HONG KONG HUA GUANG INDUSTRIAL CO (A FIRM) v. MIDWAY INTERNATIONAL LTD AND OTHERS

In The High Court Of The

Hong Kong Special Administrative Region

Court Of First Instance

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Judgment

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Introduction

1. In 1995 Hong Kong Hua Guang Industrial Company (the plaintiff), a firm trading in clocks and watches in Hong Kong, purchased on ex warehouse terms a quantity of clocks (the goods) from Seiko Hong Kong Limited (Seiko) for resale to its customer in Huangpu, PRC. For the purpose of arranging the necessary shipment to the customer, the plaintiff on or about 22 November 1995 contracted Midway International Limited, a freight forwarder (the 1st defendant), to transport the goods consisting of 9840 quartz clocks that were eventually packed in 759 cartons and stuffed into 2 containers in readiness for the sea voyage. The plaintiff had since 1991 been using the shipping services of the 1st defendant for the shipment of various goods. The contract between the plaintiff and the 1st defendant in respect of this particular consignment contained a minimum of express stipulations, but plainly it was on terms that now fall to be identified. It was a matter of much controversy in the trial. It is upon such ascertainment that the rights and responsibilities of the various parties to the suit can be determined.

2. The 1st defendant brought in Coastrand Shipping Limited, a company of international freight forwarders (the 2nd defendant) to perform the relevant service contracted by the plaintiff. The 1st defendant's stance was that its obligation was merely that of an agent to arrange for the necessary shipment and to complete the transport documentation on the plaintiff's behalf.

3. On about 25 November 1995, Seiko delivered the goods to Chan Kam Wah (Chan) upon the instruction of the plaintiff. The plaintiff contended that Chan was its servant or agent at all relevant times, and accordingly it had acquired possession or an immediate right to possession of the goods, a fact hotly disputed by the 1st and 2nd defendants. The goods were then duly packed into two containers of the 2nd defendant that Waga Container Limited (Waga), a transportation contractor instructed by the 1st defendant, in turn sent to the Cha Kwo Ling container terminal, a location designated by the 2nd defendant for loading on to a barge for eventual transfer to a freighter for the sea journey to Huangpu. Upon delivery to the container terminal, the containers were transferred on to the barge "Ye Xiong" by Hango Maritime Limited (Hango), pursuant to the instruction of the 2nd defendant who had contracted it.

4. The evidence disclosed that sometime during that night, some thieves raided the barge and unlawfully removed the two containers amongst others and made off with them by sea. Quite soon after the incident, a vessel carrying the containers was intercepted by Chinese Customs in Chinese waters. The goods were confiscated and those on board apprehended. The exact circumstances surrounding the theft which was discovered on 28 November 1995 were nebulous, but it seemed certain that the unidentified culprits had obtained access to the barge which was lying in the sea by the container terminal by sea. There was no evidence to indicate that there was any nexus between them and the 1st and 2nd defendants.

5. It was against this background that the plaintiff launched proceedings to recover damages for its loss against both defendants. As against the 1st defendant, the case, as eventually mounted, was for damages for breach of agreement and bailment, it having abandoned the cause of action premised purely on negligence. The claim against the 2nd defendant was for breach of bailment alone.

6. In very broad outline, both defendants have challenged the plaintiff's entitlement to sue for lack of any legal or possessory title to the goods at the time of the pilferage. The 1st defendant, not surprisingly, required identification of the contractual terms that had allegedly been breached and strict proof of causation and damage. From the circumstances attending upon the chain of contracts and possession, each defendant has also denied having acquired the status of bailee of the goods in question. The 2nd defendant has alternatively contended that the contract between the 1st defendant and itself had incorporated certain standard terms and conditions thereby making it a bailment on terms thus defeating the claim in bailment whether brought by the plaintiff or the 1st defendant in its claim for indemnity in the Third Party proceedings. In these related proceedings, the 2nd defendant has counterclaimed, inter alia, for indemnity against the 1st defendant who has additionally sought an indemnity for negligence or breach of duty against the 2nd defendant.

