NANTONG ANGANG GARMENTS CO LTD v. HELLMANN INTERNATIONAL FORWARDERS LTD

CACV 106/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 106 OF 2011

(ON APPEAL FROM HCCL NO. 117 OF 1994)

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REASONS FOR JUDGMENT

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Hon Tang VP:

1.  These proceedings have a chequered history. The writ of summons was issued on 24 June 1994 by the Plaintiff ("Nantong") against the Defendant ("Hellmann"). Third Parties' proceeding was commenced by Hellmann against the 1^st Third Party ("Silking") in November 1994 and the 2^nd Third Party ("Lerner") on 16 February 1995. On the first day of trial on 19 November 2002, Hellmann submitted to judgment in the afternoon "prior to the completion of the evidence of the plaintiff’s first witness, Mr Daniel Ng Ho Ngor": see para 5 of Stone J's Reasons for Judgment dated 28 November 2002. On the basis of the non-appearance of the Third Parties, on 20 November 2002 Stone J gave judgment against the Third Parties in favour of Hellmann. The Third Parties applied by summons filed on 1 November 2004 to set aside Stone J's judgment. That was dismissed by Stone J on 28 January 2005 but the appeal was successful and on 23 September 2005, this Court (differently constituted) set aside Stone J's judgment against the Third Parties. There was then an unsuccessful application for leave to appeal by Hellmann to the Appeal Committee of the Court of Final Appeal. Leave was refused on 29 September 2006.

2.  Eventually, there was a re-trial of the Third Parties' proceedings before Reyes J in May 2011, at the end of which, Reyes J found in favour of Hellmann and against the Third Parties.  This is the Third Parties' appeal from the Judgment of Reyes J. 

3.  The background to these proceedings has been succinctly set out in the judgment, and I will concentrate on the matters which are relevant to this appeal. 

4.  These proceedings concerned 903 cartons[1] of silk blouses and pants ("the garments"), the subject of 5 purchase orders placed by Silking on behalf of Lerner with Drake International Holdings Ltd.  Those orders had been sub-contracted to Nantong.  The garments were sold on FOB terms and provided for shipments to Lerner in Columbus, Ohio, USA by air.  Payment terms were "LC at sight".  One or more letters of credit ("the LC") in respect of these purchase orders were issued by Citibank, the benefit of which had been transferred to Nantong.

5.  Hellmann is part of a group which had offices worldwide and a liaison office in Shanghai (see Statement of William Chiu).  Presumably, Hellmann was a member of the International Air Transport Association ("IATA") and as such, they were authorised to issue, sign and give out air waybills on behalf of carriers.  These air waybills are known as "house airway bills" ("HAWBs").

6.  By a Letter of Instruction dated 23 February 1994 ("LOI"), Nantong instructed Hellmann to consign the garments to Columbus by air.  As the learned judge has explained in para 26 of his judgment, such carriage "would have been subject to the Warsaw Convention".  It is unnecessary to distinguish between the Warsaw Convention and the Amended Convention, the articles relevant to this appeal (Articles 5 to 14) are not in any material respect different.  The parties have referred us to the Amended Convention in Schedule 1 to the Carriage by Air Ordinance (Cap 500) and I am content to work on the basis of the Amended Convention. 

7.  Following the LOI, Hellmann issued 2 sets of HAWBs ("the Lerner HAWBs") in relation to the garments.  That which the learned judge called "Lerner 1" covered 355 cartons and "Lerner 2" 548 cartons. 

8.  The Lerner HAWBs were of course in 3 original parts, one for the carrier, another, the original consignor's copy, which was signed by Hellmann and handed to Nantong as the consignor; the third, the consignee's copy (Lerner was the named consignee) would have accompanied the cargo.  The destination stated on the Lerner HAWBs was Columbus, USA.  Articles 6 and 8.

9.  Article 13 provided that subject to Article 12, on arrival of the cargo at Columbus, Lerner would be entitled to require Hellmann to hand over to it the consignee original of the Lerner HAWBs which accompanied the cargo, and to deliver the cargo to it.

