at all material times the operator of a warehouse in Kwai Chung. Storage space in the warehouse is rented out from time to time. The warehouse is temperature controlled at three levels, namely, -18oc, (oc to +4oc and 18oc to 22oc. These levels are capable of adjustment within reason where the customer requires an alternative temperature for his product.

4. The defendant is a company incorporated in Hong Kong engaged in the business of shipping into Hong Kong garlic cloves for sale domestically and worldwide. Henan Cereal Oils v Foodstuffs Import & Export Corporation (Henan) is a company incorporated in the Henan Province of PRC whose business includes the purchase and export of PRC grown garlic.

5. In July 1996 Henan purchased white garlic harvested in late June or early July in the Henan Province and engaged the defendant as agent to ship the same to Hong Kong and on its behalf arrange storage of it in Hong Kong pending sale. The consignment weighed 587.65 tonnes made up of 251.23 tonnes of 5cm white garlic; 113.56 tonnes of 6cm white garlic and 222.86 tonnes of Cang Shan garlic.

6. For the purposes of this dispute it is common ground that in the course of the agency thus entered into Henan was cast in the role of the defendant's undisclosed principal.

7. Lee Wai Kuen (Mr W K Lee) is and was at the material time a director of the defendant. The defendant had not previously used the services provided by the plaintiff. Acting on the recommendation of a customer he contacted the plaintiff in late July. Mr W K Lee's contact was Alice Kwok (Miss Kwok), marketing manager of the plaintiff and authorized to contract on behalf of the plaintiff. During the course of two or three days between 29 July and 1 August the parties through their respective representatives contracted verbally for the garlic to be stored at the rate of HK$2.50 per packet of ten kilogrammes. The garlic was transported to the warehouse in a total of twenty six 40 foot containers. By the terms of the contract twenty two of these were delivered to the plaintiff's warehouse on 2 August 1996 and the remaining four were received the next day.

8. What precisely comprised the contract and what its terms were is in dispute as I shall come to.

9. As each container arrived the lorry driver was handed a tally sheet recording the quantity of garlic received as a receipt. The tally sheets stated on their face that the receipt was subject to the plaintiff's godown warrant. On or about 5 August the plaintiff posted to the defendant a document headed 'Godown Warrant' which, inter alia, purported to exempt or limit the warehouse operator from liability in the event of damage to the product during the period of storage in the warehouse.

10. The garlic was stored on several floors of the warehouse in that part of it whose temperature was in the (oc to +4oc category. There was no adjustment made to that temperature, nor was it stored separately from other bailed goods; some of the garlic was stored in the vicinity of eggs and photographic paper held on behalf of another customer.

11. On 20 September 1996 a representative of a company interested in purchasing some or all of the garlic inspected a sample of it. As a result of what she discovered and reported to Mr W K Lee he made his own inspection the following day. He noted first that a thermometer placed at the doorway of the compartments in which the garlic was stored recorded that the temperature was between (oc and +4oc. Next he cut into sample cloves of the garlic, to find that they were beginning to sprout. This was of immediate concern because garlic which has sprouted has lost some of its nutritional content and thus worth. In severe cases it can only be marketed as garlic powder, worth much less than a complete clove, and in extreme cases it has no worth whatsoever. To preserve the stock, hopefully retard the growth and protect its value he immediately caused a fax to be sent to the plaintiff requiring the temperature to be reduced to -2oc. It is the defendant's case, denied by the plaintiff as I shall come to, that it was an express provision of the original contract that the garlic be stored at -2oc. The fax included a complaint that this essential requirement had not been met. On 23 September he instructed a further reduction to -4oc. The plaintiff complied.