The contractbetween the plaintiff and the 1st defendant

7. The question which must first be addressed relates to the capacity of the 1st defendant when it contracted with the plaintiff. Did the 1st defendant contract as principal for shipment of the goods to China or had it merely undertaken the role of agent for and on behalf of the plaintiff in arranging such transport by some other carrier?

8. On the evidence, I have no doubt that the claim of agency is insupportable. The present agreement was negotiated between Eric Cheung, a partner of the plaintiff (Cheung) and Alan Tam, the executive director of the 1st defendant (Tam). Tam gave evidence as DW1. Cheung and Tam had had prior dealings with each other in respect of earlier shipments of goods by the plaintiff. These transactions had been uneventful. Although the 1st defendant did not possess any means of transportation and had always had to resort to other carriers to effect shipment in the past, it was plain to me that on this occasion and as happened in the past, it had undertaken the task of carriage as principal for a fee. The remuneration agreed upon was for the entire carriage of the goods from Hong Kong to Huangpu as it included the costs of ocean freight, inland freight, truckage, but not it seemed drayage. Although the fee pleaded in the Amended Statement of Claim of the plaintiff was just $4,780, as was pointed out by Mr. Kerr counsel for the 2nd defendant, this amount was unlikely to have been correct. An invoice issued to the plaintiff by the 1st defendant dated 21 September 1995 in respect of a single 20-foot container from Hong Kong to the same destination was for an amount of $10,219.85 with an admitted profit of $5,601.50. For the very same undertaking, the 2nd defendant had only charged the 1st defendant $2,670. The goods on this occasion were housed in two 40-foot containers. It was the 2nd defendant's evidence that it would have billed the 1st defendant for $6,740 out of which payments would have to be made to the owners of the barge and the ocean carrier. That being so, I accept that the true cost to the plaintiff would have been in excess of $20,000 as contended by Stanley Ip (DW2), a director of the 2nd defendant (Ip). As a principal the 1st defendant stood to make a larger profit than the 2nd defendant. Were the 1st defendant to have been a mere go-between contracted to do no more than arrange delivery of the goods to China and to charge accordingly, the rate charged to the plaintiff would have been very handsome indeed. Furthermore, following notification of the loss, the 1st defendant proceeded to seek compensation from the 2nd defendant. It had done so upon it own initiative, no doubt in recognition of its potential liability as a principal contractor to the plaintiff. I therefore conclude that the contract in question contemplated that the 1st defendant was to be directly and contractually responsible to the plaintiff for the overall performance of the carriage. The role the 1st defendant had assumed was not purely introductory in nature in all th circumstances. It was most certainly the attitude of the plaintiff at the time of contract and when the writ was issued. As far as the plaintiff was concerned, the contract was with the 1st defendant and not the 2nd defendant with whom it had no direct dealings at any stage.

The terms of that contract

9. The contract was partly oral and partly in writing. In so far as it was oral, it arose from the negotiations between Cheung and Tam. The plaintiff's evidence (which I accept) was to the effect that its partner, Cheung had telephoned Tam with whom he had previously dealt in similar situations, informing him that the plaintiff needed transport for the goods to Huangpu. The price was agreed, instructions were given and the 1st defendant had accepted the undertaking. Prior to the agreement on the freight, the plaintiff had despatched a facsimile dated 22 November 1995 setting out the identity of the consignee, the nature of the goods, their quantity as well as the shipping marks. This faxed document formed the written part of the contract, which contract as I have remarked, had in any event contained a paucity of information. For one thing, it was completely silent as to whether the 1st defendant was entitled to delegate all or some aspects of the contractual obligation. As happened, the 1st defendant resorted to the services of the 2nd defendant in discharging its obligation under the contract. This the 1st defendant was without doubt entitled to do as in reality, the plaintiff was principally concerned to ensure that the goods were delivered to its buyer in the PRC safely and as quickly as possible. Under the sub-sale, the plaintiff would have been entitled to payment within 10 days of receipt of the goods by the Chinese buyer. Time was therefore a significant consideration to the plaintiff. The plaintiff did not seek to suggest that delegation was not permissible under the agreement. In fact, it seemed to have accepted that involvement of subcontrators in the shipment was contemplated. It had not been overly concerned if the carriage was to be farmed out to another carrier provided the objective was satisfactorily achieved and its interests safeguarded or at least, not compromised in any way.

