LEUNG WAN KEE SHIPYARD LTD v. DRAGON PEARL NIGHT CLUB RESTAURANT LTD AND ANOTHER

CACV 277/2010 & CACV 278/2010

CACV 277/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 277 OF 2010

(ON APPEAL FROM HCA NO. 889 OF 2010)

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BETWEEN

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CACV 278/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 278 OF 2010

(ON APPEAL FROM HCA NO. 1288 OF 2010)

BETWEEN

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JUDGMENT

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Hon Tang VP:

Introduction

1.  By a shipbuilding contract dated 2 July 2008 (“the Agreement”) made between Dragon Pearl Night Club Restaurant Limited (“Dragon Pearl”) and Leung Wan Kee Shipyard Limited (“LWK”), LWK agreed to build a 50 metre-long steel twin screw passenger cruiser in its shipyard in Wuzhou city in Guangxi province, in accordance with certain technical specifications annexed to the Agreement, at the price of HK$19,200,000 to be paid within 7 days of:

-   signing the Agreement (1st instalment);

-   after the keel of the Vessel is laid down (2nd instalment);

-   completing the hull of the Vessel (3rd instalment);

-   completing the superstructures of the Vessel (4th instalment);

-   launching the Vessel (5th instalment);

-   successfully completing the handover of the Vessel in Hong Kong and handing over the Vessel handover documentation to the owner (6th instalment);

-   within 30 days after expiry of the Vessel's warranty period (7th and last instalment).

2.  Both Dragon Pearl and LWK are Hong Kong companies, and the Agreement is governed by Hong Kong law.

3.  The Agreement also provided for inspection by Dragon Pearl's inspector on site of the construction works, and that:

"7.5     The risks during the construction of the Vessel shall be borne by (LWK), and (LWK) shall be responsible for taking out insurance covers (at LWK's costs) …"

4.  The first four instalments have been paid and the Vessel was launched on 19 September 2009 and arrived in Hong Kong in February 2010.

5.  LWK is the plaintiff in HCA 1288/2010.  Dragon Pearl is the 1^st Defendant in that action.  A Mr Chan Siu Tung, who was the managing director of the 1^st Defendant, is the 2^nd Defendant.  LWK complained, inter alia, of failure on the part of Dragon Pearl to pay the 5^th and/or 6^th instalments and other incidental payments.

6.  Dragon Pearl is the Plaintiff and LWK, the Defendant, in HCA 889/2010.  The essence of Dragon Pearl's claim is that

"4.   … at each stage of the construction of the steel harbour cruiser when an instalment of the price becomes due and payable, property in the steel harbour cruiser, so far as then finished, shall pass to the Plaintiff upon acceptance of the work done."

The Appeal

7.  A total of six applications (in the two actions) was heard before Deputy High Court Judge Au-Yeung on 29 October 2010.  This is Dragon Pearl's appeals. 

8.  Mr Michael Yin, who appeared for Dragon Pearl in the appeals, has informed us that unless we are of the view that the property in the Vessel had passed to Dragon Pearl, "so far as then finished … upon acceptance of the work done" by Dragon Pearl, it would not be necessary for us to consider any of the other issues.

9.  Mr Yin relied on Seath v. Moore (1886) 11 HL 350.  In particular, the following observations in the judgment of Lord Watson at page 380:

"The English decisions to which I have referred appear to me to establish the principle that, where it appears to be the intention, or in other words the agreement, of the parties to a contract for building a ship, that at a particular stage of its construction, the vessel, so far as then finished, shall be appropriated to the contract of sale, the property of the vessel as soon as it has reached that stage of completion will pass to the purchaser, and subsequent additions made to the chattel thus vested in the purchaser will, accessione, become his property. It also appears to me to be the result of these decisions that such an intention or agreement ought (in the absence of any circumstances pointing to a different conclusion) to be inferred from a provision in the contract to the effect that an instalment of the price shall be paid at a particular stage, coupled with the fact that the instalment has been duly paid, and that until the vessel reached that stage the execution of the work was regularly inspected by the purchaser, or some one on his behalf. I do not think it is indispensable, in order to sustain that inference, that there shall be a stipulation for payment of an instalment in the original contract, or that the stipulated instalment shall have been actually paid. The absence of these considerations, which are, in themselves, of great importance, might, in my opinion, be supplied by other circumstances. At all events, whenever during the currency of a contract which contains no such stipulation, the parties in good faith agree that the purchaser shall pay a sum to account of the price, and that the vessel, so far as constructed at the date of that payment, shall be appropriated to the contract, I see no reason to doubt that the new covenant so made ought to have the same effect as if it had been a term of the original contract.  I am, however, of opinion that, by the law of England, in order to pass the property as sold, there must always be facts proved or admitted sufficient to warrant the inference that the purchaser has agreed to accept the corpus so far as completed as in part implement of the contract of sale."

