ORIENTAL AIR TRANSPORT SERVICE LTD. v. CARGOCARE HONG KONG LTD.

HCA5945/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5945 OF 1997

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J U D G M E N T

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1. The plaintiff and the defendant are both Hong Kong companies, carrying on business as freight forwarders. The defendant is the subsidiary of a Swiss company, Cargocare AG. Originally, the plaintiff acted as the Hong Kong agent of Cargocare AG. They had a profit-sharing agreement. In the late 1980s, the defendant company was set up in Hong Kong and was in effect substituted for its Swiss parent in the relationship with the plaintiff.

2. On 19 June 1991, the parties entered into an Agency Agreement whereby the defendant appointed the plaintiff as its handling agent in Hong Kong. The purpose of the agreement was stated as being "to co-operate in the airfreight forwarding traffic between Hong Kong and cities worldwide." It contained a specific profit-sharing agreement in respect of Hong Kong/Switzerland traffic. The parties continued in co-operation under this agreement and a Supplemental Agency Agreement dated 11 April 1996 until the defendant gave three months' notice of termination of the agreement on 19 September 1996.

3. Following termination, on 11 January 1997 the plaintiff through solicitors demanded payment of an alleged outstanding balance of $2,289,292.50. The defendant replied on 3 March 1997 that the balance due by it was $366,108.76 and tendered a cheque. This the solicitors accepted by their letter of 7 March 1997, without prejudice to the plaintiff's claim for interest which was stated to be $305,433.65. Ultimately, the claim for interest was reduced to $184,085.70, being interest on various payments which the plaintiff claimed were due by the defendant, but not paid, as at 11 April 1996 and thereafter. The defendant did not pay the interest demanded.

4. The plaintiff now claims this sum of $184,085.70. The defendant denies liability for the interest claimed, and counterclaims for additional profit which it says the plaintiff failed to declare and pay.

5. The clauses of the Agency Agreement of 19 June 1991, which are of particular relevance to this case, are clauses 6 and 7 which read as follows:

"6. Profits arising from the traffic Hong Kong/Switzerland shall be shared on a 70/30 percent basis, i.e. 70% for CCL and 30% for OATS.

7. Profits will be calculated according to the following formula:

Airfreight charges-as per H-AWBs		XXXXX.XX
Less -	Airfreight charges paid to airline
	- Garment rack charges, if any
	- Trucking charges at destination, if any
	- Handling commission for Macau agent, if any	-XXXXX.XX
Profit to be shared as per para 6.		XXXXX.XX

8. All accounting transaction, including payment of invoices will be handled between Cargocare (HK) Ltd and Oriental Air which must be settled on a credit term of 45 days, i.e. the transaction made between 1-15th of the month will be settled on or before the 15th of next month and the transaction made between 16-30th of the month will be settled on or before the 30th of next month."

6. The following clauses of the Supplemental Agency Agreement of 11 April 1996 are also particularly relevant here:

"1. This supplement is to supersede the Clause 8 implemented in the agreement of the 19th June 1991, commencing on today's date.

2. This agreement shall be valid as from today's date.

3. Each party shall settle the payment of all invoices to the other party in 30 days from the date of monthly account statement, for all transactions made in the previous month. The party who owes funds to the other party shall be responsible for the bank charges. Each party shall have the right to charge the other party the interest at 1.5% per month or part thereof for the overdue outstandings."

7. The plaintiff's case is basically that the defendant had, for some time before the date of the Supplemental Agency Agreement, defaulted in payment of the balances due to the plaintiff. That Agreement allowed the plaintiff to charge, and it did charge, interest on all sums due before as well as after the date of the Agreement. The figures are set out in a schedule attached to the Statement of Claim. It shows 99 invoices with "payment due" dates up to 31 March 1996 and a further 190 with "payment due" dates between 15 April and 31 October 1996. The defendant denies liability for interest.

8. The defendant counterclaims for undeclared profits. Its case is that the sums charged by the plaintiff as "airfreight charges paid to airline" under the Agency Agreement did not reflect the sums actually paid. In fact, the plaintiff paid a lower figure to the airlines and took a hidden profit. The final figure worked out from figures obtained by the defendant through late discovery is $121,375.98.

9. In addition, the defendant counterclaims for hidden profit which it claims the plaintiff made on local handling, loading and other charges. Again, the defendant's case is that the charges made to it for these do not reflect what the plaintiff actually paid out. It says that on a proper construction of the Agency Agreement, the difference should have been included in the figures on which profit was calculated. The final figure claimed is $170,749.72.

