NANTONG ANGANG GARMENTS CO LTD v. HELLMANN INTERNATIONAL FORWARDERS LTD

cacv 64/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 64 of 2005

(on appeal from HCCL NO. 117 of 1994)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal from the judgment of Stone J dated 28 January 2005 dismissing the summons dated 23 November 2004 of Silking Development Ltd and Lerner Stores Inc (“the third parties”).  The summons issued pursuant to Order 35, rule 2, Rules of the High Court, Cap. 4 was for extension of time for making the application and for an order that the order of Stone J dated 20 November 2002 entered in favour of the defendant against the third parties be set aside.  At the conclusion of the hearing, judgment was reserved which we now give.

Background

2.  It is necessary to put the judgment obtained in the third party action in context.

The pleadings

3.  The main action was a claim by the plaintiff manufacturer against the defendant freight forwarder for damages for breach of a contract of carriage by air, the consignee being Citibank Hong Kong.  The terms of the contract were set out in a Shipper’s Letter of Instructions dated 23 February 1994.  The goods had been manufactured for the 2^nd third party an American company.  The goods consisting of 903 cartons of garments and delivered by the plaintiff to the defendant’s Shanghai office were to be sent by the defendant by air freight directly from Shanghai to Columbus, USA.  That did not happen.  Instead, the plaintiff alleged that without its consent, not only did the defendant cross out “Citibank” the original consignee named in the 2 airway bills and unilaterally named the 2^nd third party as consignee, it also caused the goods to be re-routed to Hong Kong and released by the defendant to the 1^st third party, a company which acted as agent for the 2^nd third party.  The plaintiff also alleged that, on becoming aware of this state of affairs on 3 March 1999, it gave instructions to the defendant to withhold the goods but the defendant wrongfully released them to the 1^st third party who was neither the consignee nor a person entitled to receive the goods.  The amount claimed was US$284,480, interest and costs.  There were further or alternative claims in negligence and/or conversion, the latter being premised on the plaintiff being the owner of the goods and/or entitled to immediate possession of the same. 

4.  In its defence, the defendant denied that there was any contract of carriage between it and the plaintiff and asserted that it had accepted the goods in Shanghai for carriage to Columbus on the instructions of the 1^st third party for delivery to the 2^nd third party.  Specifically, the defendant denied that the plaintiff was entitled to have the goods delivered to it or in accordance with its instructions.  In any event, it alleged that its liability was limited by clause 21 which appeared on the reverse side of the airway bills and the amended Warsaw Convention.  Third party notices, in substantially similar terms were subsequently served on each of the third parties to the effect that in the event of the defendant being liable to the plaintiff notwithstanding the defence, it claimed to be entitled to be indemnified by the third parties “against any liability on the part of the defendant to the owners of the goods and/or any person having the right to immediate possession thereof …”.  It also claimed contribution in the event that the defendant and the third parties were liable to the plaintiff for the same damage.  The defendant’s pleaded case against the third parties as originally framed appeared to have been based solely on an implied indemnity said to arise from complying with instructions given by the third parties.

5.  The 1^st third party filed a defence to the effect that at all material times it merely acted as the agent of the 2^nd third party.  It admitted sending letters of instructions dated 28 January 1994 and 4 February 1994 to the defendant requesting it to transport the goods from Shanghai to Columbus for delivery to the 2^nd third party.  It further admitted faxing instructions as per the 2^nd third party’s instructions to ship the goods via Hong Kong.  Having received further instructions from the 2^nd third party, it orally instructed the defendant to deliver the goods to the 1^st third party “as agent for [the 2^nd third party]”.  It accepted that it received 902 cartons on or about 7 March but denied any liability to indemnify the defendant in respect of the latter’s liability to the owners of the goods and/or any person having a possessory title.  It further denied any liability for conversion and/or contribution as claimed.

6.  The 2^nd third party pleaded that the 1^st third party was its agent, that it had placed orders with and paid for fabric for the goods to be manufactured by Drake International Holdings Ltd, and that the plaintiff was a sub-contractor of Drake.  It therefore denied that the plaintiff was the owner of the goods or was entitled to claim for the value of the goods without reduction of the price of the fabrics.  The rest of the defence was similar to that filed by the 1^st third party.

7.  Directions were given in March 2002, some eight months before the trial, that the main action and the third-party action be heard at the same time.