10. The evidence was that the 2nd defendant was the only subcontractor able to effect delivery to that port at the material time. The 1st defendant had previously made use of the 2nd defendant to ship consignments to the same destination and those transactions have been carried out without mishap. Whilst it is true that the 1st defendant had made no enquiries with the 2nd defendant about its operation or security features, the 1st defendant was entitled to conclude that the 2nd defendant was a competent and trustworthy subcontractor to employ given the history of their past dealings. To put it another way, the delegation to the 2nd defendant was not so unreasonable as to tantamount to a breach of 1st defendant's primary contractual duty. This is pertinent to the 1st defendant's duty of care arising under the contract to take reasonable care of the goods, a duty which must flow by implication from the circumstances of the case. Such a duty to carry out the undertaking with reasonable care and skill is implied pursuant to section 5 of the Supply of Services (Implied Terms) Ordinance, Cap. 457.

11. Although performance of the contract could be delegated, ultimate responsibility remained firmly with the 1st defendant who would be exposed to liability for any improper performance occasioning loss by its subcontractor. However, there is no automatic liability for loss or damage to goods which occur while the goods are in the hands of the subcontractor unless the primary contractor has broken the contract or the terms of bailment in passing possession to the subcontractor. Unless the contract provides otherwise (not the case here), the principal contractor incurs no responsibility for damage to or loss of the goods unless the subcontractor has somehow breached his own duties as bailee: see Palmer on Bailment, 2nd ed. page 1353. It is therefore incumbent upon the plaintiff to positively establish on a balance of probabilities that the 2nd defendant had been negligent and that such negligence had led to the theft of the goods. Should such proof be forthcoming, the 1st defendant would be vicariously liable in damage.

12. It was the plaintiff's position that there must have been some negligence on the part of the party tasked with the safekeeping of the goods for the theft would not otherwise have been possible. Accordingly, it was said that the 1st defendant would be vicariously accountable. I propose to revert to this matter when the circumstances of the theft come to be considered.

The plaintiff's entitlement to prosecute its claims

13. The terms under which the goods were sold to the plaintiff by Seiko provided that legal property was not to pass to the buyer until payment had been effected in full in cash: see clause 14 of the relevant Order Forms. Payment of the price did not occur in any event until after the loss had been occasioned. The payment date was February 1996. It must, therefore, follow that the plaintiff did not enjoy any legal title at the material time. Neither had the 1st defendant any legal ownership over the goods when they went missing. A claim for damages in negligence for loss of or damage to property is unsustainable unless the claimant can demonstrate legal ownership of or possessory title to the property at the time when the loss or damage occurred. Contractual rights in relation to such property which have been adversely affected by such loss or damage are insufficient: The Aliakmon [1986] Lloyd's Law Reports vol.2, p.l. For this reason, the plaintiff's cause of action in negligence against the 1st defendant (which was not pursued) would have foundered ab initio. There was additionally the impediment thrown up by the authority in Tai Hing Cotton Mill v Liu Chong Hing Bank [1986] AC 80 that a claim in negligence brought independently from bailment cannot lie as the different standards applicable would lead to inconsistent findings. In the absence of legal ownership or possessory title, the 1st defendant's claim in the Third Party proceedings for negligence or breach of duty would likewise fail.

