WüNSCHE HANDELSGESELLSCHAFT INTERNATIONAL MBH v. GENERAL ACCIDENT INSURANCE ASIA LTD.

HCCL 73/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.73 OF 1994

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J U D G M E N T

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1. These proceedings arise out of the purchase by, and shipment to, the plaintiff, of a total of 26 consignments of canned Chinese vegetables and fruit, given as asparagus spears in the Points of Claim, but including beans and pineapple, on various occasions in 1991. Upon their arrival at the destination port of Hamburg a considerable number of the cans were found to be damaged and a claim was made against the defendant, the insurer of the cargo, by the plaintiff, to whom the policies of insurance had been assigned by their supplier, Lain Fung Trading Company (Lain Fung). The claim was rejected by the defendant on the basis that the damage had occurred prior to the arrival of the goods at Shenzhen, the port of shipment, and that the policies of insurance only covered them from there to Hamburg. The plaintiff now seeks a declaration that the defendant is liable to indemnify them on the grounds that, on a true construction of the policies, the goods were insured for the whole of the journey to Hamburg from the respective factories in China where they were canned and packed, and not just the sea voyage from Shenzhen, and, or alternatively, that the damage was more likely to have been caused during stuffing of the containers in Shenzhen, and would have been covered in any event.

2. The original orders for the goods were placed with Lain Fung who in turn ordered them from various suppliers in China. Lain Fung then contacted the insurance broker with whom they then dealt, Barryson Union (HK) Ltd (Barryson) and requested them to arrange insurance cover for the carriage to Europe. It is the plaintiff's case that Mr Ng of Lain Fung specifically asked for cover from the respective factories in China through to Hamburg, but I will return to this when I consider the evidence shortly. Following the request to Barryson, through their Mr Adam Wong, the defendant, then New Zealand Insurance Ltd, issued a cover note for a maximum of US$2,000,000.00. This was intended to cover a number of shipments of varying values, each of which would be deducted from the maximum until it was used up and, if more were required, another cover note issued. For each shipment a separate policy was issued.

3. The application for insurance from Barryson in each case included a request that the goods be covered from the factory in China, in the words: "To be effected from factory in the P.R. of China, to warehouse in Hamburg, warehouse to warehouse clause is included...". However, the cover note stated that: "This insurance attaches from the time the goods leave the fty/warehouse at the place named in policy for the commencement of the transit...". The policies only referred to either "China Port" or "Shenzhen, China Port". There was no reference to any other place in China.

4. The goods, packed into cardboard boxes, were delivered from various factories in China in Fujian, Shanghai, and Sichuan, either by road, or a combination of road and rail, or, in the case of Fujian, by boat along the coast, to Shenzhen, where they were stored in a warehouse for two or three days, then loaded into containers which in turn were loaded on to a ship or ships for the voyage to Hamburg. This took place on 26 occasions throughout 1991, from June to November, and on the arrival and inspection of each at their destination, damage was found. This was both from wetness in the containers, causing rusting on, and other wet damage to, the cans, and denting of cans, caused either by rough handling of the goods in transit from the factories, or on stuffing, or before the goods left the factories. The surveyors in Hamburg were of the opinion that the wet damage was due to the cartons being loaded into the containers in a damp or even wet condition, and container sweat, the effect of a colder climate on the contents of a container on a voyage from a warm humid area, had exacerbated this.

5. There are two main areas of issues here: what cover was given by the cover notes and policies issued by the defendant, and whether that included the damage sustained by the cargo in this case. The latter will, if the insurance only covered ex-warehouse Shenzhen, depend on where that damage occurred.

The insurance cover

6. It is the plaintiff's case that, the applications for insurance having requested cover from the factories in China, and the cover notes referring to "the time the goods leave the fty/warehouse....", Lain Fung were entitled to assume that the insurance was in accordance with their request for cover from the factories in China and that, insofar as the policies do not reflect this, they are entitled to rectification.