Interest

10. The plaintiff claims interest at 1.5% per month on all sums which were outstanding before and after the Supplemental Agency Agreement came into force. It is argued that on a proper construction of the two Agreements, taken together, the interest provision applies to "all invoices" and "all transactions".

11. Not surprisingly, the defendant does not agree with this and argues that if interest is payable, it is only payable on sums which became due after 11 April 1996. In any event, says the defendant, the Supplemental Agency Agreement does not provide that interest shall be payable but only gives the parties the right to charge interest. Since the plaintiff never notified the defendant that it would exercise that right, it must be taken to have waived it or is estopped from claiming it.

12. Mr Chong, for the plaintiff, argues most ingeniously that even if it be found that interest under the Supplemental Agency Agreement is only chargeable on sums falling due after its date, the plaintiff is still entitled to interest before that date at the commercial rate as damages.

13. His first argument is that the common law rule that interest cannot be awarded as general damages does not apply in cases where there is a contract for payment on a certain day, or that from the course of dealing between the parties, it may be inferred that interest is payable. He relies on De Havilland v. Bowerbank [1807] 1 CAMP 50.

14. The common law rule is to be found in The London, Chatham and Dover Railway Co. v. The South Eastern Railway Co. [1893] AC 429. It has been criticised. Mr Chong points to a passage by Lord Shand in the report of the case itself, deploring the English common law rule and saying that it is desirable that the Scottish practice of claiming interest be followed. Mr Chong says that the rule is founded on the old presumption against usury, but there is no need for protection against usury now; we have the Money Lenders Ordinance.

15. Mr Chong argues that the common law rule does not apply in Hong Kong. He says that there appears to be no local decision ever applying it prior to 1 July 1997. If it did, its application under the Application of English Law Ordinance would be subject to its applicability to the circumstances of Hong Kong or its inhabitants, with such modifications as circumstances may require. Its application would, he says, produce unfairness and injustice. In any event, the Application of English Law Ordinance is now repealed. Under the Hong Kong Reunification Ordinance, only that part of the English common law which had, prior to 1 July 1997, been applied to Hong Kong, would continue to apply.

16. If I have understood the argument correctly, it is all wonderfully ingenious. But the fact is that, whatever criticisms may have been levelled at the rule, even by Lord Shand in the case itself, The London, Chatham and Dover Railway Co. did not change the law. Further, the House of Lords in The President of India v. La Pintada Compania Navigacion [1985] AC 104 elected not to overrule the decision in The London, Chatham and Dover Railway Co.

17. As McGregor on Damages puts it at page 425 of the 16th Edition:

"It is indeed an odd conclusion that interest should thus be irrecoverable although obviously foreseeable, and yet recoverable where foreseeable only because of special circumstances brought to the knowledge of the defendant; this, however.... is a necessary consequence of the retention of London, Chatham and Dover Railway Co."

18. Mr Au, for the defendant, argues that the reason for the introduction of the statutory provision for the granting of interest on debts in the discretion of the court was to mitigate the common law rule. Corresponding provisions (section 48 of the Supreme Court Ordinance) were applied in Hong Kong before 1997, and this shows that the common law rule then applied and still applies here.

19. I have no doubt that the English common law rule applied in Hong Kong as at 1 July 1997. Under the Hong Kong Reunification Ordinance, it still applies. The parties cannot have interest unless they contract for it, or they can bring it within the second limb of Hadley v. Baxendale [1854] 9 EX 341, or the court, in its discretion, awards interest.

20. Mr Chong argues that interest would indeed fall within the second limb of the rule in Hadley v. Baxendale (the remoteness test where a promisor with notice of special facts had assumed responsibility for a type of loss not normally within contemplation). He relies on an admission to this effect by the defendant's manager, Mr Spoerri, in cross-examination to the effect that interest was in contemplation because the defendant had collected the money from the customers.

21. Here, we have to look at the contract and interpret it objectively by reference to the meaning of the words and the surrounding factual matrix. What the parties subjectively thought it meant is irrelevant. There is nothing at all about interest in the Agency Agreement. How interest could be taken to be within the contemplation of the parties or a special circumstance communicated by one party to the other, I do not understand. The simple fact is they did not contract for interest under the Agency Agreement, so the plaintiff cannot have it.

22. The parties were members of the Hong Kong Association of Freight Forwarding Agents. That Association produced a list of figures for charges to be applied by its members, including interest. Such a list showing charges to be levied from 1 January 1996 has been produced. It includes interest on overdue accounts at 1% per month. However, this document is not binding on the members, and it would only become so if it were incorporated in an agreement between them, which it was not.