The trial in 2002

8.  From the time the third party notices were served until some three weeks before the trial, the third parties had been legally represented.  Their solicitors, Simmons and Simmons, did not come off the record until 29 October 2002.  The third parties did not instruct another firm in their place and were not represented at the trial.  Although Mr Au of the first third-party was in court on the first day of the trial, it is clear from Mr Au’s affirmation that his reason for attending court was in answer to a subpoena served on him by the defendant and that he was “ready to give evidence, inter alia, in support of [the defendant’s] contention that the plaintiff had no title to the goods”.  No request was made by him at the beginning of the trial ‘to represent the third parties’. 

9.  After the appeal hearing, the court called for a transcript of the hearing in 2002.  This together with the written submissions of the plaintiff and defendant submitted to the judge revealed that when the trial began, liability was no longer in issue, with the defendant conceding that it had acted in breach of the contract of carriage entered into with the plaintiff.  The outstanding issue was quantum.  On that question, it was the defendant’s case that quantum should be reduced on the grounds that (a) the 2^nd third party had paid for the fabric (which fact it proposed to establish by the evidence of its witnesses Au Hoi Fung and Michael Toole) and hence the plaintiff’s interest in the goods was of a significantly lesser sum than the invoice price; (b) that the limitation provisions in Art. 24 of the Carriage by Air Ordinance, Cap. 500 applied; and (c) that the Warsaw Convention applied limiting recovery to US$276,469.13.  Ground (a) reflected the defence pleaded by the 2^nd third party.

10.  The proceedings continued on that footing.  The real defence was ground (a); the other grounds, if successful, would only have reduced quantum by about US$7,000 (and not US$3,000 as had been represented to the judge who commented that that line of defence was not worth “powder and shot”). 

11.  The plaintiff called its witness Daniel Ng who gave evidence as to, inter alia, the ownership of the goods.  His evidence was interrupted by a lengthy exchange between the judge and counsel for the defendant, Mr Kat, when the judge questioned the viability of the defendant’s defence based on ownership of the fabric if Mr Ng’s evidence on that issue were accepted.  There followed this exchange:

MR KAT:	That’s it, my Lord.  That’s then in my third party proceedings my indemnity.  Those are the only ones I need.
COURT:	Of course, but I’m factoring in because I don’t see anyone here.  There is no one here from Silking or Lerner.
MR KAT:	That’s right, my Lord.
COURT:	Is that right?
MR KAT:	Well, I’ve got -- I’ve actually subpoenaed the Silking witness.
COURT:	But I mean do I have any representation?  Is anyone asserting a right…
MR KAT:	No, no, they’re not here to oppose judgment, my Lord.
COURT:	Is anyone asserting a right to be heard?
MR KAT:	No, my Lord.  Simmons & Simmons have come off the record about…
COURT:	That’s right.
MR KAT:	…a little while ago.
COURT:	They’ve come off.  So Simmons & Simmons off records.
MR KAT:	For both third parties, and then don’t attend they’re not represented at the opening of the trial.
COURT:	Well, there is no one here.  Put it like this: there is no one here who is saying, “Please, Judge, I want you to hear me on behalf of Silking or Lerner”.  You apparently are subpoenaing someone who is here under coercion to give evidence that you want from him.
MR KAT:	Yes, from Silking, and I’m calling, by way of a hearsay notice, the evidence that Lerner would have given in third party proceedings and I’m calling that in this trial.
(Tr. pp. 13M-14H)

Pausing there, it is a little surprising that there is no record of Mr Au having been asked by the court or counsel for the defendant to confirm his position, if only to avoid any possible misunderstanding. 

12.  Be that as it may, in the course of Mr Ng’s evidence, it became apparent that he had documents with him in court some of which had to be discovered.  This necessitated an adjournment at 12.15 pm.  Shortly before that, the judge acceded to the request of counsel for the defendant, Mr Kat, that Mr Au who was summonsed to court by subpoena be released until the following day.  It was left on the basis that Mr Au would be warned to attend court at 11 am the next day but that those instructing Mr Kat would call him at the end of the day and tell him whether it was going to be 11 or later.

