KITH MUTUAL BENEFITS INTERNATIONAL LTD. v. STACK ELECTRONICS FAR EAST LTD.

HCAJ123/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO.123 OF 1997

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Admiralty action in rem against : The Ship or Vessel "Tang He" (PRC Flag)

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J U D G M E N T

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Facts

1. On 16 April 1995, a collision occurred between two vessels in the Hong Kong harbour. The two vessels were "California Luna" and "Tang He". The "California Luna" carried containers which had fireworks inside. The collision occurred shortly after it set sail. As a result of the collision, the fireworks caught fire and were destroyed.

2. In this action, the owners of the fireworks claimed against the owners of "Tang He" for the value of the damaged fireworks. The plaintiffs who claimed to be owners of the fireworks are Wald & Co. Inc. ("Wald"), L.W. Loyd Co. Inc. ("Loyd") and Sunlight China Products Ltd ("Sunlight"). The owners of "Tang He" admitted liability for the damaged fireworks to the extent of 70% of their invoice value. The issue common to the plaintiffs' claims is whether they had the title to the fireworks at the time of the collision. The plaintiffs will have the title to sue if they were the owners of the cargoes at the time of the collision : The Charlotte [1908] P 206.

The claim of Wald

3. Wald purchased the fireworks from two companies in Hong Kong. The first company was Yuen Loong Hong Firecrackers Ltd ("Yuen Loong Hong") who sold to Wald 816 cartoons of fireworks at an invoice value of US$12,970.80. In respect of this sale, the documents produced included a packing list and an invoice both dated 21 April 1995. The invoice described the term of sale as "FOB Hong Kong". There was also a bill of lading dated 21 April 1995 in which Yuen Loong Hong was described as the shipper and the consignee was described as "TO ORDER OF SHIPPER". No written contract was produced.

4. The second lot of fireworks was purchased from Po Sing Fireworks (Hong Kong) Ltd ("Po Sing"). The invoice value was US$20,129.01. In respect of this sale, there was a confirmation note dated 20 September 1994 in which the price was described as "FOB Hong Kong"; and an invoice dated 18 April 1995 for the value of FOB Hong Kong US$20,129.01. Page 1 of the invoice stated, among other things, "BY ORDER AND FOR ACCOUNT RISK OF : WALD & CO INC.". There was a packing list dated 18 April 1995 and a bill of lading dated 24 April 1995. In the bill of lading the shipper was described as Po Sing and the consignee was "TO ORDER OF SHIPPER". Again, there was no written contract of sale.

5. According to Wald, it had done business with both of these Hong Kong companies before. The usual arrangement with them was for the paperwork for the shipments to be forwarded to Wald, either through the banks or simply by courier. They endorsed the bills of lading and sent them to Wald. Wald would then make payment following receipt of the shipping documents. Sometimes payment would be made after Wald's receipt of the goods. The payments in respect of the two consignments were arranged on 26 July 1995. Payment was made through Mark Twain Kansas City Bank ("Mark Twain Bank") who arranged for a bank draft to be supplied to Yuen Loong Hong. Payment was made to Po Sing by way of a telegraphic transfer to their account from Mark Twain Bank as well.

Sale of Goods Ordinance

6. The following are some of the relevant sections of the Sale of Goods Ordinance ("the Ordinance") which deal with the transfer of property between the seller and the buyer :

"18. Goods must be ascertained

Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained.

19. Property passes when intended to pass

(1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.

7. 20. Rules for ascertaining intention

Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer-

Rule 1. -

Rule 2. -

Rule 3. -

Rule 4. -

Rule 5. (1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description, and in a deliverable state, are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made."