7. As I have said, Lain Fung placed their insurance through the brokers, Barryson, where Mr Ng of Lain Fung dealt with Mr Wong. He had been their insurance agent for some time, and appears to have placed their insurance with New Zealand Insurance before. There is no evidence that cover had ever been requested ex-factory in China before, but straightforward marine cover ex-China port, usually Shenzhen. The first application in respect of these consignments was sent to the defendant by Barryson and was apparently passed to a Mr Derek Yeung, who was branch manager of the defendant's Central branch. This was because, as he says, a request for ex-factory cover was very unusual, and would only be given for particularly good and long standing customers, and even then only after precise details of the place of the factories, and time and mode of transportation had been given, and approval from head office obtained. The requirement for specific details of time place and mode of transport are understandable, as these goods had to come considerable distances through China to Shenzhen by various modes of transport, often over unsatisfactory roads, and to be transferred by hand more than once in transit. The approval of head office was not strictly necessary as Mr Yeung had sufficient authority, but his evidence, which I accept, is that he would always seek approval in such a case.

8. Mr Yeung personally dealt with this application, and says that he told Mr Wong of Barryson that the cover requested could not be given, but from the port only as before. He says that Mr Wong accepted that, and he, Mr Yeung, wrote on the application the wording above, later typed or chopped on to the cover note, which he said was in "standard wording". The cover note was passed to Barryson who in turn gave it to Lain Fung. There was no query or complaint from Lain Fung. In due course, as each consignment was prepared to be shipped and details of quantities given, separate policies would be issued and also passed to Lain Fung. These all included the same wording as to when the insurance attached as in the cover notes, and, except for the first, gave the voyage as Shenzhen, China Port to Hamburg, with no other place of commencement of transit. The first gave the commencement as simply China Port.

9. The evidence of Mr Ng is that he believed that the wording of the cover note included cover from the factories, and would not have agreed if it did not. He says that he told Mr Wong the origin of the goods, but says in his statement that he just told him they came from factories "in Fujian and Sichuan etc.". He said that he expected to have to pay a higher premium for such cover, but appears to have made no enquiries when there was no such demand, assuming that he had been given a discount.

10. The evidence of Mr Wong of Barryson was the subject of some criticism from Mr Kerr for the plaintiff in his submissions, and I am bound to agree that in many respects it was far from clear. I take into account however that these were events over 10 years ago now, that he was first aware that there had been any problem with the shipments some 5 years later, when he was approached by Mr Ng in 1996 to help him sort it out, and gave his witness statement to the defendant's solicitors in December 1997. There were no contemporary documents apart from the applications, cover notes and policies themselves with which he could refresh his memory, which was clearly far from perfect and on occasion he contradicted himself. But on the important aspects of this matter he was certain, even though these might be largely of what he would have done as a responsible insurance broker acting for a client. The first of these was that he told the staff of Lain Fung that the defendant would not provide the cover requested, but only the usual marine cover from the port. He said that he usually dealt with a female member of the staff at Lain Fung, and he and she regarded this as a routine matter, no different from the others he handled for them. This is not, of course, strictly correct, as there was the unusual application for ex-factory cover here, but this having been declined, he clearly considered it as relatively unimportant, and able to treat the shipments as he had others previously. I accept that this is what he did, and that he communicated this to the Lain Fung staff. This may not have been to Mr Ng himself, and it may be that Mr Ng would have taken the matter further, or negotiated, if he had been told, but he did see the cover notes, and the subsequent policies, and equally treated them as routine in the way he did not look beyond the words "the fty/warehouse in the place named in the policy" to see if the unusual cover requested had indeed been given, bearing in mind that no extra premium had been demanded. One would expect, in a case such as this, which appears to have been a one-off application for different insurance than usual, Mr Ng would have taken greater interest in the cover given, and at least studied both the cover note and the policies. He claims to have done nothing apart from look at the cover notes and see the words referred to above, in spite of knowing that details of the factories, mode and condition of transport had not been given to the insurer.

