MARIANNE TRADING LTD. v. CHEUNG YAN TIN AND OTHERS

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HEADNOTE

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Sale of goods - duties of FOB buyer and seller - buyers failure to make arrangements for collection during shipment period fatal to claim for non-delivery.

1990, No. A4289

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Plaintiff claims damages arising out of a contract in writing dated 23rd December 1988 whereby it agreed to purchase from the Defendant 5,400 of Maling Brand canned Chinese mushrooms. The Plaintiff alleges that it was entitled to reject 918 cartons which were in fact delivered. The damage under this head of claim is said to be US$29,145. The Plaintiff further alleges that the Defendant failed to deliver the balance of 4,482 cartons and that, in consequence thereof, it has suffered damage in the sum of US$13,446. The Defendant has a counterclaim for non-acceptance in the sum of US$8,964.

2. The quality claim and a non-delivery claim are quite separate but before dealing with them in turn, I should set out the basic facts relevant to each claim.

The Quality Claim

3. The order was dated 23rd December 1988 for 32,400 cans packed in 5,400 cartons containing 6 cans. The mushrooms were to have been produced by Putian Cannery in China bearing can code Q5 and FEC No. 07858. The total price was US$140,000, FOB Shenzhen. It was an agreed term that the cans should be free from rust, corrosion, dents or foreign materials.

4. Mr. Pei, the Managing Director of the Plaintiff asserts that on or about 27th December 1988, Mr. Ng of the Defendant informed him that only 10,800 cans in 1,800 cases of the mushrooms were available for inspection and collection by his company and that the remaining 21,600 cans would be available for collection at a later date. I should add that 1,800 cases could be loaded into two containers measuring 20 feet in length.

5. Having received this information, Mr. Pei went to warehouse no. 706 at Shun Ghang in Shenzhen on or about 27th/28th December to inspect the goods. It was a public warehouse and although there were a lot of goods in the warehouse, he was shown 1,800 cases of Maling Brand canned mushrooms. He says that he randomly selected several cans of the mushrooms for inspection and noted that they all bore the code Q5, indicating they were canned by the Putian Cannery in Fujian Province. The cans he inspected were not dented nor corroded. He also opened the cans, inspected the size, colour and shape of the mushrooms and looked for and discovered water with the mushrooms. He was thus satisfied that the samples he inspected were of code Q5 cans. He said they were not dented, corroded, rusted or bulging and they contained pieces and stems of mushrooms in water. He was satisfied with the samples he inspected and returned to Hong Kong the same day.

6. On his return to Hong Kong, he informed the Defendants that he approved the samples and believed that the cans to be delivered would correspond with the sample. His company applied to the Shanghai Commercial Bank Limited for a letter of credit at sight to be opened in favour of the Defendant covering 32,400 cans of mushrooms in 5,400 cases up to a limit of US$140,000. The bank opened an irrevocable letter of credit on or about 29th December 1988 in favour of the Defendant for the said sum.

7. Believing that he was going to be able to fill two container loads, Mr. Pei made arrangements through Minko Consolidators Limited, the Plaintiff's forwarding agent, to despatch two container tractors to the warehouse in Shenzhen to collect the mushrooms. The two container tractors arrived at the warehouse at about 5:00pm on 30th December 1988 but the Defendants only had 5,508 cans of mushrooms in 918 cases available and thus only one container was loaded. The loading was only completed at about 2:45pm the next day and the container tractors with the mushrooms returned to Hong Kong. The Defendants admitted their failure to deliver the other container load and agreed to pay and did in fact pay the Plaintiff damages representing the loss suffered by the Plaintiffs which were quantified in the sum of HK$4,016.

8. I will deal with the rest of this episode when I come to consider the claim for non-delivery. At this point, however, it is important to find out what happened to these 918 cases after they were loaded onto the container which the Plaintiffs had sent in accordance with the FOB terms.

9. After being collected from Shenzhen, the mushrooms were shipped by sea to Seattle. They were then transported to the Ettinger Warehouse at Minneapolis in the State of Minnesota where they were stored from February 1989 until September 1989. In March 1989 the USA Food and Drug Administration detained certain Chinese canned mushrooms and they were in fact banned from the United States in October 1989. This is perhaps why it took until September 1989 to effect a sale.