14. In relation to the claim for breach of agreement, the rights and responsibilities of the plaintiff and the 1st defendant would rest on the terms and conditions identified as flowing from that agreement. In choosing a subcontractor to execute the contract on its behalf, the 1st defendant would have to exercise proper care in the selection of a competent and skilful carrier. The available evidence in point would suggest that the appointment of the 2nd defendant was a proper exercise of the undoubted duty of the 1st defendant to take reasonable care of the goods. I cannot discern the this responsibility had been breached in any way. What the 1st defendant had done was to no more than properly discharge its part of the bargain. The 2nd defendant was in so far as concerns the agreement, an independent subcontractor for whom the 1st defendant would generally not be responsible. It would have been otherwise had the 2nd defendant as bailee of the goods breached its own duties under the bailment and that occasioned the loss incurred. There does not appear to have been a breach of the primary obligation undertaken under the agreement on the part of the 1st defendant. Its selection of the 2nd defendant was a sound and proper exercise of its commercial judgment in the circumstances.

15. Assuming for the moment that the 2nd defendant was a bailee for reward of the 1st defendant (a matter of considerable argument), all that the available evidence can demonstrate was that the theft had occurred on the barge. Exactly how the offence had been perpetrated and by whom remained uncertain as was previously stated. It was Ip's evidence for the 2nd defendant that he was aware that a watchman would remain aboard the barge after the goods were loaded on to it pending transshipment to an ocean freighter. The onus was upon the plaintiff to prove to the civil standard of proof that the theft was committed owing to the negligence of the 2nd defendant. This the plaintiff has failed to do in my view as the mere fact of loss is not synonymous with there having necessarily been a breach of duty by the 2nd defendant. Thus, the plaintiff has failed under this head of claim which must be dismissed. For completeness, I fail to see what more either defendant could have done to avoid this misadventure.

The case on bailment against both defendants

16. The evidence established that the goods were delivered to Chan on 25 November 1995 by Seiko. The plaintiff maintained that Chan was not an independent contractor but its servant or agent for the purpose of collection on its behalf. What seems reasonably unambiguous is the fact that the plaintiff at no time prior to the loss had ever acquired actual or physical possession of the goods. That it lacked legal title to them has been established. If it had somehow obtained possession, then the delivery of the goods to the 1st defendant under its direction and control would in the normal way create a bailment situation with the 1st defendant assuming the role of intermediate bailee with the duties and responsibilities usually associated with such a status. If and when the containers were passed into the possession of the 2nd defendant for shipment, the 2nd defendant would likewise have become a bailee. In both instances, by voluntarily taking possession of the goods, each defendant would have assumed an obligation to take due care of them and each would be liable to the plaintiff for its respective failure to do so, if any. Such subbailments have been denied.

17. The evidence indicated that the goods were collected by Chan upon the plaintiff's direction from Seiko. The cartons of clocks were not delivered directly to the plaintiff, but handed over to Waga for delivery to the container terminal. Waga had been employed to accomplish this by the 1st defendant but the 1st defendant was not in attendance when delivery was made by Seiko. In turn, the 2nd defendant had engaged Hango for a relatively small fee to load the two containers on the barge. There was some evidence that the barge was owned by Hango from its letter dated 5 January 1996, but the matter was by no means clear. What seems reasonably clear, however, was that neither defendant had acquired actual possession of the goods at any stage because of the intervening involvement of Waga and Hango. The defence contentions taken cumulatively logically refuted the creation of bailment in favour of either defendant. What they have each strenuously asserted did correctly reflect the reality of the situation in light of the state of the evidence.

18. The plaintiff having unarguably no legal title to the goods, equally cannot assert any immediate right to possession. To sustain its claims in bailment, it must have acquired either actual possession or an immediate right to possess on the authorities. Such right must have come into existence by the time of the disappearance of the goods. This clearly was not the scenario. Further, until the plaintiff tendered or paid the price, an event which only occurred in 1996, possession could not have vested in it at the crucial time: see Clerk & Lindsell on Torts, 17 ed., paras 13-51 and 13-52. For these reasons, the claims in bailment against both defendants were incompetent and should be dismissed as well.