11. The extent to which such cover would be unusual is easy to see. The standard and usual marine policy covers goods after they leave the warehouse in the port of shipment in a sealed container, the voyage to their destination, to the warehouse the other end. The risk involved is comparatively low, restricted to loss of the container in transit through accident or otherwise, damage to the goods through mishandling of the container, or theft. By comparison, the risk attaching to the transit from possibly remote parts of China is considerably greater. With transport arranged by the factories, by truck over often inadequate roads, transfers, no doubt by hand, to trains, or by boat along the coast in the case of Fujian, with no indication of the protection the goods are given during their journey, there would be a severe risk of damage or loss before arrival at the port of loading, which would have to be taken into account in the premium charged. There is no evidence that Mr Ng even knew what the arrangements for transport were from each factory, yet he says that he thought the extra risk was covered by a discount. I regret that I cannot accept this. He is a businessman, engaged in this trade for some time, knowing the extent of such risk, and the kindest view I can take of his evidence is that he too regarded this as a routine matter, like so many other shipments, and, while he passed on a request from his customers for a greater degree of cover, did not then carefully check to see if he had been given it, having been put on notice at least by the lack of any change in the usual premium. I am satisfied on Mr Yeung's evidence, lacking in clarity as some of it might have been, that he told Mr Wong, Lain Fung's agent, that the ex-factory cover could be given, and it is also more likely than not that Mr Wong passed this information to Lain Fung.

12. I am therefore of the view that on a balance of probabilities Lain Fung, either through their agent Mr Wong, or through their own staff, were aware of the cover which had been provided, and that is what was reflected in the cover note and the policies, namely from leaving the warehouse in the port of departure until arrival at the warehouse in Hamburg.

13. As the plaintiff's arguments regarding rectification depend upon a finding that Lain Fung, and more particularly Mr Ng, believed that they had the cover requested, and were led to believe this by the defendant, my findings above conclude this part of the matter, but I will also, for the sake of completeness, briefly look at the issues of law that have been raised by the parties on this subject.

14. From the authorities to which I have been referred, it is apparent that rectification is available where it is found that the policy does not reflect the true intentions of the parties or the agreement made between them as to its terms. It is not necessary to show a previous concluded and binding contract in different terms to those in the policy, but there must have been a common continuing intention with regard to the agreement and some outward expression of accord in relation to the parties' intention. There is a presumption that the policy embodies the real contract between the parties and a strong case is required to rebut it. The first point here is that there was clearly no common intention. I accept, on the evidence, that it was never the intention of the defendant, at any stage, to offer the cover requested. There can be no question of a mistake being made by Mr Yeung in the drawing up of the policies, which embody what he was prepared to give, and for which the proper premium was paid, and Mr Ng does not dispute that the premium charged was the usual premium for ex-China Port insurance. There must be clear evidence that the cover notes and policies do not accurately represent the true agreement of the parties.

15. But Mr Kerr takes the matter a step further. He submits that, just as there is a duty upon an insured to act in utmost good faith, there is similarly a reciprocal duty upon the insurer. That proposition is clear from the judgments in Banque Keyser Ullmann en Suisse S.A. v Westgate Insurance Co. Ltd [1990] 2 Lloyds L R 377, and, indeed, the judgments of the courts below in the same case. But that duty of disclosure is as to facts known to the insurer material to the risk insured. Thus the insured is under a duty to disclose matters which would increase the risk, while the insurer must disclose facts which reduce it, such as giving cover for a voyage which the insurer knows has already been safely completed, an example given by Lord Mansfield in Carter v. Boehm (1766) 3 Burr. 1905. Similarly, there is a duty on the insurer to make it clear to the insured what risk is covered, and must not mislead.