10. In September 1989, the goods were sold to a company called New England and were delivered to them in Philadelphia where they were rejected on 8th September 1989.

11. Following rejection by New England, the goods were stored at the Shipside Warehouse at Philadelphia. It then seems that these goods were sold three times by a company called Dynasty, which acted as the Plaintiff's agent in USA, but on each occasion the goods were rejected.

12. Following these three rejections, Dynasty contacted Alan Brokerage who through Tri-State Representatives found a company called T&L Foods who were prepared to buy these mushrooms. Unfortunately T&L foods rejected these mushrooms on delivery to them in New Jersey in November 1989.

13. On 26th February 1990 (14 months after collection by the Plaintiff), the goods were submitted to SGS for inspection at the Shipside Warehouse.

14. Mr. Horace Wong, who appeared for the Defendants, submitted that this story as to what had happened to these peripatetic mushrooms was full of gaps, doubts and contradictions and he questioned whether this story could be true.

15. If this story was true, Mr. Wong submitted that the complaints made by the various buyers ought to tally with the defects found on inspection by SGS. He has referred me to the complaints made by the various buyers and he submits that the complaints are not consistent with each other but, more importantly, they do not tally with the findings of SGS.

16. In a letter dated 13th September 1989, New England complained that:-

"The case were damp with rust and some were smashed. We opened a few cases and inside the cans were rusty, some dented and many popped out..."

17. Dynasty's description of the defects were as follows:-

"Each time the order was refused because the cases were leaking, cans were bulging and they generally looked very bad."

18. The complaint related by Tri-State was:-

"... my customer inspected the delivery and found the cans were blowing up and not in a useable condition..."

19. SGS inspected 34 cartons containing 200 cans. The selection was said to be randomly made from all layers and was described as very thorough. However, despite this, not one can was found to be leaking, bulging or popping out. The cartons were not damp - in fact they were all dry with no mildew. SGS found that the cartons were "intact and in good condition".

20. Mr. Wong submits that the SGS report casts serious doubts as to whether the mushrooms inspected by SGS were the very same mushrooms delivered 15 months earlier to the Plaintiff. He correctly reminds me that the onus is on the Plaintiff and he points out that during the long time gap, there is no certainly as to what happened to this consignment. He even raises the possibility that SGS inspected a completely different lot of goods to those which the Plaintiff collected at Shenzhen.

21. Mr. Wong also pointed out that there was a significant discrepancy in relation to the can code numbers. SGS stated that all the goods were found to bear a can code no. "O51". It is fairly clear that the "O" is a misprint for "Q". However, Q51 was a different can code from that of the goods which the Defendant delivered to the Plaintiffs. They were all Q5. No satisfactory explanation was given as to how it came about that SGS inspected cans bearing Q51.

22. The uncertainties do not end here because the cans inspected by SGS all bore a manufacturing date. Many of the cans inspected by SGS bore manufacturing dates between 18th and 20th December 1988 and the Defendant's evidence was that it would take a 12 day period from the date of manufacture to the date of delivery in Shenzhen when one takes into account the incubation period of 7 days, a period of 2-3 days for applying labels and another 2-3 days for transportation. On this basis, it was contended that mushrooms canned on 20th December could not have got to Shenzhen by 30th or 31st December 1988.

23. Mr. Wong has made all these and other points in his written closing submissions with great clarity and force. I have given very long and careful consideration to the points which he has made with forensic skill. However, at the end of the day, I have concluded that the Plaintiff has in fact established, on the balance of probabilities, that the consignment collected from Shenzhen on 30th/31st December 1988 was in fact the same consignment which was consistently refused by the proposed buyers and inspected subsequently by SGS. In my judgment it is just too great a coincidence that the same number of cartons appears consistently throughout this period. Although Mr. Wong is able to criticise the Plaintiffs for not having evidence to prove precisely what happened during this fairly long period of time, nevertheless there are sufficient documents in the agreed document bundle to make me feel confident that at all times the same consignment is being referred to.

24. Although the canned numbers point has caused me trouble, I had to remind myself that SGS only inspected 3.64% of the total number of cans. As to the manufacturing date it is clear that Mr. Wang, who used to work for Anhui, who were the sellers to the Defendants, was only estimating the length of these processes and had no personal knowledge of what had or had not been done to this consignment. Further, it was interesting that he admitted that if the 7 day incubation period was shortened, this would lead to bulging or leaking cans which is consistent with the complaints made about this consignment.