Passing of property in f.o.b. contract

8. It is accepted by both parties that the fireworks were unascertained goods. In a f.o.b. (free on board) contract, prima facie, the property passes on shipment : Halsbury's Laws of England, 4th Ed. (Reissue), Vol.41 at para. 351. The rationale for this is in fact based on rule 5(1) of section 20 of the Ordinance in that the goods had been unconditionally appropriated when they were shipped. A discussion on this topic can be found at para.20-057 of Benjamin's Sale of Goods, 5th Ed. :

"... The question whether goods are unconditionally appropriated to the contract depends on the intention of the parties; and 'appropriation' is used both in a 'contractual' and in a 'proprietary' sense. In the case of an f.o.b. contract goods are 'appropriated' to a contract in the 'contractual' sense (so that the seller is irrevocably bound to deliver those goods under the contract) on shipment at the latest. Property under an f.o.b. contract cannot pass before such appropriation and will pass if the goods have been shipped and there has also been a 'proprietary' appropriation, i.e. one that is 'unconditional' in the sense that the seller does not reserve a 'right of disposal'. But often there will be no such 'unconditional' appropriation on shipment, for the seller may, by the manner in which he deals with the shipping documents, indicate his intention to retain a right of disposal."

If the property had passed to Wald then it clearly had the title to sue. The presumption that property passes on shipment, however, is only a prima facie presumption and can be rebutted. In Halsbury's at para.351 it is stated that :

"Prima facie the property passes to the buyer on shipment, but as in a cif contract the inference may be rebutted and the moment of the passing of the property postponed, as where the seller takes or deals with the bill of lading in such a form or manner as to show that he did not intend to appropriate the goods to the contract, or that he has reserved a right of disposal until performance of the contract terms of payment, whether they are for payment in cash or by acceptance of a bill of exchange or under a letter of credit."

Bills of lading deliverable to the order of the seller

9. Mr Sussex, SC, counsel for the defendants, argued that this prima facie rule is rebutted because in the bills of lading, the consignee described as "To the order of the seller". Under section 21(2) of the Ordinance, if the bills of lading are deliverable to the order of the seller, the seller is, prima facie, deemed to have reserved the right of disposal. Where in a contract goods are appropriated to the contract and where the buyer reserved the right of disposal of the goods until certain conditions are fulfilled, section 21(1) of the Ordinance provides that notwithstanding the delivery of the goods to the buyer, or to a carrier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.

10. In The "Ciudad de Pasto" [1998] Vol.2 LLR 208, Staughton LJ at page 213 held that :

"Here by the bills of lading the goods were deliverable to the order of the sellers : consequently the prima facie presumption is that they reserved the right of disposal. Unless the presumption is displaced, that has the result that the property did not pass to the buyers until the condition imposed by the sellers was fulfilled. That condition was, presumably, that the balance of the price be paid."

In The "Starsin" [2000] 1 LLR 85 Colman J held at page 104 :

"Fetim purchased its Port Klang cargo on f.o.b. terms. The vessel sailed on Dec. 8, 1995 ... Mr. Keller of Fetim stated in his statement that the purchase took place when payment was made on Dec. 11, 1995. The bills, which were to the sellers' order, were received on Dec. 18, following payment. I infer that the sellers retained a jus disponendi. It is to be inferred that had they not been paid, they would not have been obliged to send the bills to the buyers. Notwithstanding that in an ordinary f.o.b. contract title passes on shipment if the seller retains a jus disponendi, title passes on payment of the price : see Mitsui & Co. Ltd. v. Flota Mercante Grancolonbiana S.A. (The Ciudad de Pasto), [1988] 2 Lloyd's Rep. 208 in which the retention of a jus disponendi in a f.o.b. contract as envisaged in s. 19(2) of the Sale of Goods Act, 1979, was inferred."

11. In Benjamin's Sale of Goods, 5th ed., para. 20-064, the authors dealing with the equivalent of our section 21(2) stated that the prevailing view is that the section can apply to an f.o.b. contract :

"Under such a contract the seller is not bound to pass the property in the goods at any particular time : he can perfectly well ship the goods 'in performance of his contract' and so perform his duty to deliver without simultaneously making an unconditional appropriation so as to pass the property. If this were not the case, considerable difficulties would arise in financing f.o.b. sales.