12. Meanwhile the plaintiff had submitted an account for storage charges so far incurred of $170,332.50 and the defendant paid this on 2 October. Apart from $24,000.00 paid in December it paid nothing more although thereafter it received monthly accounts. The reason was that it met buyer resistance because of the sprouting. The reduction of the temperature of the coolstore was ineffective to halt the sprouting probably because it was done too late. In September 95.76 tonnes of the garlic was sold, albeit at a discounted price, to a company called Hang On Transportation Company (Hang On). In October another company called Top Pearl Limited (Top Pearl) bought 72 tonnes, also discounted. Attempts to sell more were at first frustrated by the refusal by the plaintiff to release the goods pending payment of the overdue storage charges. The defendant declined to pay these, holding the plaintiff responsible for the damage to its stock and loss of value. The impasse was resolved when the defendant paid $500,000.00 to its solicitors, Messrs Van Langenberg & Lau, as stakeholders. The remaining garlic was sold in batches and the last of these left the warehouse on 18 April 1997.

The Proceedings

13. Unable to resolve the issues, the plaintiff issued a writ in July 1997 for the recovery of the storage charges incurred between 2 August 1996 and 18 April 1997. Allowing for the payments made totalling $194,332.50 this comes to $789,412.50. Relying on the terms of the Godown Warrant which it says contractually binds the parties it claims interest at 2% per month on the monthly amounts due from the date the charge was incurred until payment.

14. The defence is that the plaintiff stored the garlic at a temperature too high to prevent deterioration and was thus in breach of the contract and thereby had repudiated the contract. The defendant accepted the repudiation by letter in January 1997. Thus it is not liable for all or part of the balance of storage charges claimed.

15. Further, it counterclaims for the loss of worth of the garlic and additional expenses incurred of US$226,685.00.

The issues

16. The pleadings and background reveal a number of issues of fact and law to be resolved. I believe these are as follows:

(a) What were the terms of the storage contract? In particular, was it an express term that the garlic be stored at a temperature below the chiller range of between (oc and +4oc? Were the parties bound by the terms and conditions of the Godown Warrant?

(b) If the plaintiff is found to have been in breach, to what extent if any is the defendant liable for storage charges unpaid? To what extent is it entitled to relief for loss of value of the stock? Is the plaintiff entitled to the protection afforded by the exemption clauses in the Godown Warrant?

Liability

17. I shall deal with the disputes of fact which go to the issue of liability first, requiring a review of the evidence not already dealt with in the history.

The plaintiff's case

18. Miss Kwok, the plaintiff's marketing manager, was called first. She said that the price was fixed over the telephone with Mr W K Lee on 1 August 1996. On the same day she discussed with another staff member of the defendant, a Miss Lam, the temperature at which the garlic should be stored. She quoted the three different temperatures available, and that it was their normal practice to store garlic in the chiller compartment, that is at (oc to +4oc. Miss Lam agreed to this. Then on 3 August, by which time the consignment had been delivered, Mr W K Lee told her he wanted the temperature to be -2oc. She found that to be an usual request and asked that this be put in writing. As nothing was received, the garlic was stored at a temperature of (oc to +4oc; that is until she received the faxes of 21 and 23 September. In compliance with the requests therein the temperature was adjusted to -2oc and then -4oc. She conceded that the fax of 21 September included a complaint that the garlic had not been stored at the agreed temperature of -2oc. But she did not respond because she referred both faxes to her superior, called Lee Tsun Kwok (Mr T K Lee).

19. She and Mr W K Lee spoke on the telephone in November 1996 when the issues of unpaid storage charges and the deterioration of the garlic were discussed. (As that telephone call was recorded with the transcript adduced in evidence by the defendant I shall return to that and Miss Kwok's evidence concerning it.)

20. Mr T K Lee was called next. He has been engaged in the cold storage business since 1981 and has been with the plaintiff since 1989. He is and was at the material time an assistant general manager. He said according to practice, garlic is stored in the chiller compartment at (oc to +4oc; never below (oc as this will damage the product. When the written requests of 21 and 23 September were received he found them highly unusual, but complied because that was what the customer required. He noted the complaint of the first fax but did not then and does not now accept it was valid. It is standard practice that any variation from the standard temperature options is required to be asked for in writing. He chose not to respond to the complaint.