10.  Under Article 12:

"(1) … the consignor has the right to dispose of the cargo by withdrawing it at the aerodrome of departure or destination, or by stopping it in the course of any journey on any landing, or by calling for it to be delivered at the place of destination or in the course of the journey to a person other than the consignee named in the air waybill, or by requiring it to be returned to the aerodrome of departure. …"

11.  On 3 March 1994 Nantong exercised its power under Article 12 to stop delivery under the Lerner HAWBs such that even if the goods had been carried under the Lerner HAWBs to Columbus, Lerner would not have been entitled to take delivery of them.

12.  What led to the present proceedings?  As the learned judge explained without the knowledge or consent of Nantong, Hellmann on Lerner's instruction (given around 1 March 1994), issued 2 parallel sets of HAWBs (the Silking HAWBs) in relation to the garments.  Silking 1 covered 355 cartons covered by Lerner 1 and Siking 2 covered 548 cartons covered by Lerner 2.  These HAWBs were for carriage of the garments from Nantong in Shanghai to Silking in Hong Kong.

13.  Furthermore:

"10.   Neither Lerner nor Silking wished Nantong to know that the goods were to be delivered in Hong Kong to be subjected to a full inspection."

14.  Contrary to the terms of the purchase orders neither Silking nor Lerner intended that the garments should be paid by "LC at sight".  Mr Terence Au Hoi Fung, the financial director of Silking, said in his witness statement of 7 December 2009:

"17.   … Lerner, … instructed us not to air lift the goods to Columbus, U.S.A. as originally scheduled but to divert them to Hong Kong for thorough inspection and disposal. …"

15.  That such was the understanding was confirmed by Mr William Chiu Hon Kin ("Mr Chiu"), the sales manager of Hellmann at the material time, who said in his supplemental witness statement filed on 8 December 2009, by which time he had become an Assistant General Manager, that:

"12.   … Lerner made it clear that, aside from conducting full inspection (in Hong Kong) F.O.B. Group/Silking would proceed to sell the goods on Lerner's behalf. …"

16.  The Silking HAWBs enabled the garments to be carried to Hong Kong by China Eastern Airlines and they arrived in 3 lots:

"12.   … 270 cartons on 3 March 1994 at 1100 hours; 627 cartons on 3 March 1994 at 1700 hours; and 5 cartons on 5 March 1994 at 0900 hours.  One carton went missing.  It was never delivered."

17.  The garments were released to the Third Parties and Nantong was not paid by "LC at sight", Nantong commenced the present action against Hellmann on 24 June 1994 for damages.  On the first day of trial, Hellmann consented to judgment in favour of Nantong, which in substance provided for payment by Hellmann to Nantong of "US$370,000, such sum to be inclusive of interest and costs"[2].

18.  As explained above, the hearing before Reyes J was a re-trial of the Third Parties proceedings.  Hellmann's claim against the Third Parties was based on a letter of indemnity dated 4 March 1994.  The letter of indemnity read:

"In refer to your letter dated March 01, 94.  Contents is clearly noted.

As an agent act for Lerner, we were instructed that the ... shipment [of 903 cartons] should be routed via HKG and not direct fly to Columbus.

Due to the above said route changed.  We hereby confirm to you that we will undertake and agree to bear full responsibilities/ liabilities whatsoever directly or indirectly arising from or relating to the said route change."

19.  The learned judge said the letter of indemnity was given on 4 March 1994, in consideration of Hellmann’s acting upon Lerner's instruction to carry the goods from Shanghai to Hong Kong instead of to Columbus (para 14).