Section 19(2) (i.e. our section 21(2)), however, embodies only a prima facie rule; so that it is theoretically possible for property to pass on shipment despite the fact that the bill of lading made the goods deliverable to the seller's order. But where the buyer has not yet paid for goods shipped under such a bill this result would follow only in highly exceptional circumstances. The current view is that property normally passes only on payment in full; and a number of earlier authorities which at first sight may appear to support a different view are, it is submitted, explicable on other grounds." (my emphasis)

The parties' position

12. Mr Sussex argued that because of the reservation by the sellers in the bills of lading, property had not passed at the time of the collision. Such evidence of a course of dealing is brief, and inadequate to establish a contractually binding course of dealing affecting the legal rights of the parties as to the passing of the property, so as to displace the general rule. Furthermore, despite request from the defendants, Wald had not provided any discovery to support the suggestion of a course of dealing.

13. He further relied on a letter dated 29 March 1995 from Po Sing to Wald which stated that "would you kindly either open your L/C covering the above shipment or if possible, we would prefer that you wire transfer the money to us immediately after shipment effected". This strongly suggested that the seller did intend to reserve the right of disposal in the goods until they had secured or even received payment. He also referred to two faxes by Yuen Loong Hong to Wald. In the fax dated 18 April 1995, Yuen Loong Hong stated that :

"The shipping company confirmed that the container is a total loss. Very sorry. We are preparing the paper work for this shipment, and it will be forwarded to you through the banks as we normally do. Hopefully your insurance company will settle the claim before the bill comes due."

In the fax dated 21 July 1995, Yuen Loong Hong stated that :

"We presented the above invoice through our Hong Kong Chinese Bank to your Mark Twain Bank for payment. Please make payment of this invoice as you normally would through Mark Twain Bank. Thank you."

14. Mr Smith, counsel for the plaintiffs, stated that the defendants had made the request for discovery rather late which made the task of the plaintiffs providing the documents impossible. The transactions between the parties took place in 1995. The plaintiffs had supplied its list of documents in January of this year, but the defendants only chose to make the request for additional documents in September which was shortly before the trial.

Evidence lacking

15. In my view, in ascertaining the intention of the parties, it would not be too useful to look at the dealings with the bills of lading after the collision because although the bills of lading were documents of title, the goods no longer existed when the bills were sent to Wald. What this claim boils down is really this : has Wald provided evidence which would rebut the presumption that property had not passed because of the reservation of disposal by Yuen Loong Hong and Po Sing. The starting point is that the current view is that where there is a reservation of disposal by the seller, the property would only pass with payment in full. In this case Wald had not made the payment before the collision. I accept that the previous manner in which Wald transacted its business with its suppliers is a relevant consideration, particularly when one of them was prepared to endorse the bill of lading and sent it by courier to Wald even before it received payment. But in my view, Wald had not produced credible evidence in support of its contentions. It is not simply a matter of the defendants making the request for documents late, surely the burden must be on Wald to establish its claim by credible evidence. This would involve the discovery of previous transactions relied upon by Wald. The problem in this case is particularly acute because Wald did not give any oral evidence. The statement of Wald was admitted by way of hearsay notice. There is no chance for the defendants to test the accuracy of the statement in court by cross-examination. Wald had not provided documentary evidence in respect of the previous dealings. I can only repeat the observation of the judge at page 215 of "Ciudad de Pasto", "Where evidence is wholly inadequate the impact of the burden of proof assumes critical importance." In my view Wald has failed to show that property had passed to it at the time of the collision. I shall dismiss the claim of Wald.

