Savino Del Bene China Ltd. v. Convac Technologies Ltd.

DCCJ3504/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3504 OF 2001

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J U D G M E N T

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1. The Plaintiff carried on the business of a freight forwarder. In about early October 2000, the Defendant engaged the Plaintiff to convey by air two lots of DVD machines ("the Goods") respectively from Germany and Switzerland to Hong Kong for the purpose of an exhibition held from 15 to 17 November 2000 in the Hong Kong Exhibition Centre ("the Convention Centre"). According to clause 16.2 of the Agreement signed by both parties ("the Agreement"), it required the Goods to arrive at the Convention Centre on or before 8 am on 12 November 2000.

2. A small portion of the Goods arrived in Hong Kong on 11 November 2000 and delivery was made on the same day. Unfortunately, due to the delay caused by the airline company, a large portion of the Goods only arrived in Hong Kong on 13 November 2000, and delivery was made at about 10 am on the same day. The Defendant accepted delivery on both occasions and duly used the Goods for the purpose of the aforesaid exhibition. However, according to the Defendant, it did suffer loss as a result of the late delivery, including: (i) overtime payment for the Hong Kong engineer in the sum of HK$46,465.01; (ii) cost of sending extra engineers from Germany in the sum of $156,550.97; and (iii) cost of extra rental for equipment, hall and extra material in the sum of $24,000; a total of $227,015.98.

3. Although I do not have to deal with this particular issue, I certainly have some reservation about the genuineness of the quantum of such loss. Firstly, in the exchange of correspondence between the parties after the incident, the Defendant initially claimed that the loss was only $21,317. It was subsequently increased to $75,265, but it was far less than the amount of loss claimed by the Defendant in the pleadings. Secondly, I suppose that the Defendant would only have to arrange engineers flying from Germany after learning about the late delivery of the Goods. However, according to the Schedule of Loss prepared by the Defendant, these engineers actually arrived in Hong Kong on 12 November 2000, which was the same day as the agreed date of delivery stipulated in the Agreement. In such circumstances, one would certainly query whether such engineers flew to Hong Kong just because of the late delivery.

4. In the Summons by the Plaintiff dated 12 April 2000, the Plaintiff is relying on Order 14, rule 1, and Order 14A, rule 1 of the Rules of the District Court, Cap. 4, to ask this court to grant judgment in favour of the Plaintiff. The terms of the Summons read as follows:

"(1) That the following question of law may be determined, namely, whether clause 16.2 of the Agreement dated 26 October 2000 purportedly made between the Plaintiff and the Defendant is a penalty clause;

(2) That if the said question be answered in the affirmative, final judgment in this action be entered against the Defendant for the amount claimed in the Statement of Claim with interest, as therein claimed;

(3) Costs of this action and of this application be to the Plaintiff to be taxed if not agreed and be paid to the Plaintiff forthwith."

5. Paragraph (1) of the Summons relates to the construction of clause 16.2 of the Agreement. The said clause reads as follows:

"16.	Penalty
16.1	The equipment mentioned in the Appendix 1 and 2 have to be in HKCEC at maximum 8 am on Sunday 12 November 2000 provided that CONVAC makes the equipment ready for pick-up not later than 6 November 2000.
16.2	For any reason that the equipment cannot arrive on Sunday 12 November 2000 at 8 am at HKCEC, SAVINO will take up all the transportation charges."

6. The difficulty with the Plaintiff's summons is that the court can only grant judgment in favour of the Plaintiff if I answer the question raised in paragraph 1 in the affirmative. Hence, if I answer the question in the negative, or that the court does not see fit to invoke the jurisdiction under Order 14A to make the determination, then there is no basis for the Plaintiff to obtain judgment against the Defendant.

7. Bearing the aforesaid in mind, the first question that the court has to decide is whether the court should invoke the jurisdiction under Order 14A to make a determination of a point of law. The difficulty facing the Plaintiff is that there is considerable dispute of facts between the parties relating to the making of the Agreement. According to the Plaintiff, the penalty for late delivery as specified in clause 16.2 was not raised in the discussion leading to the conclusion of the Agreement, while the Defendant claimed that its representative, Mr Abdel Ghaffar, did actually raise such issue. There is no dispute, however, that the parties actually signed a written agreement containing this term.

