MILTEX INDUSTRIES LTD. AND ANOTHER v. MODERN CENTURY FORWARDING LTD. AND ANOTHER

HCA 6298/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6298 OF 1995

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J U D G M E N T

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1. This is a claim for damages for breach of a contract for the carriage of goods.

Background

2. The first plaintiff is called Miltex Industries Limited (Miltex) now in liquidation and presently not pursuing its claim as I shall come to. The second plaintiff is called Ashok Kumar Fabiani (Mr Fabiani) trading as Sonu's International.

3. At all material times Miltex and Sonu's International carried on business in Hong Kong as exporters and importers. Specifically their primary function was to receive orders for the purchase of merchandise from customers off shore, source the goods, negotiate with supplier and customer and, if successful, supply the customer. There is no connection between Miltex and Sonu's International, save that both were coincidentally caught in circumstances giving rise to loss and this litigation.

4. In November 1994 both received faxes from an individual in Durban, South Africa, who said he represented Badshahi Import and Export CC (Badshahi). Neither had communicated with or conducted any business with Badshahi before. The faxes read that Badshahi was looking to purchase merchandise. Correspondence resulted the outcome of which was that both Miltex and Sonu's International contracted with Badshahi to supply it quantities of fabrics, T shirts and men's briefs. Each demanded and received a deposit and then proceeded to comply with Badshahi's conditions as to shipping of the merchandise. This was that they were to engage the services of a freight forwarder called Modern Century Forwarding Limited (Modern Century). This they did.

5. Express terms of payment were incorporated into the contracts with Badshahi in each case. Badshahi was to pay the purchase price in full on D/P (documents against payment) terms; namely, that delivery was only possible upon presentation of the original bill of lading and other documents of title, available from the consignee's nominated bank upon payment in full of the purchase price. Badshahi directed that it was content that no account need be made for the deposits in each case which could thus be held as security against future orders.

6. Miltex's goods were shipped to Durban in three separate consignments and those of Sonu's International in four. They were carried on the ships Vaal and Marcon which left port within a few days of each other in January 1995. The bills of lading that issued for each consignment recorded on the face that Modern Century was the agent of a company called Wide Sky Shipping Limited (Wide Sky) which signed the bill as agent for Transocean Container Line SA (Transocean) the shipping company that would carry the goods.

7. When the merchandise arrived in Durban it was unloaded and held by a company called TMP International Freight Services CC (TMP) in terms of the bills of lading. An apparent representative of Badshahi sought to take delivery by presenting indemnities purportedly issued by the Habib Overseas Bank (not, as it happened, the consignee's nominated bank) and in reliance on the authenticity of these the goods were released. This was contrary to the express terms of delivery which were D/P. The indemnities were forgeries. Badshahi and the merchandise have disappeared without trace. Both Miltex and Sonu's International are out of pocket for the purchase price less deposits paid.

The Claims

8. Miltex and Sonu's International say they each contracted with Modern Century and or in the alternative Wide Sky (named in the proceedings first and second defendants respectively) for the safe transport of their cargo to Durban and delivery to Badshahi on express terms. When the term relating to delivery was breached they suffered loss for which one or other or both of Modern Century and Wide Sky must be liable. Both claim against both damages for such loss for breach of contract, interest and costs. In the alternative both claim wrongful detention or conversion.

The defence

9. The defence common to both defendants is that Modern Century acted as agent for Wide Sky which acted as agent for Transocean. As Transocean was known by the two plaintiffs to be the principal they as agents are not liable for any alleged breach of contract. If, on the other hand, they or either of them are found to be contractually liable that liability is limited by the terms of contract. Detention and conversion are denied.

10. The defence of agency is refuted by the plaintiffs. Though Modern Century may hold itself out as agent for Wide Sky and Wide Sky hold itself out as agent for Transocean the contract of shipment was entered into and then performed either by Modern Century and Wide Sky as co-principals or by one or the other as a principal.

The Status of Miltex

11. After the issue of the writ but before trial Miltex went into liquidation. After his appointment the Official Receiver has expressed reluctance or inability to incur further costs of litigation and took no steps to set the matter down for trial. Sonu's International did do so and this trial has proceeded on its claim only.

The Issues

12. Those matters I have to consider are as follows:-

first, did Sonu's International contract with Modern Century and Wide Sky or either of them as principals, or were they or either of them involved only to the extent that they were agents for a disclosed principal, Transocean, and thus not liable for default by that principal?

