LONG EMPEROR LTD v. SCANWELL CONSOLIDATORS LTD AND ANOTHER

HCA 2190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2190 OF 2002

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J U D G M E N T

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I. Background

1. On about 15 October 2001 the Plaintiff received 3 Purchase Orders from Donnkenny Apparel Inc. ("Donnkenny") (through the latter's buying agent Kasmen Limited ("Kasmen")) for 18,000 pieces ladies' coloured 100% cotton knitted sweaters ("the Finished Goods") at a total price of US$83,730 ($653,094). Donnkenny stipulated that the Finished Goods should be shipped from Bangladesh (where the Finished Goods would be made) on or before 15 December 2001. On 29 October 2001 Kasmen and the Plaintiff signed 3 Sales Contracts ("the 3 Contracts") for the Finished Goods.

2. When the Plaintiff received the Purchase Orders it placed an order with Man Hing Hong ("MHH") in Hong Kong for 4,416.66 kgs of 2/20 100% combed cotton yarn dyed in various colours ("the Cotton Yarn"). The Plaintiff envisaged that the Cotton Yarn would be shipped to Dhaka in Bangladesh where Classic Supplies Ltd. ("Classic") would use the same to manufacture the Finished Goods for the Plaintiff. On 10 November 2001 MHH invoiced the Plaintiff for US$23,805.80 ($185,685.24) in respect of the Cotton Yarn.

3. By a Shipping Order ("the Shipping Order") prepared on about 1 November 2001 the Plaintiff instructed the 1st Defendant to carry a container stuffed with the Cotton Yarn (packed in 129 cartons) to Dhaka on board the vessel "SOROE MAERSK" ("the vessel"). The vessel was estimated to depart Hong Kong on 4 November 2001 and arrive Dhaka on 21 November 2001. Ms So Lai ("Ms So") of the Plaintiff filled in the Shipping Order pursuant to information on the vessel's sailing times and destination provided by Ms Carol Ma ("Ms Ma") of the 1st Defendant. It was intended that the Cotton Yarn would be delivered to Classic in Dhaka.

4. By an International Bill of Lading No. HKDHA073845 ("the Bill of Lading") dated 4 November 2001 in Hong Kong, the 2nd Defendant acknowledged receipt from the Plaintiff of a Container No. MAEU6770109 ("the Container") stuffed with the Cotton Yarn for carriage on the vessel and discharge in Dhaka. The Cotton Yarn was consigned to the order of Mercantile Bank Ltd. and named Classic as Notify Party. The reverse of the Bill of Lading contained the following terms:-

Clause 2.2: "'Carrier' means Scanwell Container Line Ltd. on whose behalf this Bill of Lading has been signed."

Clause 4.1: "Carrier is entitled to perform the transport in any reasonable manner and by any reasonable means, methods and routes."

Clause 6.4: "Carrier does not undertake that the goods shall be delivered at any particular time and shall not be liable for any direct or indirect loss caused by any delay."

Clause 14.3: "If goods should remain in Carrier's custody after discharge from the ship and possession is not taken by Merchant, after notice, within the time allowed in Carrier's applicable tariff, the goods may be considered to have been delivered to Merchant, and, at Captain's option, may be stored at Merchant's expense."

Clause 16.2: "Freight shall be deemed earned on receipt of goods by Carrier, whether the freight be intended to be prepaid or collected at destination ..."

Clause 17: "... the Carrier may sell at public auction or private sale ... the goods, wares and/or merchandise ... and apply the net proceeds of such sale to payment of the amount due the Carrier ..."

5. The vessel formed part of the fleet of Maersk Sealand. At all material times the 1st and 2nd Defendants acted on information about the sailing time and destination of the vessel provided to them by Maersk Hong Kong Limited ("Maersk"). Unfortunately, there was a communication problem with Maersk. At the Plaintiff's request, Ms Ma had telephoned Maersk to inquire about sailings to Dhaka in early November. An unidentified Maersk officer at the other end of the telephone line must have misunderstood what Ms Ma said. Instead of "Dhaka," the Maersk officer appears to have heard "Dakar" and come under the impression that the Cotton Yarn was to be shipped to Senegal rather than Bangladesh. The Maersk officer therefore gave particulars for the vessel, which was sailing for Dakar (not Dhaka) on 4 November 2001.