The claim of Loyd

16. Loyd purchased the fireworks from Po Sing as well. According to Loyd, it had done business with Loyd for several years. The order was placed with Po Sing in August 1994. The purchase price was US$53,694.51. The sale was f.o.b. Hong Kong. Among the documents related to the sale was an invoice and packing list both dated 18 April 1995 issued by Po Sing. According to Loyd, following shipment, Po Sing would endorse the bill of lading and send it to Loyd by DHL courier. The normal procedure would be for Loyd to send a cheque to Po Sing upon receipt of the original documents. In this case, Loyd sent a cheque to Po Sing on 24 July 1995. It was stated that its agreement with Po Sing was to send the payment upon receipt of the documents, however on occasion it had taken the liberty of paying after receipt of the goods. The bill of lading in respect of the fireworks shipped on the "California Luna" was dated 24 April 1995. The shipper was Po Sing while the consignee was again described as "TO THE ORDER OF SHIPPER".

Same problem

17. In my view, the claim by Loyd faces the same problem as the claim by Wald. The defendants were precluded from cross-examining Loyd, whose witness statement was admitted by way of the hearsay notice only. The evidence is wholly inadequate, the previous dealings alleged by Loyd were not supported by documents. In my view, the seller had again reserved the right of disposal which precluded the passing of property at shipment. I shall dismiss the claim by Loyd.

The claim of Sunlight

18. Sunlight agreed to sell the fireworks to Greg Shelton in the USA. According to Mr Wilson Wai Shing Mao of Sunlight, the goods were sold on "C & I terms". Mr Mao produced a packing list dated 18 April 1995 in respect of the shipment and also the invoice dated 21 April 1995. Page 1 of the invoice stated "Payment Term - C & I OMAHA, NE (i.e. Nebraska) BY T.T. WIRE". Page 4 of the invoice stated that :

"Total ........................... 1139 ctns.	____________
Total : F.O.B. HongKong ............................	US$ 43625.33
Plus : Insurance .........................................	US$ 144.00
Grand Total : C & I OMAHA, NE ...............	US$ 43769.33 "

19. The bill of lading was dated 15 May 1995, the shipper was Sunlight and the consignee is "TO ORDER OF GREG SHELTON". Mr Mao said that it was not the practice of Sunlight to send the original bills of lading until they received the wired funds from the buyer. He confirmed that Sunlight had received no payment from the buyer in USA.

Nature of the contract

20. Mr Sussex argued that the contract being a C&I (cost and insurance) contract, the buyer was responsible for the freight. This contract was in the nature of an f.o.b. contract. In an f.o.b. contract, the property in the goods, prima facie, passes to the buyer on shipment. He further submitted that the taking of a bill of lading to the buyer's order suggests that it was the intention of the parties that property would pass on shipment. If the property had already passed to the buyer, then Sunlight does not have the title to sue.

21. Mr Smith, on the other hand, argued that a 'C&I contract' is akin to a c.i.f.(cost, insurance, freight) contract. The property in the goods had not passed at shipment. It would only do so when the bill of lading is subsequently endorsed to the seller. In Sanders Brothers v. Maclean & Co. (1883) 11 QBD 327, in a transaction involving a c.i.f. contract, Bowen LJ held that :

"... A cargo at sea while in the hands of the carrier is necessarily incapable of physical delivery. During this period of transit and voyage, the bill of lading by the law merchant is universally recognised as its symbol, and the indorsement and delivery of the bill of lading operates as a symbolical delivery of the cargo. Property in the goods passes by such indorsement and delivery of the bill of lading, whenever it is the intention of the parties that the property should pass, just as under similar circumstances the property would pass by an actual delivery of the goods." (my emphasis)

22. In The "Elafi" [1981] 2 LLR 679, Mustill J (as he then was) held that :

"... Here, since the contract was on c.i.f. terms, it is very probable that the property would have passed to the claimants when the shipping documents were negotiated, for the cargo was ascertained and appropriated from the outset, and the general rule is that under a c.i.f. contract the property passes with the documents. The only cause for uncertainty is the fact that the claimants had a right to reject goods in excess of the stipulated quantity, so that it would not be possible to know during the voyage whether any individual portion of cargo might not ultimately revert to the vendors. I believe, however, that in such a situation the property in the entire cargo would pass conditionally to the claimants, subject to a retransfer of any excess if the claimants so elected, and that this would be sufficient to found a claim in tort in respect of all such cargo as the claimants chose to accept." (my emphasis)