13. Secondly, if the contracts were with Modern Century and Wide Sky or either of them as principal, did they or either of them as principal act in breach giving Sonu's International the right to be compensated for the full extent of the loss suffered, or was that loss wholly or partly exempted?

14. These are the matters to be dealt with after a consideration of the evidence and application of the legal principles pertaining as I now come to.

The Evidence

15. Until a short time prior to trial the same solicitors acted for both Modern Century and Wide Sky. But as the trial date approached Wide Sky professed not to be able to fund its litigation costs any further and the solicitors were given leave to withdraw. Wide Sky has not sought the right of personal representation and has taken no further steps though I am satisfied it had knowledge of the hearing date.

16. In the event I heard from two witnesses; Mr Fabiani of Sonu's International and one Wilson Wong Kam Chiu (Mr Wong) Modern Century's managing director. In addition I had the usual arch files containing copies of relevant documents and correspondence which included some whose authenticity was at issue as I shall come to.

17. I heard from Mr Fabiani first.

18. Badshahi having stipulated that Sonu's International must arrange shipment of the goods through Modern Century and he not having dealt with those freight forwarders before he asked for and was given a quote for its freight charges from one Peggy Kwan Pui-kee (Miss Kwan) of Modern Century. Though these rates were higher than those he could have achieved elsewhere and he told Badshahi so, Badshahi insisted on his dealing with them, acknowledging that the surcharge could be added to the bill. So he proceeded to contract with Modern Century. But how this came about is a matter of material issue. It is his case that there was a verbal exchange and exchange of faxes with Miss Kwan by which the parties came to be bound. This was followed by two faxes he was to send confirming details as to two of the consignments for the issue of the bills of lading, one of which is exhibited at Bundle 3B page 355. The other fax relating to the remaining two consignments cannot be found.

19. Shown a document headed 'Fax Booking Dock Receipt - for CFS Cargo (FBDR) which recorded on its face that it derived from Modern Century Forwarding Ltd (As agents for Wide Sky Shipping Ltd) which Mr Wong was later to attest had been sent to him in blank so that he could fill out the details of the proposed shipments, that is the nature of the goods, the destination, the consignee's particulars and so on, and then return it to Modern Century, he was adamant that he did not fill out and return any such form. Mr Fabiani was unable to explain why in his statement of claim in a clause setting out the documents evidencing the shipping agreements there was included the following, namely, "Fax Booking - Dock Receipts dated on or about 17 January 1995 issued by the 1st and/or 2nd defendants setting out the particulars of the shipments in question," which words indicate there were in existence two FBDR forms as claimed by Mr Wong, beyond that such documents did exist in the Miltex case and his solicitors who represented Miltex must mistakenly have assumed the pattern was repeated in his case. Certainly he has never had them in his possession or handed them to his solicitors when they were instructed or subsequently. Prior to trial that mistake was rectified by removal of the words in amended pleadings. Mr Wong when testifying as to their existence was unable to produce the same or copies. He was later to say that they were lost. I pause here to say the significance of the FBDR is that it records on the face the agencies to which I have referred and that the fax booking was subject to Modern Century's standard terms and conditions.

20. In due course the consignments were packaged and ready to be shipped. Sonu's International received from Modern Century invoices for the cost of freight and paid them. Modern Century received the consignments and handed over two bills of lading. They were signed by Wide Sky as agents for Transocean, which was stated to be the owner of the ship upon which the goods were to be carried. But this was of little moment to him. On advice he was concerned that the bills were ocean bills of lading, to protect his interests during the voyage, and that they were to order or otherwise recorded that they would be delivered only against production of the original bills of lading. Miss Kwan assured him on both counts.

21. Then his bank purchased the bills with recourse and sent them to the consignee's nominated bank in Durban. There was nothing further to do but wait for word that the shipments had arrived, been unloaded and paid for. But when the expected time lapse had passed without word he began making enquiries, first of Badshahi, from whom he got no reply, and then Miss Kwan. She reported back after a passage of time that TMP whom she described as "our agent" had released the goods against forged bank indemnities. Mr Fabiani went to South Africa to pursue payment or recover the goods. His journey was fruitless.