25. In my judgment, it is just too far fetched to believe that some other consignment of exactly 918 cartons made the journey around the USA.

Insofar as it was suggested that there was forgery or concoction, I reject those allegations as unproved.

26. The plain fact of the matter is that the Defendants delivered a consignment to the Plaintiff at the end of December 1988 and this consignment was shipped to Seattle where they arrived in mid-February 1988. The consignment arrived in the United States without any FDA inspection. Although the consignment remained in Seattle for some time, as soon as they were delivered to New England Foods in September 1989, they were rejected and consistently rejected thereafter. There is no evidence that they were improperly stored in Seattle and in fact the SGS report appeared to suggest that no damage was caused during transit or storage. I admitted an affidavit of Jesse Cheng (deceased) who was at the material time the President of Dynasty who confirmed that the consignment was stored at the Ettinger Warehouse and that there had been no problems with storage of goods therein.

27. On the evidence I have heard, it seems clear to me that the goods must have been in poor condition when delivered to the Plaintiff for there is no other reliable explanation as to why they were in such a state when, admittedly after some delay, they made the rounds to the various buyers.

28. In my judgment, the Plaintiff has established its quality claim as pleaded and is entitled to the amount claimed, namely, US$29,145. Mr. Wong attempted to argue that the Plaintiff had suffered no loss because they issued an invoice to Dynasty at $20 per carton. However, I am satisfied that they were not selling to Dynasty who were merely their distributors in the United States for the purposes of arranging sale to other customers and that the invoice of $20 was merely required for the purposes of importation into the United States. I pressed Mr. Pei very carefully on this issue, particularly whether he in fact sold directly to Dynasty, but he eventually confirmed, and I accept, that Dynasty's role was to find buyers for the Plaintiff and were not a direct purchaser. I am thus satisfied that the sum of US$29,145 is properly claimable.

The Claim for Non-Delivery

29. By the terms of the contract dated 23rd December 1988, the goods were sold to the Plaintiff FOB Shenzhen with shipment end of January 1989 latest. After the 918 cartons were delivered to the Plaintiff, on 1st December 1988, there was still the whole month of January 1989 for the Defendants to deliver the balance of 4,482 cartons to the Plaintiff in accordance with the contract.

30. It is perfectly plain on the evidence that the Plaintiff did not contact the Defendant between 1st December 1988 and 31st January 1989 in order to give shipping instructions for the balance of the goods. What the Plaintiff should have done is to have informed the Defendant that on a specified date within the shipment period they were going to send vehicles to collect the balance of the goods. Once that had been done, there would have been an obligation upon the Defendant to make the goods available to be placed upon the vehicle or suggest another date for this to be done within the agreed shipment period.

31. When cross examined, Mr. Pei was asked specifically whether he had ever requested delivery of the balance. His first reply was that he had a letter of credit. When the question was repeated, he said that he could not recall. It was put to him that there was no mention of him having contacted the Defendants either in his statement or in any other communication. His reply to that was that the Defendant should have told him that the goods were ready for collection. It was then put to him that he made no request for delivery, gave no shipping instructions, nor did the Plaintiffs make any claim for non-delivery until September 1991 when they amended their statement of claim. Mr. Pei denied that a former employee of the Defendants, Shirley Au, tried to contact him a number of times. When asked specifically whether he was concerned about the balance, he replied "I did nothing about it".

32. To circumvent this evidence, Mr. Ismail for the Plaintiff submitted that the terms of the contract "latest Hong Kong end of January 1989" had been modified or varied by the parties. Mr. Ismail said that this modification could be found in Mr. Pei's evidence. Mr. Pei said that on 27th December 1988, after the date of the contract, he was told by Mr. Ng that the Defendants only had 1,800 cartons, which was two container loads available for inspection and collection and that the balance would be available for collection at a later date. Mr. Pei then went to Shenzhen to inspect and in fact inspected, so he said, 1,800 cartons at random at the warehouse there. He then arranged for two containers to go to the warehouse. He said that if he had been told that 5,400 cartons were available he would have despatched six container tractors to collect the shipment. He applied for partial shipments to be permitted under the letter of credit because he was told that only 1,800 cartons were available for collection. He said that the application would not have been made if he had been told that 5,400 cartons were available for collection. However, on 31st December 1988, the Plaintiff was only able to collect 918 cartons in one container and, as I have said earlier, the Defendant compensated the Plaintiff for loss suffered in despatching the other container. The Defendant explained this on the basis that it was paid as an attempt to maintain a good commercial relationship between the Plaintiff and the Defendant but was not intended to admit any liability.