16. What then has the insurer here done to fall foul of these principles? I agree that the cover notes might have been worded in slightly clearer language, and the word "fty" or factory was neither necessary nor relevant. However, this was, as Mr Yeung said, a standard clause, and it is understandable that it should be included unchanged in what they considered a usual cover note and policy. There was not only no intention to mislead, I am satisfied on my findings above that Lain Fung's agent was well aware of the extent of the insurance and had agreed to it and passed this on to their staff. There was no ambiguity as all parties knew what was agreed, and that was not what had originally been applied for. There had been adequate disclosure, and there is no evidence of any sharp practice. The insured had the cover that the defendant was prepared to give, and the latter had received no more than an appropriate premium for that cover.

17. In any event, even had the defendant not made full disclosure, or unintentionally misled the insured, what remedy is available? The plaintiff seeks rectification, but I am far from satisfied that this is a remedy that can be claimed, in the absence of fraud or deceit, of which there is no suggestion here. Unilateral mistake does not assist the plaintiff unless this has been induced by inequitable conduct. As to failure to make full disclosure, it is clear from the Banque Keyser case above that the remedy is a right to avoid the contract, to have it rescinded and the premium refunded. There cannot be any claim beyond that for damages, and certainly not for rectification.

Damage to the goods

18. The next question then is to determine where the damage to the goods occurred, and whether the insurance covered it. The plaintiff's case on this is that it is more likely than not that, firstly, the wet damage to the cartons and the goods occurred upon them being loaded into the containers in Shenzhen, and, secondly, the denting from being mishandled at the same time. They base the first on the fact that the far greater part of the wet damage was to goods loaded and shipped in June and July, months in respect of which I think I can take judicial notice that there is a high likelihood of heavy rain in the southern part of China in the area of Hong Kong and Shenzhen. Both types of damage are also based on the evidence of Mr Ng that he, or his staff, would have inspected the goods in the warehouse prior to loading, when extensive damage would have been apparent.

19. The goods were the subject of examinations by surveyors at Hamburg and the findings are similar in each of their reports. These are to the effect that the goods had been stuffed into the containers in a wet or moist condition, or had been affected by moisture prior to stuffing which had dried off leaving rust marks where staples had corroded, with tins affected by rust. As it was not salt water which had affected the goods, they opined that it was most likely that they had been exposed to rain, combined with condensation from container sweat in the course of the voyage. The denting they attributed to knocks and blows at some stage of the transit as a result of rough and careless handling, and to some extent to bad stowage. There was also a degree of shortage apparently from pilfering. This was a comparatively small amount, with no evidence as to when it occurred. I shall assume for the purposes of this case that it was at the same time, in the handling and loading in Shenzhen.

20. The goods, having arrived in Shenzhen from various parts of China, were stored there in the warehouse for three or four days before being loaded into containers for their sea voyage. During this time, Mr Ng said it was his practice to either inspect the goods himself, or send a member of his staff to do so. The container for the goods would arrive on a lorry which would be backed up to a long concrete apron extending out from the warehouse, and covered by a roof or canopy, open at the front and sides, and with a short gap between the edge of the roof and the top of the container. The goods would be brought out of the door of the warehouse on trolleys to be loaded into the containers by the warehouse staff, and it is likely that they may have to stay for a few minutes between the door of the warehouse and the container before being loaded. It is this period which Mr Kerr urges upon me as the most likely that (a) it rained heavily, and (b) the rain would wet the goods from being, presumably, blown in under the canopy. Mr Ng initially said that the container was loaded inside the warehouse. He then corrected himself and said that it was outside but under the roof so it was protected, but sometimes containers were loaded in the open. There was no evidence at all about these consignments, nor any evidence about weather in the vicinity at the time each shipment was at Shenzhen. I am accordingly asked to infer from the general pattern of weather in the summer in southern China, and the possibility that some of the goods might have spent a short time not totally enclosed in the warehouse, that this was the most likely place for this damage to occur.