10.  Mr Yin accepted that Seath v Moore is not authority that as a matter of law, if a ship is built under the superintendence of the buyer, and it was to be paid for by installments, there is a contract for the sale of the ship as it was being built.  He accepted that these are but marks which may enable such a conclusion to be reached. 

11.  Seath v Moore was decided before the Sale of Goods Act 1893, and should be read with Sir James Liang & Sons, Limited v Barclay, Curle & Co., Limited [1908] AC 35.  There, the contract expressly provided for:

"… Delivery to be considered completed after the satisfactory official trial provided for as follows: … The vessels will not be considered as delivered to and finally accepted by the purchasers until the said ships have passed the official trial trip in Genoa, have been approved in Genoa by the Italian emigration authorities, and all conditions of the contract have been fulfilled. …"

12.  Section 18 of the Sales of Goods Act 1893 where relevant provided:

"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 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."

13.  Section 20 of the Sale of Goods Ordinance is modeled on section 18 of the Sale of Goods Act and Rule 5 governs the present case.

14.  In Sir James Liang, Lord Dunedin (the Lord President) in the First Division of the Court of Session, Scotland explained that prior to the Sale of Goods Act,

"… you might contract in what terms you pleased – you might contract that property should pass - and yet it was impossible to make the property pass without delivery; … But the whole matter has been really altered by the Sale of Goods Act (56 & 57 Vict. c. 71), and now it is quite clear that by the law of Scotland, if people choose so to contract, they can pass the property of a thing which is being sold without delivery.  That being so, it seems to me clear, and I think it should be clearly laid down, that if people want these consequences to happen they must really say so.  There is not the slightest difficulty in so framing a contract, if it is wished, as between a shipbuilder and the person who is buying the ship, that the property in a gradually constructed ship shall be held to pass at certain stages; but if so, I think it must be clearly said.

'My Lords, in the contract under discussion not only is that not clearly said, but I think the other thing is said.  I think that the only sale that is found in this contract is the sale of a completed ship. …"

15.  On appeal to the House of Lords, Lord Loreburn LC said at page 43:

"… The facts referred to by Mr. Clyde and Mr. Smith, namely, that the ship was to be paid for by instalments, and that there was a power of inspection on the part of the purchasers, may be marks pointing to the property passing, but it is not conclusive, and the question still remains as to what the contract really means.

I think the contract was for a completed ship, and the risk lay upon the builders until delivery, and there was no intention to make delivery or to part with the property until the vessel was completed. …"

16.  The Earl of Halsbury said:

"My Lords, I am of the same opinion.  There is no doubt that a contract might be so framed as to give the purchaser power to claim the property in those parts which, when they are put together, make the complete ship; but in each case the question must be whether or not the contract has been such, and I think this has not been so made."

17.  Lord Robertson said at page 44:

"My Lords, the question in the present appeal seems to me to be governed by the Sale of Goods Act, and, by that statute, to be determinable by the intention of the instrument under which the ship is built.  In aid and supplement of construction, the statute supplies certain rules; but these may or may not come in operation, according as the contract requires it. …"

18.  And at page 45:

"… the fifth head of the 18th section of the Act is so directly applicable that it required perhaps more attention than it has received. …"

19.  There is no dispute that the Vessel was not in a deliverable state during its construction.  Thus, unless a contrary intention can be found in the Agreement, the appeal must fail. 

20.  Both Sir James Laing and Seath v Moore were referred to in Pacific Islands Shipbuilding Co Ltd v Don the Beachcomber Ltd (No.3) [1963] HKLR 515.  However, there the contract expressly provided that:

"… that if the purchasers have made the stipulated payments the ship shall at all stages of construction be deemed the property of the purchasers …"  page 518.