8. According to the principles as laid down in Cable & Wireless HKT International Limited v New World Telephone Limited [2000] HKEC 368, Rockwin Enterprises Limited v Shui Yee Limited and Others [2001] HKEC 1102 and Maxmedia Limited v Roberto de Vido HCA A4233/2000, the court should not invoke the Order 14A jurisdiction to make a final determination on a point of law if there is substantial dispute about the facts relevant to its determination. However, in order to overcome this hurdle, Mr Ng for the plaintiff made a difficult decision conceding the facts raised in paragraphs 3 and 4 of the Affirmation of Abdel Ghaffar and paragraph 4 of the Affirmation of Chu Kit-shan. This is a formal admission on the part of the Plaintiff, and Mr Ng perfectly understands that he cannot challenge the Defendant's evidence in this regard later in the trial, if there is one.

9. By reason of the above admission, there is no more dispute of fact relating to the determination of the penalty clause issue, and I see no reason why the court should not determine this point of law at this stage. As this issue forms one of the main disputes between the parties, a determination will certainly save time and cost, and it would further assist the parties in the efficient disposal of the action. I therefore invoke the jurisdiction under Order 14A to determine the point of law as to whether clause 16.2 of the Agreement is a penalty clause or not.

10. Both parties do not dispute that clause 16.2 of the Agreement provides for withholding of payment of freight charges if the Plaintiff failed to comply with the terms of the Agreement, and it was not a typical "entire obligation clause". Indeed, on proper reading of the said provision, it cannot be said that it is an "entire obligation clause". The clause provides that the Plaintiff would have to pay for the freight charges if it failed to deliver the Goods before the agreed time, and so the question remains whether this is a penalty clause or not.

11. The question whether a sum stipulated for in a contract is a penalty or liquidated damages is a question of law. Lord Dunedin, in delivering his opinion in the Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79, summed up the law in the following propositions (at pp. 86-88):

"(1) Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages... ... ...

(2) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage.

(3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of the breach.

(4) To assist this task of construction various tests have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are:

(a) It will be held to be a penalty if a sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach.

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money and the sum stipulated is a sum greater than the sum which ought to have been paid... ... ...

(c) There is a presumption (but no more) that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage. On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of a breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was a true bargain between the parties."

12. In my judgment, the facts of the present case certainly support that clause 16.2 is a penalty clause. Firstly, it was so labelled by the Defendant who drafted the Agreement. Secondly, the clause provides for a single lump sum payable or withheld by way of compensation on the occurrence of one or more or all of the several events, some of which may occasion serious and other but trifling damage. Imagine that the delivery was only late for one minute and another case in which the delivery was late for a few days, the loss suffered by the Defendant would be very different. In the case of the former, the Defendant would not suffer any damages at all, but if the delivery was late for a few days, the Defendant may suffer tremendous loss which, according to them, may amount to millions of dollars. Further, there would be no difficulty in assessing the actual loss suffered by the Defendant in different scenarios. Hence, I cannot accept that, even if such matter had been raised by the Defendant in the discussion leading to the conclusion of the Agreement, the clause did represent a genuine pre-estimate of the loss by the parties.

13. It is the Defendant's case that the exhibition was so important to it, and so they should be free to fix a sum as liquidated damages in the case of late delivery. However, imagine that the delivery was late for a few days, and as a result the Defendant could not use the Goods in the exhibition. The loss suffered by the Defendant in such a scenario would be tremendous. In such circumstances, is the Defendant seriously asserting that his claim is only limited to the freight charges? In my judgment, the answer is clearly no. Clause 16.2 is certainly a penalty clause in the true sense. If the Plaintiff was late, no matter how slight was the delay, then it had to be punished for such act.

14. I therefore answer the point of law in the affirmative. The next question I have to consider is whether I should grant judgment in favour of the Plaintiff under Order 14. It is common ground that the Plaintiff had delivered the Goods to the Defendant, and so the former was entitled to the freight charges as agreed by them. In an action for freight charges, it is an established common law rule that a defendant would not be allowed to set up a defence or counterclaim in respect of the cargo, and this principle has been held to apply to a claim for air freight charges by a freight forwarder (See: RH & D International v IAS Animal Air Services [1984] 2 All ER 203, Aries Tanker Corporation v Total Transport Ltd [1977] 1 Lloyd's Rep. 334, Emery Air Freight Corporation v Equus Tricots Ltd [1989] 1 HKC 541 and RAF Forwarding (HK) Ltd v Wong Angela Trading as JMT Co. [1999] 2 HKC 135). Further, the two Hong Kong authorities above did also lay down the principle that upon an application for summary judgment for freight charges, there would not be a stay of execution pending the determination of the counterclaim.

15. Based on the aforesaid, I grant judgment in favour of the Plaintiff against the Defendant for the amount claimed in the Statement of Claim, and I now hear the parties' submissions on the questions of interest and costs.