21. He conceded he was not party to the negotiations leading to the contract for storage and had no personal knowledge of the defendant's temperature instructions then given.

22. He said when the consignment was delivered the tally sheet then handed to each driver acknowledged receipt of the goods in question subject to the terms of the Godown Warrant which was sent to the defendant a few days later.

The defence case

23. Mr W K Lee came first. He said that during the course of the conversations he had with Miss Kwok he stressed all along that the temperature at which the garlic had to be stored was -2oc, to preserve the quality. She did not then or thereafter query this requirement nor call for it to be in writing. Nor did she make any reference to the contract being subject to the terms and conditions of a Godown Warrant, the existence of which was not disclosed. When a copy of the same was received in the post a week or so later he chose to ignore it as it was brought to his attention well after the parties had agreed all terms. As far as he was aware the garlic was in good condition at the time of delivery having been harvested no more than about one month prior to that date.

24. He sent the fax of 21 September to complain that his instruction as to the temperature had been disobeyed, viewing this as the sole cause of the deterioration of the product. His later instruction to reduce the temperature to -4oc was a belated attempt to retard the sprouting that had begun but to no real effect.

25. In November he spoke to Miss Kwok about the issues of non-payment of storage charges and the unfortunate sprouting of the garlic. He tape-recorded the conversation because he wanted to preserve her reaction to his complaint that his instructions that the temperature be at -2oc had not been complied with. At one point in the conversation he said:

"When I came to inspect (it) on the last occasion, (I discovered) that (the garlic) was (separately) kept on several floors. (B: Mm.) So possibly, I know that you did not have enough space there, (B: Mm.) and therefore (it) was kept on several floors. (B: Mm.) Well, but, that is, you said er that unless we took up the lease of the warehouse then we could select the temperature, but I had no idea about this at that time. At that time I (B: Mm.), that is, when (I) delivered (the garlic) to the warehouse, I certainly explicitly made it very clear (B: Yes.) that (the garlic be kept) at 2 degrees below zero.

26. Miss Lee responded - 'Mm.'

Suggesting that perhaps Miss Lee was not personally to blame he then said:

"I - I, that is, have all along been dealing (original in English) with you. (B: Yes, yes.) (I) think that you, that is, are better, (B: Uh-huh.) and more honest. (B: Yes.) It may be that you had given out the INSTRUCTION (original in English) (regarding, the temperature), your other colleagues did not carry it out."

27. Her response was against 'Mm.' He said:

"Therefore I also, alas! - that is to say - thought about it for a long time and don't know what I should say to you. (B: Yes - Mm.) So, Em, it is because, that is, as a matter of fact we had, had Er told you that (the garlic) must be stored at that (specific) temperature."

And again her response was 'Mm.'

28. Returning now to Miss Kwok's evidence, and her explanation for these responses, she said in evidence in chief that she was not admitting default either by her or the plaintiff but rather showing she was being attentive to what was being said. She did not challenge the allegations because she wanted to preserve courtesy, not offend the customer, and thereby encourage payment of outstanding charges. But in cross-examination she did concede that her responses indicated that she accepted that the instructions were to store the garlic at -2oc. She agreed that at no point did she say that the garlic was stored at between (oc and +4oc because there was no written instruction confirming the requirement that the temperature be at -2oc. Her explanation was that she had made this clear at the outset so that there was no point in repeating herself.

29. I come now to evidence produced by the defendant by agreement. This is a report by a company called SGS Hong Kong Limited whose activities include the inspection and testing of foodstuffs and other product. The defendant engaged it to carry out a random inspection of the garlic and report on its condition. Inspection was undertaken on 7 and 8 November. The report is dated 12 November. A random selection of 517 cartons revealed that in all cases there was evidence of sprouting to varying degrees of maturity. The report was illustrated with a number of photographs of the offending cloves.