19. If I were wrong to so conclude on the issue of bailment, was either defendant in breach of its obligations as bailee? It would appear not for the following reasons.

20. A bailee is liable for his own wrongful or negligent discharge of the terms of bailment. He would also incur vicarious liability for the acts of his sub-bailees delegated with the duty to take reasonable care of the goods: Palmer, p.869 to 870. In the circumstances of the case, the only identifiable bailee would have been Hango on whose barge the containers where stowed at the time of the theft. Hango would be liable in damages if the theft had arisen consequent upon some wrongful or negligent act of its servant acting in the course of his employment. To render the Hango liable, and by extension the anterior bailor/ bailee, namely the 1st and 2nd defendants, the servant must have been engaged upon some aspect of the duty of care in relation to the goods. It is not every negligent act of a servant that would make his master liable in bailment. As I have found, there was insufficient evidence to establish that the person entrusted with the proper care of the goods on the barge had slipped up. Quite who had been responsible for the misappropriation was difficult, if not impossible, to ascertain.

21. The 2nd defendant has prayed in aid certain trading terms which it said had been incorporated into and therefore governed the rights and responsibilities of all the parties to the suit. The terms were embodied in a set of Standard Trading Conditions which Ip testified was applicable to all business transactions since 1 January 1995. It was the 2nd defendant's contention that these contractual stipulations were common in the freight forwarding trade and must be taken to apply in the instant case, the clauses excluding and limiting liability being neither onerous nor usual on the authority of Hong Kong Container Services Co Ltd v Bewise Motors Co Ltd [1997] 2 HKC 615.

22. The circumstances showed that the 1st defendant on Tam's evidence was fully aware that it was common place for freight forwarders to seek to limit liability particularly when the goods were in the hands of third parties. It was therefore submitted that the 1st defendant must have been fully cognizant of the fact that such a clause would be incorporated into the contract between itself and the 2nd defendant at the time of contracting. The 1st defendant could accordingly be said to have accepted such a stipulation, consented to its inclusion and was bound by it. The bailment between the defendants was accordingly on terms urged by Mr. Kerr whose submissions I wholly accept in this regard.

23. As between the plaintiff and the 1st defendant, delegation by the 1st defendant of its duty to other carriers under the agreement was envisaged. In essence, the plaintiff left the actual shipment to the 1st defendant to undertake on whatever terms the 1st defendant thought fit as was submitted. It would therefore also be bound by the Standard Trading Conditions which I find to be applicable. By leaving matters to the discretion of the 1st defendant, the inference can only be that the plaintiff had at the time of contract, consented to them impliedly or ostensibly authorised the 1st defendant to entrust the goods to the 2nd defendant on those terms: see The Pioneer Container [1994] 2 HKLR 134. Under clause 14 of those terms and conditions, the 2nd defendant would only be liable in damage if the loss was occasioned by the wilful neglect or default of the 2nd defendant or its own servants.

24. The phrase "wilful neglect or default" has been construed in the Bewise case, supra to denote more than simple negligence. A person would not be guilty of such conduct unless he knew what he was doing and had intended to do what he had done which amounted to a breach of duty, or was recklessly careless in the sense of not caring whether his act or omission was or was not a breach of duty. In the circumstances of the case, it could not be said that the 2nd defendant had committed such default. As the 1st defendant was entitled to contract on such terms on the authority of the plaintiff, it would also have the benefit of such terms and conditions.

Conclusion

25. The plaintiff having wholly failed, it remains for me to dismiss its claims against both defendants. There will be an order nisi for costs in favour of both defendants, such costs to include their costs in the Third Party Proceedings, to be taxed if not agreed.