6. Although Maersk issued some documents (such as an MTL Equipment Interchange Receipt ("the Receipt")) to the 1st Defendant indicating that Maersk had in mind Dakar as the place of delivery, the discrepancy was not spotted by Maersk or the Defendants. Indeed, the Sea Waybill No. HKGN22552 which Maersk issued to the 1st Defendant for the Cotton Yarn stated that the vessel was bound for Chittagong and delivery would be in Dhaka. It was not until after the Cotton Yarn had been loaded on board and the vessel had left Hong Kong that the mistake was discovered.

7. Various proposals were made between Maersk and the Defendants on how the situation might be remedied. The Defendants proposed that Maersk send the Cotton Yarn by air freight from Alge?iras to Dhaka at Maersk's expense. Maersk did not accept this. Maersk suggested instead that the Cotton Yarn be shipped on 24 November 2001 from Alge?iras to Tanjung Pelapas and then on-shipped to Chittagong for delivery in Dhaka. If that plan were adopted, the Cotton Yarn would arrive in Dhaka on about 23 December 2001. Later, the sailing date from Alge?iras was revised to 27 November 2001 on the vessel "CARSTEN MAERSK" ("the Return Vessel").

8. Having learned what had happened to the Cotton Yarn, the Plaintiff was understandably upset since it had committed to Donnkenny and Kasmen to ship the Finished Goods from Dhaka by 15 December 2001. Told of Maersk's proposal to ship the Cotton Yarn from Alge?iras, the Plaintiff told the Defendants that the Plaintiff could confirm a decision by 26 November 2001. But Maersk replied to the Defendants that, if Maersk were only instructed to load the Return Vessel on 26 November 2001, it "may not [be] possible [to] load ... [the] container to expected vessel due to operation problems". The Plaintiff does not seem to have definitively replied to the Defendants on the proposal for shipping the Cotton Yarn on the Return Vessel.

9. By letter dated 28 November 2001 the 1st Defendant informed the Plaintiff that Maersk would in any event be sending the Cotton Yarn to Dhaka on board the vessel "SVEND MAERSK" on 4 December 2001. Delivery might then be expected in Dhaka on about 29 December 2001.

10. By letter ("the November letter") dated 30 November 2001 to the 1st Defendant, Messrs Belinda Ip & Co. (the Plaintiff's then solicitors) replied as follows:-

"Kindly note that our client will not accept the above captioned container and its cargoes now arranged to be shipped back to Bangladesh. As you admitted that you have breached the Bill of Lading by failing to deliver the container to the designated destination (as admitted by way of your letter dated 22nd November 2001). By the said breach, our client is entitled not to accept the late delivery.

Further, please be informed that the end users of the goods contained in the said container have indicated that they will not take up the said cargoes because of the late delivery. Resulting, our client suffered losses and damages economically and more important reputation and future order would be affected.

By the aforesaid reasons, we reiterate that our client will not accept the said container. In addition, we hold you fully liable for our client's losses and damages resulting from or incidental to your wrongful delivery. We repeat paragraph 3 and 4 of our last letter to you and our client's loss would be in the estimation of HK$1,200,000.00."

11. The Plaintiff refused to take delivery of the Cotton Yarn in Dhaka at all. This was probably because on about 28 November 2001 Kasmen on behalf of itself and Donnkenny had cancelled the 3 Contracts due to the delay in shipping the Finished Goods which would inevitably arise from late arrival of the Cotton Yarn in Dhaka.

12. Mr Jonathan Wong (who appears for the Defendants) tells me that the Cotton Yarn remains in the Customs House in Bangladesh. There was correspondence after November 2001 among solicitors for the Plaintiff, Defendants and Maersk as to the disposal of the Cotton Yarn by auction in Dhaka. But that intended course of action seems to have been abandoned. It is unclear whether that was because the Cotton Yarn has little or no value and no one would be interested in buying the same at auction or because the cost of clearing the Cotton Yarn through Customs would exceed the re-sale price of the same or because of some other reason.