13.  When the court resumed the hearing shortly before 3 pm on the first day, Mr Kat advised the judge that the plaintiff and defendant had settled the main action on the basis that there be judgment for the plaintiff for US$370,000 inclusive of interest and costs with a payment schedule.  It is to be noted that the plaintiff’s claim was for US$284,480 plus interest and costs.  To all intents and purposes, the defendant had abandoned its case on the ownership of the fabric as to which Mr Au was a key witness.  It had no doubt been decided that, tactically, the defendant would do better to submit to judgment and recover from the third parties in the third party action.  The judge made an order in terms after which Mr Kat requested that Mr Au be formally discharged.  The following exchange then took place:

COURT:	Order - - I make an order in terms of the settlement in the head action.  Two, an order discharging forthwith the subpoena on Au Hoi-fung and dispensing with any requirement further to attend to give evidence in this action.  You don’t need a third party, do you?
MR KAT:	No, my Lord.
….
COURT:	Right.  Now, Miss Cheng, it seems to me, just looking at the shape of this, that Mr Kat wants to address me in the third party action.
….
MR KAT:	Your Lordship will find the relevant documents in the relevant places.  The two third parties do not attend.  Although they had notice of this hearing, my Lord, they came - - Simmons & Simmons came off the record, I understand, a week or two ago.  My Lord, third party pleadings.  My statement of claim - - my statements of claim can be found at pages A42 to A44 in the bundle.  My Lord, I …
COURT:	No, I haven’t really looked at this.  Let’s - - just take me through it, will you, Mr Kat.
(Tr. p. 29G-S)

Pausing there, in the context, the judge’s question to counsel upon discharging the subpoena was really whether Mr Au was needed for the third party action.  Of course, at this stage Mr Au was not in court having been released earlier that day “until further notice”.  In my view, at that point counsel ought to have invited the court’s attention to the fact that Mr Au was a director of the 1^st third party and that Mr Au ought at least to have been advised that the court was proceeding to hear the third party action and the reasons therefore.  I have to say the fact that this was not done fills me with unease because there is nothing in the record to show that the judge was alive to the fact that Mr Au was a director of the 1^st defendant and that at no stage until his release ‘until further notice’ had he been asked to confirm that the third parties did not wish to be heard in the event of the third party action proceeding.  A layman may be forgiven for not understanding the niceties of a third party claim when he had reason to believe that the third parties and the defendant had a united front on the ownership issue vis-à-vis the plaintiff.  

14.  The third party action proceeded but after Mr Kat’s opening there was a 40 minute adjournment pending the arrival of his witness.  When the hearing resumed Mr Kat submitted handwritten draft amendments to the statements of claim against the third parties, precipitated no doubt by the judge’s observations made in the course of his opening.  Those amendments introduced for the first time a cause of action based on a letter of indemnity dated 4 March 1994 written by the first third-party which Mr Kat submitted should be construed as having been provided on its own behalf as well as on behalf of the second third party undertaking and agreeing “to bear all responsibilities/ liabilities whatsoever directly or indirectly arising from the route change”.  He obtained leave to do so and typed-up copies were submitted to the court when the hearing continued the following morning.  However the defendant did not file the amended statements of claim with the registry or serve the amended pleading on the third parties.  Until the hearing of the present appeal when copies were supplied to the parties, neither counsel (who did not appear for the parties in 2002) had had sight of the amendments which formed one of the grounds for the judge’s finding that the third parties were jointly and severally liable to indemnify the defendant in respect of its liability to the plaintiff in the main action together with interest and costs.

15.  The judge gave judgment in favour of the defendant against the third parties and each of them based on the contractual indemnity introduced by the amendment as well as on the implied indemnity.

The proceedings below

16.  Approximately 2 years after the judgment in the third-party action, the third parties took out a summons on 23 November 2004 under Order 35, rule 2 to set aside that judgment and for an extension of time to do so.  Order 35, rule 2 reads as follows:

“2.	Judgment, etc., given in absence of party may be set aside (O. 35, r. 2)
	(1)	Any judgment, order or verdict obtained where one party does not appear at the trial may be set aside by the Court, on the application of that party, on such terms as it thinks just.
	(2)	An application under this rule must be made within 7 days after the trial.”

17.  A short chronology of the key events appears below:

Date	Event
20.11.02	Judgment of Stone J
28.11.02	Reasons for Judgment handed down and copies sent to TPs
19.12.02	receipt by 1st TP of copy sealed order and letter of demand for payment from D’s solicitors
08.01.03	letter of demand enclosing sealed order sent by D’s solicitors by registered post to 2nd TP
12.03.04	D’s bill of costs sent to 2nd TP
23.03.04	D’s bill of costs and notice of taxation appointment returnable on 27 April 2004 served on the 1st TP
27.04.04	D’s costs taxed at $889,070.51
15.06.04	copy sealed allocatur served on 1st TP
15.07.04	demand for taxed costs of $889,070.51 enclosing allocatur dated 14.06.04 served on 2nd TP
09.08.04	further demand for judgment sum , interest and costs sent to 2nd TP
10.09.04	motion for summary judgment against 2nd TP filed in New York
29.09.04	2nd TP files cross-motion in NY proceedings against D
25.10.04	affirmation of Au in support of application under O.35, r.2
01.11.04	O.35 summons issued by TPs
13.12.04	hearing of O.35 summons by Stone J
28.01.05	Judgment of Stone J dismissing summons
07.03.05	New York decision on summary judgment application in favour of D