30. Finally I heard from Liu Ton Lu (Mr Liu) whose post is Deputy Research Officer at the Office for Research on Storage, Zhinam Fruit Research Institute, National Association of Supply. His qualification and experience reveal that he is undoubtedly an expert in the field and, in particular, how garlic should be dealt with following harvesting to preserve its nutritional content.

31. Having prepared a report he confirmed its truth and accuracy from the witness box. In it he stated:

"7. Theory about Appropriate Temperature for Storaging and Preserving Garlic

When the garlic have grown to their maturity, the outer layers of the petals will be covered by crispy cloak, whereupon the garlic will enter into a period of natural dormancy for 2 months. After the elapse of the dormancy period, the most efficient way to preserve the garlic and to extend the length of dormancy is, as the best method currently offered by science, to keep them in cold storage. That is to say, by way of strictly keeping the garlic at low temperature and suitable humidity, the garlic bulbs will be stopped from sprouting and growing. Further, cold temperature is effective in preventing excessive evaporation of water contents in the garlic and contraction of germs and bacteria. As a result, the freshness of the garlic can be preserved for longer period.

8. According to considerable amount of experiments, the reason why the use of cold storage is efficacious in preserving freshness of the garlic lies in the fact that there is a close association of the temperature of the environment with the following features of fruits and vegetables:

(i) rate of metabolism;

(ii) rate of growth of micro-bacteria or germs which would bring diseases to or even kill them; and

(iii) rate of development of corporal sickness.

Each and every fruit or vegetable would have its own best equilibrium storage temperature, at which the goodness of the fruit or vegetable can be maintained and preserved in its best possible state of condition for certain period of time. If the temperature falls below this best storage equilibrium temperature, the metabolism or physical state of the fruit or vegetable will be adversely affected, giving rise to damages by coldness and/or other diseases. If, however, the temperature is adjusted above the equilibrium temperature, it will expedite rate of metabolism and aging process that take place inside organic textures of the fruit or vegetable.

9. In the event where the temperature for storage for the garlic is above the equilibrium storage temperature which is at or about -1oc to -3oc in wake and/or on the basis of substantial scientific researches, experiments and experiences acquired from or in connection with the actual handling by various enterprises in the storage thereof, the nature response of the garlic is sprouting. The reason is very simple. At the temperature between -1oc to -3oc, the garlic are kept in a state of dormancy and can be stored for very long period. Once the temperature increases above it, the rate of respiration and metabolism in the garlic will accordingly expedites, which process will break the dormancy and in turn accelerate sprouting of the garlic. Once the garlic have sprouted, there is nothing practically effective to stop them from further growing. In the Northern part of China, if the garlic are not stored in cold warehouse under the equilibrium storage temperature after the dormancy period, the sprouts inside the garlic bulbs will start to grow gradually."

32. He went on to confirm that where the garlic had been harvested in late June or early July, the dormancy period would run to the end of August, necessitating storage at between -1oc and -3oc to avoid sprouting, on or before that date. But once the sprouting had begun it could not be stopped. Still lower temperature would slow the process down, but no more than that. He also said that the sprouting signifies a loss of weight and a significant reduction in the nutritional content.

Findings of fact

33. I am satisfied on the evidence of Mr W K Lee that the garlic was harvested at the earliest in late June. On Mr Liu's evidence which I accept the dormancy period lasted until late August. Thus as a matter of fact the garlic was still dormant when it came to be delivered to the plaintiff's warehouse.

34. So, why did it sprout?

35. There is no question but that in reliance on Mr Liu's report and evidence the only reason why the garlic sprouted, and thereby lost value, was because it was not stored at a low enough temperature by the end of August. Conversely, had it been stored at -2oc it would not have sprouted and its value would have been preserved.

36. Mr T K Lee called upon extensive years in the cool storage field to venture a different view. In the light of Mr Liu's unchallenged evidence I can only say he has been misinformed.

37. But was the plaintiff responsible?

38. Miss Kwok says 'No'. She shared her superior's view that the request for a below freezing point temperature was unusual and required to be in writing. So although she concedes the request was made the fact that it was not confirmed in writing permitted the plaintiff to ignore it.