22. That was the live evidence adduced for the second plaintiff's case. But also pertinent to its case are documents incorporated in the arch files including some referred to in hearsay notices. That evidence I summarise below which goes to the make up of Modern Century, Wide Sky and Transocean and their commercial relationships.

1. Modern Century was incorporated in 1990. Mr Wong was a founder shareholder and director as was another Mr Wong called Wong Chi Ki. In 1991 they sold their shares to two men both called Chan. Both resigned from the Board consequent upon such sale. As at June 1995 the paid up capital of Modern Century was $500,000.

2. Wide Sky was incorporated in 1991. One of its shareholders is Wong Chi Ki, one and the same as the former shareholder of Modern Century. All along it has shared office space with Modern Century. As at April 1995 its paid up capital was $2.

3. Transocean was incorporated in Panama in March 1990. There are three directors all being Hong Kong residents. Mr Wong is one of those carrying the designated title of president. The capital is US$500. An address being 8th Floor Bank of Boston Building Panama is that of a company called Overseas Management Group which was responsible for the incorporation of Transocean.

4. Transocean's address is that of Overseas Management Group but it does not presently have a presence at that address. No one called Mrs A Williams is known to have worked from that address as liner manageress. A Mr H Roger was not and never has been president - that is the office held by Mr Wong. (The significance of this evidence is that in the bundle are exhibited letters written by Wide Sky to Transocean at the Bank of Boston Building address for the attention of Mrs Williams, liner manageress, concerning this litigation from May 1995 and responses from her on letterhead giving the Bank of Boston Building address with copy to Mr H. Roger, president.)

5. By document undated save that it was sometime in 1991 Transocean and Wide Sky entered into an agreement under which Wide Sky was appointed agent of Transocean. Mr Wong signed for Transocean. Wong Chi Ki was one of two who signed for Wide Sky. There was an announcement of this published in South China Morning Post of 21 June 1991. While it is not necessary for me to recount the terms in full, I record here certain pertinent extracts. The preamble states:-

"[Transocean] is a shipowner in City of Panama, carrying on lawful trade and business by offering in whole or in part its ships for the carriage of goods ..."

The appointment is expressed thus:-

"[Transocean] hereby appoints [Wide Sky] to be its sole and exclusive agent in [Hong Kong] ..."

There is a power to appoint subagents as follows:-

"Where [Wide Sky] shall consider it desirable to appoint sub-agents [Wide Sky] is entitled with the previous consent in writing of Transocean to make such appointments but only on such terms as Transocean shall in writing approve and Wide Sky shall at all times be responsible for the acts deeds or omissions of all persons firms or companies so appointed."

6. By document dated 18 June 1994 Wide Sky and Modern Century entered into an agreement headed agency agreement in which Wide Sky was described as the principle (sic) and Modern Century the agent.

23. Again I shall not recite the terms save the clause of appointment:-

"[Modern Century] agrees to handle the cargo of [Wide Sky] under the [Transocean] bill of lading covering freight in Hong Kong to and from all destinations."

7. By invoices variously dated 17 and 23 January 1995 Modern Century describing itself on the letterhead as agent for Wide Sky charged Sonu's International freight and documentation fees for each of the four consignments. The components for freight fees were respectively US$2,200, US$1,100, US$1,000 and US$1,000. Subsequently it issued credit notes in favour of Wide Sky which recorded that in each case it had paid the carriers respectively US$2,000, US$1,000, US$900 and US$900, and credited Wide Sky with 50% of the resulting profit.

24. Now I come to the evidence of the remaining witness, Mr Wong.

25. When he sold his shares in Modern Century in 1991 he stayed on as an employee and at the behest of the new shareholders and directors the Messrs Chan. They gave him the nominal title of managing director though he is not on the Board and defers to them. He could not at first recall who his fellow founder shareholder was, it being beyond his powers of recall. When prompted in cross examination, he was able to remember it was Wong Chi Ki who was then to found Wide Sky.

26. Asked to recall whether Mr Fabiani had filled out and returned the FBDR forms for the proposed shipments he said this must have been so. Customers, particularly new customers, are required to do this for a number of reasons, the most significant being so the company can check on his or its status and reliability. Moreover he was able to recall perusing Mr Fabiani's because all those relating to a new customer are referred to him for approval. This recall came to him though he is asked to vet on average 10 FBDR forms per month and this all happened more than five years ago. The loss of the FBDR forms preventing their production is because of the volume of documentation created by the company dealing with at least 3000 shipments per month; inevitably some of the paperwork goes astray.