18.  It is clear from the above chronology that this is not a case where the third parties were ignorant of the judgment made against them.  They were aware of the judgment shortly after the Reasons For Judgment were handed down.  In any event, by mid-January 2003, both third parties had had served on them by the defendant’s then solicitors, copies of the sealed order and demand for payment.  They did not see fit to seek legal advice in Hong Kong concerning the judgment obtained against them although, as noted above, they had been legally represented throughout until shortly before the trial.  The 1^st third party as agent awaited its principal’s instructions and the principal was only goaded into action by the New York proceedings.

19.  The judge dismissed the application.  On the issue of the extension of time, the judge found that for almost 2 years the third parties ignored the judgment until proceedings were taken in New York against the 2^nd third party by way of enforcement of the judgment.  He therefore declined to exercise the court’s discretion to grant the extension sought.  Whilst he considered that that would have disposed of the application, the judge went on to consider the merits in case he were wrong in his conclusion on the first point and proceeded to find no procedural or substantive merit in the application. 

This appeal

Extension of time: applicable principles

20.  Mr Lai who appeared for the parties accepted that his clients’ delay was both inordinate and inexcusable.  He accepted that in those circumstances he faced a heavy burden whilst Mr Haynes who appeared for the defendant submitted that where no satisfactory or adequate reason for the delay had been given, as in the present case, that was the end of the matter, citing the following passage from the judgment of Keith J in Chiu Sin-chung v Yu Yan-yan [1993] 1 HKLR 225 at 228 ll. 1-3:

“(ii)   … the pre-requisite of an application to extend time is a clear statement as to the reasons for the time limits not having been observed and for any delay in an applying for an extension.”

21.  But that passage must be read in context.  It was one of eight principles Keith J extracted from various authorities.  Those at (iv) and (viii) are also relevant and it is clear that the reasons for the delay were but one of the factors to be taken into account.  At (viii), it is stated that where the delay is substantial and is not wholly excusable, much more merit is required to overcome it.  In fact, Mr Haynes’ submission reflected the approach that had been adopted in Bristol-Myers Squibb and Co. v Registrar of Trade Marks [1995] 1 HKC 171.  In Mobil Petroleum Co Inc & Another v Registrar of Trade Marks [2001] 1 HKLRD 225, Hartmann J after reviewing recent authorities as to the correct principles to be employed in exercising the court’s discretion for extension of time under Ord. 3, rule 5, RHC came to the following conclusion as to the present law:

“While there may, at the time when Kaplan J gave his judgment in Bristol-Myers, have been two differing approaches, I am satisfied that with the judgments in Mortgage Corp Plc v Sandoes [1997] PNLR 263 and Finnegan v Parkside Health Authority [1998] 1 WLR 411 the law is now settled as to the correct principle to be adopted in the exercise of the court’s discretion under O.3 r.5.  It is not the principle adopted by Kaplan J; namely, that before any discretion is exercised, there must first be an acceptable reason for any delay.  It is instead the principle that all matters, including the adequacy of any reason for delay, must be considered, the one to be weighed against the other, in the exercise of the court’s discretion.”

I agree with the principles as stated by Hartmann J.  As Sir Thomas Bingham MR observed in Costello v Somerset County Council [1993] 1 WLR 256 at 264C “a rigid, mechanistic approach is inappropriate”.  In my view, the court must consider all the circumstances and decide whether the overall justice of the case requires the exercise of the discretion to extend time.

22.  In my view, there are a number of points which give rise to serious doubt as to the correctness of the judge’s conclusion that there was no merit (procedural or substantive) in the third parties’ application to set aside under Ord. 35, rule 2.  Those matters set out below lead to the conclusion that the overall justice of the case requires that the appeal be allowed.

(a)   Implied indemnity

23.  As noted above, the original pleaded case in the third party statements of claims was based on an implied indemnity.  In Yeung Kai Yung v Hong Kong and Shanghai Banking Corporation [1981] AC 787, the Privy Council (at 796 G-H) set out the general principle as laid down by the Earl of Halsbury LC in Sheffield Corporation v Barclay [1905] AC 392, 397 in these terms:

“In Dugdale v. Lovering (1875) L.R. 10 C.P. 196 Mr. Cave, arguing for the plaintiff, put the position thus: ‘It is a general principle of law when an act is done by one person at the request of another which act is not in itself manifestly tortious to the knowledge of the person doing it, and such act turns out to be injurious to the rights of a third party, the person doing it is entitled to an indemnity from him who requested that it should be done.’  This though only the argument of counsel was adopted and acted upon by the court, and I believe it accurately expresses the law.”