23. The Supplemental Agency Agreement clearly provides that it commences on, and is valid from its date, namely, 11 April 1996. How it could be taken to have retrospective effect, I cannot understand. Again, it is an ingenious argument but it goes against the obvious meaning of the words as well as against commercial reality. That the parties might have contemplated that the interest provision would have retrospective effect seems incredible. I cannot imagine any sensible businessman agreeing to pay interest retrospectively, especially at a rate higher than the commercial rate. So, if interest is chargeable at all, it is only chargeable on sums which fell due after 11 April 1996.

24. It is not disputed that the defendant was, by the time of the Supplemental Agency Agreement, generally in arrears of payment. The new Agreement tightened up the provisions for when the outstanding accounts had to be paid and provided that the party in default should pay the bank charges. Looking at the clause as a whole, it clearly means that interest was payable on any amount outstanding over 30 days. However, it provides for a new accounting arrangement to govern the time from which the credit period of 30 days is to run. Whereas under the Agency Agreement :

"the transaction made between 1-15th of the month will be settled on or before the 15th of next month and the transaction made between 16-30th of the month will be settled on or before the 30th of next month"

under the Supplemental Agency Agreement :

"Each party shall settle the payment of all invoices to the other party in 30 days from the date of monthly account statement, for all transactions made in the previous month."

25. Under the new arrangement, then, all outstanding invoices for one month are to be combined into a monthly statement in the following month; and interest starts to run on whatever is outstanding 30 days later. The actual credit period as it affects individual invoices is not clear, because it will depend on the date of the monthly statement. It would be to the plaintiff's advantage to issue the statement as early in the month as possible.

26. Curiously enough, there is no evidence before me that the plaintiff issued such monthly statements after 11 April 1996. No monthly statements have been included in the document bundle, and there is no mention of them in the oral evidence. Further, the Schedule to the Statement of Claim (as amended), the tables attached to the statement of PW2, Ms Chan Yuen Lan, and those produced by Mr Chong and annexed to his final submissions are all drawn up on the basis that the accounting arrangements under the Agency Agreement continued after 11 April 1996.

27. There is no dispute that interest was never charged between 11 April 1996 and the date of termination of the agreement which would be 9 December 1996. There was no mention of interest until the following February or March. Mr Chui, in his statement, says that he did not issue invoices charging interest because he wished to retain a good business relationship with the defendant, hoping the matter might be resolved later. Mr Spoerri says that he understood the clause to mean that if there was a large amount outstanding the plaintiff would charge him, but warn him before doing so. He received no warning. If he had received any warning or demand for interest he would have settled the balance because he could at least have borrowed the funds to do so at a cheaper rate than the rate the defendant would have charged.

28. The plaintiff argues that the conduct relied on by the defendant to support its case of waiver or estoppel does not satisfy the legal requirement for waiver or promissory estoppel. It was mere inaction; it was not an unambiguous representation of a positive and intentional nature. The representation would have to have at least as much precision as would be needed for a variation of the contract. Woodhouse Ltd v. Nigerian Produce Ltd [1972] AC 741 HL. It is accepted, however, that while mere inaction is normally insufficient to set up waiver or estoppel, it may be sufficient if coupled with a positive duty.

29. If the Supplemental Agency Agreement had provided that interest would be payable on any invoiced amount outstanding for 30 days, there would be no argument. One does not waive a debt simply by not demanding payment. However, what the Agreement provided was for the parties to have the right to charge each other interest. The defendant says that in order to exercise that right, the plaintiff would have had to give notice that it would, and this it never did.

30. Once again, it is necessary to look at the terms of the contract, both with reference to the words and with reference to commercial reality. What the parties thought it meant is not relevant as to construction though it may be relevant to waiver or estoppel. The same applies to their conduct subsequent to contract. When one comes to look at the new terms, I have no difficulty in finding that they mean that interest is to be payable. Merely to give an right to it, optionally exercised, would not make commercial sense. However, the interest is payable on the balance outstanding 30 days after the statement.

31. While the defendant would know what invoices had been issued and were outstanding at the end of any given month, and hence what total it might owe for the month, it would not know what its credit period was on that total until the statement was issued. Any businessman operating on credit needs to know this. Cash flow is important. No one is going to pay up before he must. The plaintiff did not, it appears, move on to the new arrangements and did not issue monthly statements. If it had done so, again, there would be no problem. The defendant would have known what it had to pay and when. Even if the plaintiff had failed to include an interest figure in the following monthly statement, the defendant could not have relied on this inaction.