27. He confirmed he is one of three shareholders who founded Transocean in Panama in 1990. The long term plan is that it own a ship or ships and carry on business as a shipping company using its own vessels. But at the time of incorporation it did not own any ship and has not done since. Indeed it has undertaken no trade nor performed any service for reward. It has no bank account or other assets. Meanwhile he describes it as an NVOCC - a non vessel owning common carrier. The agency agreements appointing in turn Wide Sky and Modern Century are bona fide agreements empowering these companies to act on its behalf in arranging contracts of carriage; that is how the bills of lading held by Sonu's International came into being.

28. Sonu's International's goods came to be shipped on the vessels Vaal and Marcon by virtue of bills of lading that issued from Kawasaki Kisen Kaisha Limited (K Line) and Kien Hung Shipping Co. Ltd (Kien Hung) the ship owners who owned and operated these vessels in favour of Modern Century. Modern Century billed Sonu's International as agent for Transocean then paid K Line and Kien Hung their charges. The credit notes reflect how the mark up was shared with Wide Sky. Transocean played no part and received no remuneration. That was a typical scenario.

29. When it became apparent there was a problem concerning delivery he was told to get involved and did so. Modern Century gets sued on average only once in three years. But he has no impression of having seen a solicitor's letter claiming breach or of the writ that followed, though he conceded they must have passed through his hands when shown a letter written by him to Wide Sky enclosing them, sent because Wide Sky was and is Modern Century's principal. He was not aware that Wong Chi Ki of Wide Sky had sent them to Transocean in Panama. He does not know who "Mrs Williams, liner manageress" is to whom the letter was sent and who purported to respond. Though Mrs Williams wrote on Transocean letterhead that she had undertaken certain action he had no knowledge of that nor had he or to his knowledge any officer of Transocean authorised it. He had no knowledge of Mr Roger. None of this phased him. He said when Overseas Management Group undertook to register Transocean its services included providing management and this included representing Transocean in respect of any claim, as here, concerning the carriage of cargo in which it was involved; all costs inclusive. Mrs Williams must have been of that group undertaking that service. There was no charge for that because it had already been paid for in 1990.

30. When shown a computer printout which purported to show Transocean had not paid annual licence fees to the Panamanian Treasury since 1990 and was in arrears for fees and penalties of more than US$1,600 he denied that could be so because he had not been invoiced or otherwise told.

31. That was his account, and that concluded the evidence.

Liability

32. Mr Wong was a particularly unsatisfactory witness. His answers were at times selective, at others convoluted and at others incapable of belief. If it was true that he was directed to take charge of the Sonu's International file when it was apparent things had gone wrong it seems extraordinary that he has no recollection of the solicitor's letter of demand or the writ, given that Modern Century got to be sued so infrequently. It is also extraordinary that he could not at first recall who his partner was when Modern Century was founded when since that day he has shared an office with that man, Wong Chi Ki. These so-called lapses are of no direct moment, but contrast with his remarkable recall of seeing and vetting Mr Fabiani's completed FBDR forms, given the volume of paper traffic since the transaction more than five years ago.

33. His explanation of how and why the correspondence with Mrs Williams came into being is so nonsensical as to be derisory. These letters are clearly a fabrication, designed to perpetuate a fiction that Transocean was hands on in dealing with the troubles. The one matter about which he gave evidence upon which I can rely concerned Transocean when he said it undertook no trading activity at all.

34. It follows from that that unless anything he said was backed from an independent source it is impossible for me to rely on his evidence. Mr Fabiani on the other hand gave me the impression that he is an honest man giving his account to the best of his memory and ability.

35. The upshot is that I find as a fact that Mr Fabiani did not when contracting fill in the FBDR forms and thus have notice of Modern Century's agency and exemption clauses. Had it been otherwise there would have been no need for him to forward any fax confirming the details; those would already have been recorded. Mr Wong's assertion that he could remember sighting the forms and that they had subsequently become lost was an example of his selective powers of recall and I disregarded it altogether.