13. The Plaintiff claims both the cost of the Cotton Yarn and the profit lost on the 3 Contracts. The Plaintiff says that its lost profit was $467,408.76. It arrives at this figure by deducting the cost of the Cotton Yarn ($185,685.24) from the total consideration ($653,094) agreed under the 3 Contracts.

14. The Defendants counterclaim for $13,355, comprising the following items:-

Ocean Freight	$9,750
Terminal Handling Charges	$2,065
Transportation Charges	$1,400
Documentation Fee	$ 140

The terminal handling and transportation charges are expenses incurred by the Defendants in delivering and collecting the Container to and from the Plaintiff's premises and then loading the Container on board the vessel. The documentation fee concerns the preparation of the Bill of Lading. The items claimed by the Defendant are evidenced by an Invoice No. OEI-0101252 dated 4 November 2001 sent by the 1st Defendant to the Plaintiff. The Defendant originally counterclaimed for other items. But at the end of the 1st day of trial Mr Wong limited his case to the amounts which I have just enumerated.

15. The Defendants sued Maersk as a Third Party in this action for an indemnity against liability towards the Plaintiff. By the Order of Andrew Cheung J dated 2 September 2003 the Defendants and Maersk settled the Third Party Proceedings upon payment by Maersk of $88,124 in full and final settlement of the Defendants' claims against Maersk. The Defendants and Maersk agreed that they would each bear their own costs.

II. Discussion

16. Both the 1st and 2nd Defendants are liable to the Plaintiff for breach of contract.

17. In accepting the Shipping Order the 1st Defendant entered into a contract with the Plaintiff to arrange for carriage of the Cotton Yarn from Hong Kong to Dhaka. The 1st Defendant failed to perform this obligation in a proper manner. It instead arranged for shipment of the Cotton Yarn to Dakar. The misdelivery to Senegal may have been unintentional on the 1st Defendant's part, but that is not a relevant consideration when considering whether it has breached its agreement with the Plaintiff. In any event, I am prepared to conclude on the evidence that the 1st Defendant was negligent in failing to spot earlier (from (for example) the Receipt) that the Cotton Yarn was being shipped to Dakar rather than Dhaka.

18. By the Bill of Lading the 2nd Defendant (as bailees) acknowledged receipt from the Plaintiff (as bailors) of the Cotton Yarn for delivery of the same to Dhaka. The terms of bailment were evidenced by the Bill of Lading and here constituted a contract of carriage. The contract was to deliver the Cotton Yarn by a reasonable route to Dhaka. It was not reasonable to discharge such obligation by sending the Cotton Yarn to Dakar and then arranging for on-shipment to Dhaka. The 2nd Defendant was accordingly in breach of the contract of carriage with the Plaintiff contained in or evidenced by the Bill of Lading. Again, I am prepared to find that the 2nd Defendant was negligent in issuing a Bill of Lading for Dhaka delivery when it should have spotted earlier from documents such as the Receipt that Maersk had made a mistake.

19. The Defendants rely on clauses 4.1 and 6.4 of the Bill of Lading as exonerating them from breach. I do not accept that those provisions excuse the Defendants. Clause 4.1 requires the defendants to transport goods by a reasonable route. As just mentioned, it is not reasonable to ship goods to Dhaka by first sending them to Dakar. Moreover, the Defendants must have been under an implied obligation to see that the Cotton Yarn was delivered to Dhaka within a reasonable time. As a result of the deviation to Alge?iras and Dakar, the time taken to bring the Cotton Yarn to Bangladesh cannot have been reasonable. Mr Wong accepts that Clause 6.4 does not exclude liability in negligence in the execution of a contract. As stated above I think that the Defendants were both negligent in material ways.