23. Paragraph 342 of Halsbury's has a further discussion on the parting of properties in c.i.f. contract :

"The general statutory rules as to the passing of property under a contract for the sale of goods do not greatly assist in ascertaining the moment at which the property passes where goods, whether specific or unascertained, are sold on cif terms. The provisions as to the passing of an undivided share in goods which form part of a bulk should, however, be borne especially in mind, given the frequency with which goods sold on cif terms are shipped in bulk.

Likewise, special attention should be given in the context of cif sales to the provisions as to the right of disposal. When an agreement is made for the sale of specific goods in a deliverable state on cif terms, it is not an unconditional contract, because the commercial meaning of cif imports an undertaking by the seller to do something more, namely to put the goods on a ship, and this postpones the passing of the property until at least the goods are shipped by the seller. Further, where, as is generally the case in a cif contract, the seller reserves the right of disposal of the goods until certain conditions laid down at the time of the contract or appropriation are fulfilled, the property does not pass until fulfillment of the conditions, ordinarily when the seller transfers the bill of lading. The presumption that property passes on shipment may also be rebutted where the facts of the case show that the seller never intended the mere act of shipment to operate as an appropriation of the goods to the contract either conditionally or at all."

My view

24. In my view, it would not be too useful to attach too much importance to the label of the contract. Even if the contract in question is in the nature of an f.o.b. contract, it is only a prima facie rule that the property would pass on shipment. Mr Mao had clearly stated that it was not the practice of Sunlight to send the original bill of lading until they receive payment from the buyer. The retention of the bill of lading, which is a document of title, until payment has been received is clearly an indication that Sunlight did not intend the property to be passed on shipment to the US buyer. Unlike the situation where a bill of lading is made to the order of the seller which creates a prima facie presumption that the seller reserves the right of disposal of the goods, there is no presumption that where a bill of lading is made to the order of the buyer, the seller is treated to have given up his right of disposal. As pointed out in Benjamin's at para.20-070 :

"... retention even of such a bill of lading gives the seller considerable control over the goods; for the buyer is not normally entitled to demand delivery of the goods from the carrier without presenting the bill, while the seller is normally entitled to direct the carrier to deliver the goods to a different consignee. It therefore does not follow that property will pass on shipment merely because the bill of lading is made out to buyer's order. As Lord Sumner said in a case involving a c.i.f. contract: 'in spite of the insertion of the consignee's (i.e. the buyer's) name in the bill of lading, the intention to reserve the jus disponendi to the seller till the documents are taken up is manifested by the way in which the transaction is carried through with regard to the presentation of the documents.' It is submitted that where the contract provides for payment against bill of lading the normal inference would be that the seller had reserved a right of disposal until payment in accordance with the contract had been made." (my emphasis)

25. At the time of shipment, Sunlight had not received payment. Its practice was to send the bills of lading when payment was received. In my view, Sunlight had discharged the burden of proof on a balance of probability that it was the owner of the goods at the time of the loss. Hence, it has the title to sue in this action and recover the loss from the defendant.

Insurance

26. Wald, Loyd and Sunlight had received payment from the insurers in respect of the loss of the firework. Each of them had signed a subrogation form in favour of the insurers. It is clear that payment by the insurers to them have no relevance in this case.

Conclusion

27. The claims by Wald and Loyd are dismissed. There shall be judgment to Sunlight for US$30,638.53 (70% of the invoice value of US$43,769.33). There shall be interest at judgment rate from the date of the service of the writ until payment.

Costs

28. The plaintiffs are entitled to, on a nisi basis, one third of the costs of the action.