36. The bills of lading which ultimately issued signed on the face by Wide Sky as agent for Transocean, where it was recorded that Transocean was the shipowner and carrier of the goods, were fictions. How could it be otherwise? Transocean is and always has been a shell not carrying on business because it is incapable of doing so. The agency agreement with Wide Sky is also a fiction to perpetuate the myth. The preamble is not true and the appointment meaningless. Mrs Williams and Mr Roger are, of course, non-existent.

37. Whatever is the relationship between Wide Sky and Modern Century, it has no bearing on this litigation. The agency agreement they are parties to is on the face of it an appointment of sub-agency of Wide Sky's agency with Transocean. Under the terms of the head agency agreement that can only be valid with written consent of Transocean. There is no evidence of that but in the event it hardly matters. As Transocean undertook no business, there was nothing for Wide Sky to do on its behalf and nothing for Wide Sky to call upon Modern Century to do on its behalf. If Modern Century really did share its profits on the transactions with Wide Sky that is its business which has no bearing on who the contracting parties were.

38. Sonu's International did not contract with Transocean. There was no consideration; but quite apart from that Transocean lacked the capacity. The contract was with Modern Century, which Mr Fabiani committed his company to without notice of any agency. The bills of lading on the face of them evidencing a contract with Transocean were a sham. The only true bills of lading that came into being covering these consignments came from the shipowners K Line and Kien Hung who actually transported the goods. These were created at the behest of Modern Century not, on the facts, as agent for Wide Sky as agent for Transocean transferring its shipping rights to another shipowner, but by Modern Century subcontracting, in its name, its duty to carry the goods to Durban. TMP was appointed by Modern Century to receive the goods from the carriers. Miss Kwan's reference to TMP as "our agents" was factually consistent with this scenario and a correct statement of its role. TMP failed to comply with an express contractual term on delivery causing loss.

39. Modern Century as principal in the contract of freight is liable for its agent's breach.

40. Before leaving the issue of liability I should make reference to a recent Court of Appeal decision Chan Charm Lam v. Fordpointer Shipping Company Limited, Civil Appeal 356 of 1999.

41. In that case a shipper was out of pocket when delivery was made to a consignee without production of the bills of lading and thus payment. He sued the freight forwarder with whom he claimed he had contracted. The defendant had engaged a shipping company called Fortune Network to ship the goods. Fortune Network issued the bill of lading. At trial the judge found the plaintiff contracted with the defendant who sub-contracted the carriage to Fortune Network. He found the defendant was in breach and gave judgment for the plaintiff. On appeal it was held the only contract in existence was that evidenced by the bill of lading, between Fortune Network and the plaintiff. As the defendant had no contractual interest there was no breach for which it was liable.

42. Mr Chan, counsel representing Modern Century, argues this is authority in support of his defence that it is Transocean that is the contracting party and not his client. But there is the important factual distinction that in this case I have found Transocean not to have the capacity to contract and that the bills of lading purportedly issuing under its name are a sham. Though Mr Wong and other authors of the scheme might argue long and hard that all the documents point to a bona fide principal agency relationship, if that were so Modern Century could engage in contracts of carriage giving no redress to a shipper who suffers loss, for a suit against Transocean would be a useless waste of time and money. So Chan Charm Lam is of no assistance to Modern Century, as I find.

43. It follows that I find in favour of Sonu's International against Modern Century on the issue of liability.

Quantum

44. In the event that I was to find, as I now have, against Modern Century Mr Chan has sought to limit the extent of his client's liability by invoking exemption clauses in its standard terms and conditions embodied in the contract. But the difficulty I have with this is the failure by Mr Wong or otherwise the evidence to satisfy me that Sonu's International and Modern Century were parties to a contract which incorporated such terms. There are no FBDR forms upon which I can rely. And Mr Fabiani had had no prior dealings with Modern Century. He had no notice of their existence much less that he had contracted to be bound by them. Modern Century cannot as a consequence rely on them.

45. There is no argument against the extent of Sonu's International's loss as pleaded, and it shall be entitled to recover this amount less the deposit paid, interest and costs.

Judgment

46. There shall be judgment for the second plaintiff against the first defendant in the sum of US$181,165 together with interest at 10% per annum thereon from 1 March 1995 to this date of US$95,000, amounting in all to US$276,165.

47. Costs shall be to the second plaintiff taxed if not agreed.

48. The claim against the second defendant is dismissed with no order as to costs.

(The orders for costs having been made without benefit of argument are nisi at first instance, with liberty to set down for argument on notice given within 14 days of this date)