39. Of course Mr W K Lee disputes that there was such a requirement; so who is telling the truth? There are a number of factors to assist, including the following:

(a) if there was such a request, why did Mr W K Lee not comply? After all it would have cost little time to scratch out the instruction;

(b) why was no other term of the contract required to be in writing? The temperature of storage was, after all, only one of the terms;

(c) why was not Mr W K Lee's complaint of 21 September responded to, either by Miss Kwok or Mr T K Lee, to exonerate the plaintiff from blame?

(d) why did Miss Kwok not give a similar explanation when confronted with the allegations during the telephone conversation of November?

(e) knowing that to store the garlic at between (oc and +4oc was contrary to the express instructions of the customer, why, nevertheless, did Miss Kwok arrange that the garlic be stored at that temperature, with other goods? Why did she not comply, with a letter to that effect 'in compliance with your instructions?'

40. I am satisfied that there is no ready explanation for these questions posed. Taken overall I am satisfied, the burden resting with the defendant, that it was an express term of the contract that the temperature of storage be at -2oc, and that the plaintiff was in breach of the contract for failure to comply.

41. But what was the contract?

42. It is the plaintiff's case that the parties were bound by the provisions of the Godown Warrant because the receipt for the goods expressly stated as such, and the Godown Warrant limited its liability.

Exclusion clauses

- The law

43. The burden is on the party seeking to rely on an exclusion clause to prove that it has became part of the contract. Crucial to its cause is that notice must be given no later than when the contract is made; communication after that is of no effect; see Chitty on Contracts, 28th edition vol. 1 para. 12-010.

44. There is no need for that notice to contain the conditions for the parties to be bound by them, provided that by the notice the receiving party has knowledge that there are conditions which will be binding on him; Chitty (supra) para. 12-013-014.

- the facts

45. The problem the plaintiff has in establishing the exclusion terms of the Godown Warrant were intended to be binding on the parties is that it is not disputed that the terms of the storage contract in its entirely were settled, verbally, before delivery of the consignment or any part of it. There was no notice of the existence of a Godown Warrant or any exclusion clauses contained in it prior to the receipt of the first delivery by which time it was too late to be effective. At no stage was it put forward, let alone accepted, that the parties would be bound by additional terms and in particular terms which purported to limit the liability of the plaintiff. That Mr W K Lee opted to take no steps when he received the Godown Warrant some seven or more days after the contract was finalized is neither here nor there.

46. It follows that on that ground, the plaintiff's liability is not, contractually, avoided or reduced.

The consequences

47. The plaintiff by failing to store the garlic at the specified temperature was in breach of an essential condition of the contract. That entitled the defendant, as innocent party, to treat itself as discharged from further performance, as it did by accepting the plaintiff's breach as repudiation in January 1997, and to claim damages for loss sustained by the breach.

48. It follows that it no longer was liable to meet the cost of storage of the garlic. The plaintiff's claim falls away.

49. I come now to the counterclaim.

50. It is argued by Mr Ng for the plaintiff that because the defendant was acting as agent for Henan it could not recover as damages the loss that was undoubtedly Henan's to bear. He quoted from Bowsted & Reynolds on Agency 16th edition para. 9-011:

"Unless he is a trustee he cannot recover his principal's loss only his own."

51. This would appear to run counter to the well-entrenched principle that an agent of an undisclosed principal can sue and be sued because he is contracting as if principal. I quote from Chitty (supra) at Vol. 2 para. 32.087:

"Undisclosed principal. A very important exception to the rule that an agent is neither entitled to sue nor liable to be sued on a contract made by him in representative capacity is to be found where an authorised agent makes the contract in his own name without disclosing the fact that he is acting on behalf of another. On such contracts he can sue and be sued in his own name because he is then to all appearances the real contracting party. But the intervention of the undisclosed principal ordinarily puts an end to the agent's right of action."