21. I regret that I cannot do that. All these goods had, before their arrival in Shenzhen, been on long journeys across China, by various modes of transport, taking three days or more. There is no suggestion that they were in a dry, protected warehouse during this time, and I have no evidence about the way they were handled. What is clear is that this was a time when there was a far greater opportunity for damage to occur by exposure to the elements and rough handling on transfers. Mr Ng says that he, or his staff, inspected the goods in the warehouse at Shenzhen and would have detected any substantial damage. But, as far as the wet damage is concerned, there is no evidence that the cartons were soaked so that they were clearly wet and collapsing. Indeed, Mr Kerr made a point of the fact that there was little evidence of this even after arrival in Hamburg, when they had also been subjected to container sweat, in support of his contention that collapse of the cartons could not be the cause of denting of the tins inside them. Further, Mr Ng was not examining the goods from the standpoint of a surveyor. He was making a general check on the quality of the goods, and would be unlikely to have the time to examine closely what, in many of the shipments, amounted to several thousand cartons, all stacked together in the warehouse. Dampness in the cartons may very well not then be readily apparent, unless one were specifically looking for it, and creased cartons, or even those with rounded corners as if dropped, might not necessarily arouse concern. He had no record of the examination of these shipments, and very fairly said that he had no memory of them. All he could say was what usually happened. I do not consider this good enough to outweigh the very strong inference that the goods were damaged, either by water or handling, in their long journeys across China, rather than in the short time that they might possibly have been exposed to the outside in Shenzhen.

22. But I would take this a step further. Even if the goods had been all damaged in that short window of opportunity in Shenzhen, I am not satisfied that they would have been covered by this insurance. The cover ran from the time they left the warehouse for the commencement of the transit. The point here is whether, in the course of being loaded from the warehouse apron into the container, the goods can be said to have "left the warehouse". I do not think they can. The warehouse is principally an enclosed building, but the apron is part of that building, albeit outside the main walls, and covered by a roof or canopy I assume to be attached to the warehouse. It may well be that the warehouse itself is in a secure area, as they usually are, surrounded by a fence with a gate for access by transport. There are three scenarios when goods might "leave". The first, as Mr Kerr has urged on me, is when they pass out of the door of the warehouse on to the apron. The second is when the lorry carrying the container moves away from the apron to commence its journey, and the third is when it passes out of the gate and leaves the premises completely.

23. I have to say immediately that I cannot agree with the first. The apron is part of the warehouse as an open porch is part of a house. To say that the goods have left the moment they pass through the door on to the apron seems to me to defy common sense. They do not leave until they are physically separated from the warehouse, and they cannot do that until at least they leave any part of the warehouse which is physically part of it. While the lorry is backed up to the apron and the goods are being loaded into it, they are clearly at a stage prior to leaving and commencing their journey. Indeed, although I need go no further than that, I would say that they have not left until they have passed out of the area considered part of the warehouse grounds.

24. The highest that the plaintiff can put its case is that the damage sustained by the cargo was during the period of loading into the containers, or, in the case of a few cartons, from bad stowage. However, as they have not, in my view, left the warehouse at that point, the insurance has not yet attached, and that damage is accordingly not covered.

25. There is only one other matter I would mention before concluding, and that is the point made by Mr Kerr that the defendant has pleaded that the policies were in accordance with the applications and that they are therefore bound by that, and have conceded that the policies should be in the same terms as the applications. This is not how those pleadings read to me. It is pleaded that the assured did not name any place except a China port for the commencement of the transit, and in the premises the policies were in accordance with the applications. It is specifically denied that the cover notes accorded with the applications in so far as the applications contain a request for cover from a factory which might be located anywhere in China. This does not take the plaintiff's case any further.

Conclusion

26. For the reasons above I am satisfied:

(1) that the insurance policies issued by the defendant covered the goods only after leaving the warehouse in Shenzhen and not earlier; and

(2) that the damage sustained by the goods occurred prior to their leaving the warehouse, and was accordingly not covered by this insurance.

27. The plaintiff's claim will therefore be dismissed with an order nisi for costs in favour of the defendant, to be taxed.