32. The defendant complains of a detriment in that, since no demand was made, it did not know what its liabilities were. Had it known, it would have been in a position to make provision for them, if necessary, by borrowing at the commercial rate (if it could) within the credit period.

33. Here, it seems to me, there was a positive duty on the plaintiff as the accounting party to put the new accounting arrangements in place, which it did not. There was a detriment to the defendant in that, until such accounting arrangements were put in place, it could not know what credit it had or when it had to make provision to pay up.

34. Another way to look at it is to say that by failing to put the new accounting arrangements into place, the plaintiff made a representation to the defendant, which the defendant was entitled to consider in the light of the wording of the Supplemental Agency Agreement that there was a right to charge interest. While I do not think that that, as a matter of construction, means that it was necessary to give notice that the right would be exercised, if the new arrangements were not put into place, the defendant could justifiably say that that it took this failure as a representation that the right would not be exercised.

35. Either way, it seems to me that it would be unconscionable for the plaintiff to be allowed to exercise his right to interest under the Supplemental Agency Agreement. I conclude that the plaintiff must be taken as being estopped from claiming interest under it. The plaintiff's claim for interest fails. There is no question of allowing interest under statute because the principal sum was paid off before the proceedings were instituted.

The counterclaim for profit on airfreight

36. Once again, we have to look at the Agency Agreement. It quite clearly provides that what is to be deducted is "airfreight charges paid to airline". Mr Chui, the plaintiff's director, says it does not mean that. It means "airfreight charges quoted". This has always been the case in the business of freight forwarding, since before Mr Chui started in the business in the early 1970s.

37. The defendant's director, Mr Spoerri, says that that is not so. The quoted rate would only apply where the forwarders had a "co-loading agreement" where one forwarder put his freight in with that of another, so that both could obtain a preferential rate from the airline. The one with the larger amount of freight could charge the other what it could, rather than the rate paid to the airline.

38. Both these men are experienced freight forwarders. They disagree on what is the custom of the trade. There is no evidence from any independent expert as to the custom of the trade; so it is Mr Chui's word against Mr Spoerri's.

39. According to Mr Chui, the custom of the trade is that the plain words of the contract do not mean what they say. This sort of thing is always difficult to accept. If both parties had intended that "airfreight charges paid to airline" means "airfreight charges quoted by airline", it is difficult to see why they did not write that.

40. Mr Chui advances various reasons why the meaning should be what he says it is. Not least is the argument that he would not know in advance the final rate that he would be getting from the airline. That would not be charged to him until some considerable time later and what discount he got would depend on the amount of freight he was putting through in the interim. Unfortunately, the various documents produced do not seem to support this because they show that the airline's final charge came very shortly after the plaintiff submitted its spreadsheet to the defendant showing the airfreight (as "freight cost").

41. He also says that he should not have to include this reduction in what he had to pay in the profit calculations, because he obtained it by shipping more freight. But as Mr Spoerri put it, some of the freight shipped which gave rise to the total discount came from the defendant.

42. I am not satisfied that there was any trade custom that provided for "airfreight charges paid to airline" to mean "airfreight charges quoted by airline", and I do not believe that they did. I find that the words mean what they say. The parties must be taken to have intended that the profit shared between them was what was left after deducting the airfreight actually paid to the airline from the airfreight charged on the house air waybills. That is what the contract says and the plaintiff cannot ask the court to re-write it, or interpret it in such a way as to contradict its clear terms.

43. The plaintiff's other defence to this head of counterclaim is estoppel and/or "settled account". On estoppel, the plaintiff relies the parties' subsequent dealings. These cannot be used for interpreting a contract retrospectively, but they can be used to show estoppel by convention. Mr Chong relies on various dicta of Lord Denning MR in Amalgamated Property Co. v. Texas Bank [1982] 1 QB 84 CA, in particular the following, at page 121:

"If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it - on the faith of which each of them - to the knowledge of the other - acts and conducts their mutual affairs - they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not - or whether they were mistaken or not - or whether they have in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on the contract, and cannot be allowed to go back on it."

44. If the parties, by their conduct, can be taken as having agreed that "airfreight charges paid to airline" actually means "airfreight charges quoted", there will indeed be an estoppel by convention, but it seems to me that this could only be so if the parties both knew that a different rate from that which was quoted was or could be charged. Otherwise, if one party represents to another that he is paying what he quotes, but in fact he is paying less, this is a misrepresentation. It is all very well to say that the other party acquiesces, but if he does so in ignorance, he is deceived and I do not see how an equitable remedy can be used against him.