52. If further authority is needed I turn to the Privy Council's opinion delivered in Siu Yin Kwan v Eastern Insurance Co. Limited [1994] 2 AC 1999, where Lord Lloyd of Berwick said at p. 207:

"For present purposes the law can be summarized shortly.

.........

(3) The agent of an undisclosed principal may also sue and be sued on the contract.

.........."

53. It follows that I find against Mr Ng's proposition that the plaintiff escapes liability because the loss occasioned was not that of the defendant, the agent, but that of an undisclosed principal, Henan.

54. I come now to consider the quantum of recoverable loss.

55. It is trite law that where a party to a contract suffers loss as a result of the other contracting party's breach he has an obligation to mitigate that loss. The defendant pursued that course by selling the garlic at such price as it was able to get having regard to the diminished worth of the sprouting garlic. It is not pleaded by the plaintiff that the defendant failed to mitigate the loss. But what is disputed is what the garlic would have fetched had it not sprouted.

56. I revert to the evidence to establish this.

The evidence revisited

57. Mr W K Lee said that on 18 September 1996 Henan had entered into a contract with Hang On for sale of 100 tonnes of 6cm white garlic at US$690.00 per tonne, 100 tonnes of 5cm white garlic at US$670.00 per tonne and 100 tonnes of 5cm Cang Shan garlic at US$630.00 per tonne.

58. In October 1996, Henan agreed to sell and Top Pearl to purchase 72 tonnes of 5cm white garlic at US$670.00 per tonne - the same price as Hang On had agreed to pay.

59. These transactions did not proceed, at least on terms agreed, because the garlic had become inferior.

60. Aside from the loss occasioned by the reduction in worth of the garlic the defendant incurred the additional expenditure of US$24,075.00 for transport charges and two lots of survey fees of US$1,140.00 each. (In fact only one survey was disclosed).

61. Miss Lau Chit of Top Pearl said that Top Pearl was planning to purchase the whole consignment of garlic and would have paid for the 6cm white garlic US$710.00 per tonne; for the 5cm white garlic $670.00 per tonne and for the Cang Shan 5cm garlic $660.00 per tonne.

Findings of fact

62. In his closing submissions Mr Hung for the defendant in all fairness submitted that I should value the garlic at the price that Hang On would have paid rather than the higher price that Miss Lau said Top Pearl was prepared to pay. I believe that conservative approach to be the correct one.

63. I calculate the value of garlic, before it went off, as follows:

113.56 tonnes of 6cm white garlic at US$690 per tonne	78,356.40
251.23 tonnes of 5cm white garlic at US$670 per tonne	168,324.10
222.86 tonnes of 5cm Cang Shan garlic at US$630 per tonne	140,401.80
	387,082.30
say	387,080.00
There is no dispute that the garlic was sold for	186,750.00
For a total loss of	200,330.00
To which I add the cost of transport and the cost	24,075.00
of the report disclosed	1,140.00
Making a total recoverable loss of	US$225,545.00

64. At an agreed exchange rate of 7.73, this converts to HK$1,743,462.00.

65. But there is the further expenditure, actual and notional, being the cost of storage that the defendant has and would have additionally incurred pending a sale of the garlic. I am unable to establish conclusively the point when all the garlic would have been sold and storage charges met. Adopting what I believe is a realistic approach the defendant would have had to pay until the end of November; that is four months at HK$145,905.00 per month - $583,620.00 in all. $194,332.00 was paid, leaving the notional balance of $389,288.00 that would have been incurred. I deduct this from the gross deficit of $1,743,462.00 and by this means arrive at the sum of $1,354,174.00.

The orders

66. The plaintiff's claim is dismissed.

67. There will be judgment for the defendant on the counterclaim in the sum of $1,354,174.00, together with interest thereon at the prime rate from the date of the counterclaim to this date; thereafter at the judgment rate until settled.

68. Costs, nisi at first instance, are to the defendant taxed if not agreed.