But as Mustill LJ explained in Naviera Mogor SA v Societe Metallurgique de Normandie (The “Nogar Marin”) [1988] 1 LL. Rep. 412 at 422:

“… the implication of an obligation to indemnify is not automatic.  It must always depend on the facts of the individual case, and on the terms of any underlying contractual relationship.”

24.  The facts as reflected in (1) the defence filed by the defendant in the main action; (2) the defences of the third parties to the third party statements of claim; (3) the witness statement of William Chiu of the defendant show that the instructions given to re-route were premised on the 2^nd third party being the consignee in the airway bills.  Indeed, it would appear to be common ground between the defendant and the third parties that the instructions for carriage of the goods emanated from the 1^st third party as agent for the 2^nd third party, that the 2^nd third party was the consignee and that the request for re-routing was made by the 1^st third party as agent for the 2^nd third party.  If that be the case, the re-routing could not have caused any loss in respect of which the third parties could be liable.  Put another way, if the loss is attributable to the breach of contract of carriage between the plaintiff and the defendant under which the consignee was Citibank, as was the plaintiff’s case, the loss could not have been caused by the re-routing but by misdelivery by the defendant by releasing the goods to a party other than the consignee or its agent.  That act would have been a wrongful act on the part of the defendant such as would disentitle it to any implied indemnity under the general principle set out above.

(b)   Contractual indemnity

25.  The judge’s conclusion that the third parties were jointly and severally liable under the letter of indemnity appears to be problematic.  This came about through an amendment granted at the hearing of the third party action in the absence of the third parties.  The amendment introduced a new cause of action as to which the third parties have not been accorded the opportunity to respond.  To deprive the third parties of the opportunity to deal with the amendment offends one’s sense of justice. 

26.  That there are arguable defences is clear.  First, the indemnity was given in respect of “responsibilities/liabilities whatsoever directly or indirectly arising from or relating to the said route change”.  The indemnity was not expressed to be in respect of the release of the goods to the 1^st third party: rather, it was limited in terms to the re-routing.  As a matter of construction, the judge’s interpretation is plainly susceptible to challenge.  Second, the 1^st third party’s pleaded case was that it acted throughout as agent for the 2^nd third party.  There was no evidence independent of the indemnity letter to rebut that assertion.  Whilst there can be cases where an agent is liable together with the disclosed principal, and that would arise, for example, where the contract expressly provides that the agent be liable concurrently with the principal, the agent would not normally assume personal liability.  As stated in Bowstead and Reynolds on Agency 17^thEdn. at para. 9-005,

“the question whether an agent who has made a contract on behalf of his principal is to be deemed to have contracted personally, and, if so the extent his liability, depends on the intention of the parties to be deduced from the nature and terms of the particular contract and the surrounding circumstances, including any binding custom.”

27.  The test is an objective one.  Taking the surrounding circumstances into account, I am troubled by the conclusion that the 1^st third party as agent should have been held to have assumed personal liability by providing the indemnity letter as agent.

(c)   Mr Au

28.  I have set out at some length the issue concerning Mr Au’s presence in court on the first day of the trial of the main action.  My concerns have already been set out: see paragraphs 11 to 13 above.  It would have dispelled all residual doubts had the court ascertained from Mr Au directly whether but for the subpoena he would not have attended the hearing and that he did not wish to represent one or both of the third parties in the third party action in the event of the third party action having to be tried.  Whilst of itself and absent other considerations it may not be sufficient given the inordinate and inexcusable delay on the part of the third parties in making the Ord. 35 application, it is nevertheless a factor to be taken account when considering the overall justice of the case.

Orders

29.  For the reasons set out above, I have no hesitation in allowing this appeal.  Accordingly, the order below is to be set aside.  I would also make an order nisi that costs (here and below) be in favour of the third parties.

30.  On the third parties’ application under Ord. 35, rule 2, I would order that (1) time for the application be extended; (2) the order of Stone J dated 20 November 2002 be set aside on condition that all costs thrown away as a result the third party action including all costs incurred in the enforcement of the judgment in Hong Kong and the United States be borne by the third parties in any event; and (3) there be a re-trial of the third party action before a different judge.

Hon Cheung JA:

31.  I agree with the judgment of Le Pichon JA.