20.  A fuller description of the events which led to the letter of indemnity can be found, in particular, in paras 11 to 16 of Mr Chiu's supplemental witness statement.  For example, Mr Chiu said:

"11.   … On 3 March 1994, we further received a fax (albeit dated 2 March 1994) from Lerner stating that Lerner had cancelled the orders and instructed us to contact F.O.B. Group/Silking which would be selling off the goods on Lerner's behalf in Hong Kong. …

……

15.    On the same day on 3 March 1994, Hellmann received a fax from the shipper, Nantong Angang, which instructed Hellmann that the goods could not be released to Lerner without their prior permission.  There is now produced and shown to me marked 'CHK-1' a copy of the fax from Nantong Angang.  Hellmann did not reply to Nantong Angang immediately since Allen Law or Irene Wong of Silking had indicated that there was no need to disclose to the shipper that the goods would be delivered to Hong Kong and released to Silking for full inspection (and indeed resale).  Nevertheless, the fax from Nantong Angang rendered it even more imminent for Hellmann to receive the letter of indemnity requested by it.  Therefore, I kept chasing Allen Law/Irene Wong for the letter of indemnity.

16.    On 4 March 1994, Hellmann received (the indemnity). … The indemnity letter was sent to Benjamin Hui by fax and I had also read the fax myself.  As instructed by Benjamin Hui, I specifically told Allen Law that Hellmann would not release the goods prior to receiving the original executed copy of the letter of indemnity.  It was only after the receipt of the original of the letter of indemnity that Hellmann released the goods to Silking on 5 March and 7 March 1994 respectively.  Plainly, in the absence of the letter of indemnity: (i) Hellmann would not have released the goods to Silking contrary to the shipper's instructions (in particular the fax dated 3 March 1994 from Nantong Angang), and (ii) Hellmann would not have continued to withhold from the shipper the fact that the goods were already delivered to Hong Kong and released to Silking.  Indeed, in compliance with Silking's request, Hellmann took no active steps to inform Nantong of the release of goods to Silking in Hong Kong until 21 March 1994, in response to Nantong's enquiry as to the status of the goods.  This clearly shows that Hellmann relied completely on Silking/Lerner to fully indemnify Hellman of Nantong's claims. …"

21.  Mr Charles Sussex SC (appearing for the Third Parties) submitted that the appeal turned on the construction of the letter of indemnity.  He submitted that the letter of indemnity should be read in its factual matrix.  He has referred us to what the New South Wales Court of Appeal said in Pacific Carriers Ltd v. BNP Paribas [2004] 218 CLR 451 at 462, namely:

"… The construction of the letters of indemnity is to be determined by what a reasonable person in the position of (the addressee) would have understood them to mean.  That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to (the parties), and the purpose and the object of the transaction. …"

22.  Mr Sussex relied in particular on Lerner's letter of 1 March 1994 which stated:

"As per your update written instruction on this afternoon regarding the above shipment which should be routed via HKG, you will be much appreciated if you can sign a letter of indemnity to our company, indicate precisely that you will undertake and agree to bear full responsibilities / liabilities whatsoever directly or indirectly arising from or relating to the said route change.  Kindly execute accordingly / immediately.

However, according to the aforesaid route change, we are being claimed by the airline for the deadfreight penalty. Please note that we will bill back those penalties to your company accordingly.  Kindly acknowledge by return.

Thanks in advance for your prompt response and kind co-operation."

23.  Mr Sussex submitted that read with the letter of 1 March 1994, it is clear the letter of indemnity was concerned with "deadfreight penalties and similar consequences of re-routing".  He submitted that the letter of indemnity referred only to "responsibilities/liabilities … arising from or relating to the said change" and that

"… It does not even purport to indemnify Hellmann against the consequences of delivering the goods to Lerner/Silking in circumstances where they had no right to receive the goods".

24.  However, he said at para 26 of his skeleton:

"It is clear that Nantong was unaware that the goods had been carried to Hong Kong when they exercised their right of stoppage. They were requiring that the goods be not delivered to Lerner.  What they did had nothing to do with the route change.  They merely wanted to secure themselves against non-payment."

25.  And at para 16 Mr Sussex submitted:

"Nevertheless, in wilful disregard of those instructions, Hellmann delivered the goods to Silking in Hong Kong. Silking was unaware that Nantong had exercised its right of stoppage."