33. Mr. Ismail therefore submitted that, in the light of this variation or modification, the Defendant was under a duty to inform the Plaintiff when the remaining cartons were available for collection and submitted that it made sound commercial sense since the Defendant, and not the Plaintiff, would only know such information.

34. Mr. Wong has pointed out that there is no pleading which mentions that the agreed contract term had been modified. Mr. Ismail countered this by arguing that he was relying upon a separate arrangement rather than a modification. The effect of all this was that the Defendant agreed to tell the Plaintiff when the balance was ready. It seems to me that this was a modification or variation which should have been pleaded and, in any event, I do not accept that the facts relied upon by Mr. Ismail give rise to the necessary modification or variation. In my judgment, the original contract term survived the late December 1988 debaclet.

35. I now turn to consider the obligations of FOB buyers and sellers.

36. It is well settled that one of the primary duties of an FOB buyer is to make arrangements for shipment (see Ian Stach Limited v. Baker Bosley Limited (1958) 2 QB 130).

37. In J&J Cunningham Ltd. v. R.A. Monro & Co. Ltd. (1922) 28 Com Cas 42 at p.45 Lord Hewart C.J., with reference to a contract "FOB Rotterdam, October shipment" said:-

"... the usual practice under such a contract is for the buyer to nominate the vessel and to send notice of her arrival to the vendor, in order that the vendor may be in a position to fulfill his part of the contract..."

38. In Anglo-African Shipping Co. v. J. Mortner Limited (1962) 1 Lloyd's Rep. 81, Megaw J. said at page 92:-

"They (the sellers) are not under an obligation to take the goods away from their factory or warehouse and to start them in circulation in the hope, or expectation, that they may arrive at a place which later, the buyer would have said or the place where the buyer's ship was going to be at some particular time."

39. I accept that a buyer under an FOB contract has to give shipping instructions. In the case of a land transport contract, the buyer must arrange for the relevant trucks or tractors and give shipping instructions to the seller in that he must advise the seller of the date and time when the arranged tractors will be available for the goods to be loaded. It is only after the receipt of such instructions that an obligation falls upon the seller to make available the goods to be put on board the vehicles arranged by the buyer.

40. Mr. Wong submits that a buyer who has failed to give shipping instructions in the manner set out above is not entitled to claim against the seller for non-delivery. This is apparently so even if the seller is in fact not in a position to make delivery. In such a case, a buyer who has failed to give shipping instructions cannot sustain a claim. In Southerland v. Allhusen (1866) 14 L.T. 666, Pollock C.B. said:-

"It has been decided, in a case where the expression "free on board" was used, that it is the duty of the person who seeks to have the goods to point out the ship, or specify where they are to be delivered, before he can complain that the goods are not on board the ship."

41. Mr. Wong has also referred to me to the case of Forrestt & Son Limited v. Aramayo (1900) 83 L.T. 335. In that case, there was a contract which provided for FOB London, shipment within 4 months of the contract. In other words, by 7th January 1889. The buyer failed to give effective shipping instructions but it was proved as a fact that the seller was not in fact ready to make delivery of the goods until April 1889. The question for the Court of Appeal to decide was whether the seller was liable to the buyer for damages for non-delivery. The Court of Appeal held that under an FOB contract the buyer and seller had concurrent obligations. The buyer had to give shipping instructions and the seller had to be ready and willing to deliver the goods. The buyer in that case had failed to perform its obligation to give effective shipping instructions. On this basis, it could not be said that he was ready and willing to perform the contract and he was thus not entitled to claim against the seller although it was proved as a matter of fact, that the seller was also in breach of its obligation to make the goods available for delivery. In the words of Lord Halsbury L.C. at 338:-