45. The plaintiff represented to the defendant that what it quoted was what it was charged by the airline, but this was not necessarily so. Of the 31 airfreight charges, in respect of which the defendant counterclaims, in only one case did the plaintiff pay more. In two cases, it paid the same and in 28 cases, it paid less. The plaintiff's case is that it earned these extra discounts by reason of giving more business to the airlines, and so, this has nothing to do with the defendant.

46. Mr Spoerri never queried what he was being quoted. He accepted that the plaintiff and the defendant did business on the basis of the plaintiff's quotations. He says that he thought he was being charged the net rate, and that throughout the operation of the contract he did not know that the plaintiff was taking an extra profit. He trusted the plaintiff.

47. The difficulty here is that Mr Spoerri, though he may have been ignorant of airfreight practice when he first came to run the defendant in the late 1980s, would not have been so ignorant by the time he signed the Agency Agreement. It is also a fact that while the defendant counterclaims in respect of 31 cases where the plaintiff acted as the defendant's agent and made a quotation to the defendant, there were concerned in this case 65 other transactions where the defendant acted as the agent and the business was done on the basis of the defendant's quotations. So, Mr Spoerri would have been in a position to know that further discount was possible, and indeed to take advantage of it if he could, on the freight forwarded for the plaintiff by the defendant. In fact, he admitted, under cross-examination, that by reason of incentives given by some airlines to freight forwarders, the rate would go down when the volume increased; so he did know that further discount was possible. He might not have known that he was being overcharged on any given invoice, but he would have known that the figure quoted to him was not necessarily what the plaintiff would ultimately pay. He could have inquired into this but instead accepted the Mr Chui's quotations all along.

48. In the circumstances, I do not think it can be said that the defendant was deceived by a false representation. It must be taken as having let matters go on the basis that if the plaintiff could obtain a further discount, that was a matter for the defendant and acceptable to the plaintiff. The defendant must be estopped from making this claim. Also, since the defendant settled the plaintiff's account for the principal sum after having done business with it on this basis, I do not see how the settled account could now be reopened. This head of counterclaim therefore fails.

The counterclaim for profit on miscellaneous charges

49. The miscellaneous charges shown on the plaintiff's accounting spreadsheets which were delivered with its invoices to the defendant show these as "Other charges of HAWBs". They represent various charges which had to be paid, such as terminal handling charges, local transportation and loading charges and the like. The plaintiff, it appears, entered these in the house air waybills, which were on the defendant's letterheading. They were sent to the customers who paid the total which included them and the airfreight. These other charges were shown as a debit by the defendant to the plaintiff on the plaintiff's spreadsheets, but less, in all cases, an agreed refund for handling, terminal charges and air waybill fees. The defendant, it appears, passed on these charges to its customers.

50. Now the plaintiff says that the defendant has been overcharging it for these other charges; the plaintiff actually paid less to the ground handlers, local transporters and so on that it actually charged to the defendant.

51. Unfortunately, there is absolutely nothing in the Agency Agreement to cover these other charges. Such charges as are to be deducted before calculating the profit are set out, and no others. If the parties had intended to agree that these other charges be included, it was up to them to include them. They did not. They dealt with the local charges independently. I do not see how the defendant can come to the court now and ask it to rewrite the contract in its favour, or interpret it to include something which it clearly does not include.

52. Further, the refunds for handling, terminal charges and air waybill fees were, it appears, agreed by the parties after the defendant sent a fax to the plaintiff dated 21 January 1991, complaining about overcharging on terminal handling charges, local transportation charges and the like. The amounts of them were increased over time. So the defendant knew all along, before and during the life of the Agency Agreement that there was a difference between what the plaintiff was paying and what it was charging. So, if I am wrong in finding that the defendant has no claim under the Agency Agreement, estoppel and settled account will in any event apply to defeat the defendant's claim.

53. This head of counterclaim must also fail.

Conclusion

54. The plaintiff's claim and the defendant's counterclaim are both dismissed.

55. This is an unfortunate case. The parties did business together happily enough for long enough, each giving some leeway to the other. When their relationship came to an end, the plaintiff decided to claim interest, which it could have pursued during the course of dealings, but never did. The defendant countered with claims in respect of profits which it might have looked into and claimed in the course of dealings, but never did. Large amounts of lawyers' time and ingenuity and the costs thereof have been expended on these claims which I have ultimately dismissed. I expect that those costs are by now in excess of either party's claims. If I order each party to pay the other's costs, no doubt that will give rise to further long argument and more costs will be incurred. At the end of the day, whatever costs are awarded on taxation will have to be set off. In the circumstances, I think the best course is to order that except where costs have been ordered against a party in any event, each party bear its own costs. I so order (nisi).