21.  So Pacific Islands provide no guidance.

22.  Mr Yin referred us to the judgment of Romer J at first instance, In re Blyth Shipbuilding and Dry Docks Company Limited [1926] 1 Ch 494, where there was also a similar express provision, for the passing of the property of the Vessel being built.

23.  However, Romer J's judgment shows the issue remains whether a contract was for the sale of a completed ship or "for the sale from time to time of a ship in its various stages of construction…".  If the latter then notwithstanding the property was not in a deliverable state, the property would pass, notwithstanding Rule 5, if a contrary intention appears, which may be expressed or inferred.  

24.  In other words, the matter turns on the provisions of the particular agreement.

25.  Here, the Agreement had annexed to it certain technical specifications.  Sections 8 and 9 of those specifications related to trials and commissioning and delivery.  Section 8.1 referred to berthing trials; Section 8.2 Sea trials; Section 9.1 provided that on completion of Sea trials, the vessel shall be delivered to (Dragon Pearl) in Hong Kong for handover, and when

"All permits, manuals, trial reports, warrant documentation and other relevant documents as specified shall be hand over …"  Section 9.2

26.  Clause 5.1 of the Agreement also so provided:

"Upon completion of construction of the Vessel, trials and handover shall take place in accordance with requirements. Preliminary anchoring and navigation trials （系泊及航行初步試驗） for the Vessel shall be conducted in mainland China, and final navigation trials （最後航行試驗） shall be conducted in Hong Kong ..."

27.  The language used in the Agreement may be compared with the provisions in Sir James Liang (see para. 11 above).

28.  I am of the view that the Agreement is for the sale of the completed vessel, with delivery to take place after preliminary sea trial in the Mainland and final sea trial in Hong Kong.  As Mr Suen submitted under Clause 5.2 of the Agreement, LWK must complete the construction of the Vessel（完成本船） and deliver it at LWK's shipyard in Hong Kong（在乙方香港梁穩記船廠交船）. 

29.  I also note that in both Pacific Islands and In re Blyth, both governed by Rule 5 and the decision in Sir James Laing, there were express provisions for the passing of property in the Vessel as it was being built on payment of a relevant instalment.  Having regard to Rule 5 and the decision in Sir James Laing, I would expect parties to a ship building contract would expressly provide for the passing of property during the building of a ship, if they so intend it.

30.  Mr Jenkin Suen for LWK also relied on Clause 4 of the Agreement which provided that the payment terms are CIF Hong Kong（CIF 香港） which he relied on as an indicator of the parties' intention that notwithstanding the provision for payment by stages, the parties envisaged the conveyance of a completed and finished vessel from mainland China to Hong Kong and the delivery of such completed and finished Vessel together with handover documentation in Hong Kong.  Given the provisions regarding delivery referred to in paras. 25, 25 and 28 above, I believe this provision provides further support for the view that the Agreement was for the sale of the completed ship.

31.  Mr Yin relied on Clause 7.5 which provided that the risks during the construction of the Vessel should be borne by LWK and that LWK shall be responsible for taking out insurance for all the materials and equipments used and installed (or to be used and installed) on the Vessel.  Mr Yin submitted that if property in the Vessel would not pass until delivery, it would have been unnecessary to provide that such risks should be borne by LWK. There is some force in this submission but insufficient to overcome the conclusion which I have come to.  I believe the true significance of Clause 7.5 is that LWK was obliged to obtain insurance during the construction which would, of course, indirectly benefit Dragon Pearl. 

32.  Lastly, there is a difficult provision in the Agreement, the translation of which reads:

"11.6    If in the course of construction of the Vessel, Party B encounters financial, strike or other problems which prevent Party B from performing this contract, Party A and Party B may retain (a) qualified arbitrator(s) to assess the value of the Vessel as of that date and obtain ownership of the Vessel.  Party A and Party B must compensate the other party for the difference in value ascertained upon valuation by the arbitrator(s). Party A and Party B shall each bear all of their own respective expenses."

33.  Fortunately it is not necessary to deal with Clause 11.6 because neither party could make sense of it.  Mr Yin is content if this clause is regarded by the court as neutral, namely, assisting neither party.  I do not understand Clause 11.6 and am happy to proceed as suggested by Mr Yin.

34.  For the above reasons, I would dismiss the appeals and make an order nisi that LWK is to have the costs of both appeals.

Hon Bharwaney J:

35.  I agree with the judgment of the Vice-President and with the orders proposed.