"The sole point which I intend to decide upon this appeal is that whenever there are concurrent obligations the party who seeks to recover against the other must show that he has always been ready and willing to perform the obligation upon him... The law has been well ascertained and accepted for many years upon this subject. Whichever party is the actor, and is complaining of a breach of contract, is bound to show, as a matter of law, that he has performed all that was incident to his part of the concurrent obligations. The averment that he was always ready and willing to perform his obligation is a necessary averment. Therefore in this case each party has failed to perform his obligation. It is said that the builders of the launch were not ready in time but the Plaintiff did not give notice that they had a vessel ready. Therefore it seems to me that neither party can bring an action against the other for breach of contract, because neither party was ready and willing to do his part of the concurrent acts. That is the only question with which we need trouble ourselves. The party who brings the action must show that he was ready and willing to perform his part of the concurrent acts. The Defendants have not shown that they were ready and willing to perform their part, and therefore their appeal fails and must be dismissed."

42. Mr. Ismail submits that the duty upon the Plaintiff in these circumstances would be unreasonable because the Plaintiff would have to contact the Defendant every day and ask him when and how many cartons he had available for collection until the end of January 1989. This submission in my judgment fails to appreciate the nature of the obligation upon an FOB buyer. Mr. Ismail attempts to gain comfort from the fact that there was a partial delivery in this case and that the Plaintiff was told that 1,800 cartons were available for collection and the balance available for collection at a later date. Mr. Ismail's attempt to distinguish Forrestt & Son Limited v. Aramayo is not, in my judgment, convincing.

43. What I think happened in this case was that the Plaintiff took delivery of the 918 cartons and shipped them to Seattle. During the month of January, they made no attempt to contact the Defendants to give shipping instructions for the balance. Mr. Pei seemed to think that he had to do nothing until he heard from the Defendants. But in my judgment he had a positive obligation to give instructions for the collection of the goods from Shenzhen before the end of the shipment period. On the other hand, on the balance of the evidence, and in particular the inventory book which was produced, I am satisfied that the Defendants did have during January 1989 the balance of the goods available for collection by the Plaintiffs in Shenzhen. Although Shirley Au was not called as a witness, I think it more likely than not that she was given instructions by the Defendants to contact the Plaintiffs and that she did but received no return call from Mr. Pei. Be that as it may, there is in my judgment no obligation on the FOB seller to seek out the buyer. It is the buyer who has to give shipping instructions to the seller and it is that act which imposes the obligation upon the seller. In this case, that never occurred.

44. In my judgment, the claim for non-delivery must fail because the Plaintiff had not complied with their obligations under the FOB contract. The claim would still fail even if the Defendants, contrary to what I believe to be the case, did not have the goods available for shipping on board trucks in Shenzhen during the month of January 1989. In those circumstances, the claim for non-delivery is dismissed.

The Counterclaim

45. The Defendant's counterclaim in the sum of US$8,964 being the loss suffered as a result of the Plaintiff's breach of contract in not giving shipping instructions for the collection of the balance of the mushrooms. The Defendants purchased the mushrooms from Anhui at US$24 per carton. The Defendants had a buyer at US$26 per carton and would thus have made a profit of US$2 per carton. There was initially a further counterclaim based upon Anhui's claim against the Defendant for US$61,200 but that was subsequently settled and that aspect of the counterclaim has not been pursued.

46. In my judgment, the counterclaim must fail. The evidence given before me, which I accept, was that there was, at the relevant time, a rising market in Chinese canned mushrooms. Given that fact, it was surprising that Mr. Ng of the Defendant admitted in cross examination that the Defendants did not make any real effort to sell the remaining cartons of mushrooms. The Plaintiffs had denied that the Defendant had suffered the alleged loss or any loss and damage and in my judgment the Defendant's failure to mitigate their loss is fatal to their counterclaim. Mr. Ismail asked Mr. Ng the following question:-

"From the end of January 1989, what steps did you take to reduce your loss?"

Mr. Ng "Practically nothing."

47. In my judgment, the counterclaim has to be dismissed.

Conclusion

48. It follows therefore that the Plaintiff is entitled to judgment in the sum of US$29,145 and the Defendant's counterclaim is dismissed.

49. As to costs, I propose to make a costs order nisi in favour of the Plaintiff.