20. The real question is the measure of the Plaintiff's damages. Ms Anna Saing (appearing for the Plaintiff) accepts that the operative principle on that issue is the rule in Hadley v. Baxendale (1854) 9 Exch 341. Damages should be:-

(1)	such as may fairly and reasonably be considered as arising naturally (that is, according to the usual course of things) from breach of a relevant contract; or,
(2)	such as may reasonably be supposed to have been in the contemplation of both parties, at the time when they made the contract, as the probable result of a breach of the relevant contract.

Where it is sought to rely on the 2nd limb of Hadley v. Baxendale to claim lost profit, it is usually necessary to show that at the time of contracting a plaintiff "brought home" to the defendant's mind the specific loss which might arise from a failure by the defendant to meet his contractual obligation.

21. Ms Saing accepts that the Defendants had no knowledge of the 3 Contracts at the time when the Shipping Order was submitted by the Plaintiff or the Bill of Lading issued by the Defendants. She notes, however, that there were some 9 other previous similar transactions between the Plaintiff and the Defendants whereby yarn and knitted goods were shipped to Dhaka. Prior to those 9 transactions, Mr Alexander Yiu ("Mr Yiu") of the Defendants visited the Plaintiff to learn more about the Plaintiff's business and ascertain ways in which the Defendants could provide freight forwarding services to the Plaintiff. Ms Ma would from time to time have tea with Ms So when the Plaintiff's business would be discussed. Ms Saing submits that the Defendants ought to have known that the Plaintiff was in the business of delivering raw materials to Bangladesh for wholesale manufacture into garment wear destined for third parties. The possibility that the Plaintiff had sale contracts with wholesalers such as Donnkenny ought therefore (Ms Saing suggests) to have been reasonably contemplated by the Defendants. If so, the Defendants ought to have realised that late delivery could lead to the cancellation of such contracts and financial loss to the Plaintiff.

22. I do not accept Ms Saing's argument. I do not think that mere discussions between Mr Yiu or Ms Ma on the one hand and Ms So on the other would be sufficient to "bring home" to the Plaintiff the consequences (in terms of lost profit) of late delivery. I note that no particulars were given in the evidence as to precisely what aspects of the Plaintiff's business was discussed with Mr Yiu or Ms Ma. In my judgment, general discussion on the manufacture of garments from cotton yarn would lack the particularity necessary to bring the 2nd limb of Hadley v. Baxendale in play. Given that the Defendants were not specifically aware of the existence of the 3 Contracts or their terms, I am unable to conclude that the Defendants should have reasonably contemplated that late delivery in Dhaka would result in lost profit on those 3 Contracts.

23. At the trial I drew Ms Saing's attention to the fact that the damages claimed by the Plaintiff incorporated double counting. Not only is lost profit on the 3 Contracts claimed, but the Plaintiff also wishes to be reimbursed the price of the Cotton Yarn payable to MHH. Had the 3 Contracts proceeded smoothly, the cost of the Cotton Yarn would have had to come out of the consideration paid by Donnkenny to the Plaintiff. The Plaintiff has simply calculated its lost profit by subtracting the cost of the Cotton Yarn from the gross amount to be paid by Donnkenny. In other words, if I were to accede to the Plaintiff's claim, the Plaintiff would be better off than it would have been had there been no mis-delivery to Dakar. The Plaintiff would in effect receive the entire consideration payable by Donnkenny without deduction of production costs. Indeed, the Plaintiff has not even adduced evidence of the amount that it would have paid Classic for the manufacture of the Finished Goods. Commercial sense suggests that Classic could not have agreed to manufacture the Finished Goods for free. Thus, not just the cost of the Cotton Yarn must be deducted from the gross amount payable by Donnkenny under the 3 Contracts, so should the amount payable by the Plaintiff to Classic (whatever that amount might be). Consequently, on any analysis, as a matter both of law and commonsense, the Plaintiff's claim for lost profit is untenable.