26.  I will deal first with deadfreight.  Mr Chiu, who drafted the letter of indemnity, explained in his supplemental witness statement:

"9.     I also put in a new and separate paragraph of the fax about the deadfreight penalty that Hellmann would be facing as a result of the route change and reserved our rights to bill back those penalties to F.O.B. Group / Silking.  This is a matter separate from the letter of indemnity.  It can be seen that the first paragraph of the fax concluded by requesting Silking to execute a letter of indemnity immediately.  The second paragraph then started with the word 'However', which indicates that the letter went on to deal with a different topic.  In respect of such liability, Hellmann simply reminded Silking that it reserved its right to bill back those penalties to Silking and asked Silking to acknowledge by return.  The effect of the second paragraph is similar to an earlier fax dated 22 February 1994 by Hellmann to Silking, in which we informed Silking that Hellmann was facing the claim from the relevant airline for the deadfreight.  In that fax, Hellmann informed Silking that it reserved its right to claim back the liability against Silking.  It merely requested Silking to acknowledge by return.  Hellmann never asked Silking to execute a letter of indemnity in respect of deadfreight penalty.

10.    Therefore, it was crystal clear to everyone at the time that Hellmann's request for indemnity was not concerned with the deadfreight penalty which the airline company may claim against Hellmann for air space cancellation from Shanghai to Columbus.  Nor was it limited only to a mere route change. Rather, it was made to protect Hellmann from all the risks and claims of complying with Silking's instructions notwithstanding the contrary instructions from the shipper.  Such an indemnity is particularly important given the instructions by Silking to Hellmann not to disclose to the shipper that the goods would be delivered to Hong Kong and released to Silking for full inspection."

27.  In my view, even without the benefit of the evidence of Mr Chiu, it is quite clear that the letter of indemnity was not solely concerned with deadfreight, which was dealt with specifically in a separate paragraph in the letter of 1 March 1994.  In my opinion, given the circumstances which led to the letter of indemnity, it is quite clear that it was intended and understood by the parties that Hellmann was to be indemnified for the consequence of the carriage of the garments to  Hong Kong.  The expression "re-routing" covered the issuance of the Silking HAWBs which led to the carriage of the garments to Hong Kong so that the Third Parties could obtain the garments for inspection and resale and to bypass the right of Nantong as consignor under the Lerner HAWBs. 

28.  The suggestion that the Third Parties were not aware of the stoppage by Nantong under Article 12 is a red herring.  Lerner did not take possession of the goods as consignee under the Lerner HAWBs. 

29.  Nor was the letter of 1 March 1994 the only relevant factual matrix.  The factual matrix included Hellmann and the Third Parties acting in total disregard of Nantong's rights as consignor under the Lerner HAWBs, in procuring the carriage of the garments to Hong Kong on the strength of the Silking HAWBs so that Silking might take delivery of them under the Silking HAWBs.  Obviously, Hellmann would not have permitted Silking to take delivery of the garments without the benefit of the letter of indemnity. It is in such context that one should construe the letter of indemnity.  I am in respectful agreement with the learned judge that properly construed it covered the damages which Hellmann was liable to pay Nantong.

30.  Nor does it matter whether the Third Parties were entitled vis-à-vis Hellmann to take delivery of the garments under the Silking HAWBs.  That was not the concern of the letter of indemnity.  In my opinion, given the circumstances, in particular, the re-routing under a parallel set of HAWBs so that the Third Parties could take possession of the garments notwithstanding Nantong's rights as consignor under the Lerner HAWBs, the expression in the letter of indemnity:

"… we will undertake and agree to bear full responsibilities/liabilities whatsoever directly or indirectly arising from or relating to the said route change."

was intended and apt to cover Hellmann's liabilities to Nantong under the Lerner HAWBs. 

31.  Construction of the letter of indemnity was the only argument relied on by Mr Sussex.  I believe it was the only issue on appeal.  In any event, in respect of the other points raised in the Notice of Appeal and the Supplemental Notice of Appeal, I am in respectful agreement with Reyes J.

32.  For the above reasons, I have dismissed the Third Parties' appeal with costs.

Hon Kwan JA:

33.  I agree with the reasons for judgment of the Vice President.  It is unnecessary to address Mr Sussex's arguments on common law indemnity as that was not the subject of the judge's decision.

Hon Fok JA:

34.  I agree with the Reasons for Judgment of Tang VP.