24. In the alternative, Ms Saing claims the cost of the Cotton Yarn. She says that cancellation of the 3 Contracts meant that the Cotton Yarn had become valueless. The Cotton Yarn was dyed to colours chosen by Donnkenny on the basis of "lab-dip" samples. The colours (and so the Cotton Yarn dyed to those colours) were specific to Donnkenny's requirements. This means, if Donnkenny cannot use the Cotton Yarn, no one else would be interested in them. The Cotton Yarn's market value upon late delivery in Dhaka was effectively nil. The measure of damages should be the difference between the market value of the Cotton Yarn had the same arrived on time and the market value of the Cotton Yarn at the time of actual arrival. The measure should be equivalent to the invoice value of the Cotton Yarn.

25. I think that Ms Saing is correct in this alternative measure. Mr Wong submitted that the Cotton Yarn must still have a significant value. But Mr Wong's information about the Cotton Yarn remaining unsold militates against his point. No one seems to think that the Cotton Yarn in the Customs House in Bangladesh is worth bothering about. This is despite the fact that under clause 17 of the Bill of Lading the 2nd Defendant has the power to sell the Cotton Yarn and recover any unpaid charges from the sale proceeds. In all the circumstances, it is hard to see the Cotton Yarn being worth any substantial amount.

26. I conclude that, subject to the validity of the counterclaim (see below), the Plaintiff is entitled to damages of $185,685.24.

27. On the counterclaim, I think that the Defendants are entitled to $13,355 and that amount should be set off against the Plaintiff's damages of $185,685.24.

28. Ms Saing submits that by the November letter the Plaintiff accepted the Defendants' anticipatory repudiatory breach. By 30 November 2001 (the date of the November letter), there was no way that the Defendants could have delivered the goods in Dhaka within a reasonable time of their shipment from Hong Kong. The November letter (Ms Saing says) brought the Plaintiff's contracts with the Defendants to an end. Ms Saing argues that the charges claimed by the Defendants ceased to be payable once the contract of carriage came to an end.

29. I do not accept Ms Saing's argument.

30. First, as Ms Saing herself concedes, she has not specifically pleaded that the November letter constituted an acceptance of the Defendant's repudiatory breach. It is true that the November letter is mentioned in Reply and Defence to Counterclaim §9. But this is to plead that by the November letter "the Plaintiff informed the Defendants that they would not take up the Unprocessed Goods as Donnkenny had cancelled the Sales Contract". No conclusion is drawn in the pleading. I doubt that it is now open to Ms Saing in closing submission to raise this new matter. Had he known of the point, Mr Wong may have wished to explore factual matters in relation to Ms Saing's argument (for example, whether the November letter was understood by all parties as an unambiguous acceptance of the Defendants' breach) in the course of examination and cross-examination of witnesses.

31. Second, Ms Saing's argument does not strike me as sound in law. Termination of a contract by acceptance of a repudiatory breach does not render a contract void ab initio. The contract is only avoided from the time of acceptance. The Plaintiff would have remained liable in respect of obligations already incurred, but left unfulfilled, at the time of acceptance. All the items forming part of the counterclaim were incurred on or before 4 November 2001, the date when the vessel left Hong Kong. Freight (calculated on the basis stated in the Bill of Lading that the Cotton Yarn was headed towards Dhaka) was incurred on the date of shipment by clause 16.2 of the Bill of Lading. It follows that the Plaintiff would have remained liable for all items claimed by the Defendants, notwithstanding any alleged termination of any contract by the November letter. I add that I am not persuaded by Ms Saing's suggestion that the Plaintiff should not be bound by clause 16.2 of the Bill of Lading because Ms So was not fully aware of the terms in the Bill of Lading. In an ordinary commercial context such as here, a party's failure to acquaint himself with the terms of a contract cannot excuse him from being bound by those terms.

32. Third, I doubt that the November letter is sufficiently unambiguous to constitute a clear acceptance terminating a contract. But given my conclusions above, it is unnecessary for me to make any specific finding on this ground.

33. I conclude that the Defendants are entitled to set off their counterclaim for $13,355 against the $185,685.24 due to the Plaintiff.

III. Conclusion

34. There will be judgment for the Plaintiff in the net amount of $172,330.24 ($186,685.24 - $13,355). Interest will run on that sum at 1% over Hong Kong prime from the date of writ until date of judgment and thereafter at the judgment rate.

35. I will hear counsel on costs.