SUN HUA ENTERPRISE COMPANY, LIMITED v. THE OWNERS OF THE MOTOR SHIP "HARIMA"

Admiralty action in rem against : the motor ship "HARIMA" (Japanese flag)

1986, AJ Folio 132

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ADMIRALTY JURISDICTION

_______

__________

JUDGMENT

__________

1. I have before me in this action, a summons by the defendants, the owners of the motor ship "Harima" asking for an order to set aside the warrant of arrest of the vessel and an order for that vessel's release. It raises some nice points of admiralty law. May I at the outset express to both counsel my gratitude for the care with which they have presented their arguments, coupled with their patience in their attempts to enlighten me in the mysteries of admiralty law with which heretofore I have been very unfamiliar.

2. The question which arises is the degree of disclosure necessary when application is made by a plaintiff, who has issued a writ in rem, for a warrant of arrest under 0.75, r.5. That there is an obligation to make disclosure upon what is by necessity an ex parte application, is made clear by the judgment of the Court of Appeal in England in a case called The Vasso⁽¹⁾ which judgment was delivered by Lord Goff as he now is. In that case the Court of Appeal set aside the equivalent of a warrant of arrest, namely the letter of undertaking which had been substituted for it, upon the basis of non-disclosure of material facts at the time application was made for the warrant. Having considered certain of the wellknown non-disclosure cases starting with the decision in Polignac⁽²⁾ and after considering also applications under 0.11 and applications for a Mareva injunction; Lord Goff goes on -

"In our judgment exactly the same applies in the case of an ex parte application for the arrest of a ship where as here, there has not been full disclosure of the material facts to the Court. "

By "material facts", he was plainly repeating what he had already said on the preceding page “there had been a failure to disclose facts which were material to the issue of the warrant".

3. So it is plain that the obligation arises. But to what is it directed? What facts are material to the issue of the warrant? What facts are material to the exercise by the Court of its power to issue a warrant under this relevant rule? Two very different answers have been put before me in argument.

4. The first answer which is advanced by the plaintiff, is that the only facts which are material are basically those relating to the nature of the plaintiff's claim. That is putting the matter too narrowly overall, but it is sufficient for the purposes of this case, where the argument centres upon the phrase, "the nature of the plaintiff's claim". Mr Clifford-Smith founds upon this phrase which is to be found in the appropriate sub-rule in Order 75 r.7(b). This is the key phrase. It shows which of the sub-sections in what is now section 20(2) of the Supreme Court Act 1981 the plaintiff is relying upon, to show that his is a valid claim in rem where the Court can properly exercise its special jurisdiction in rem. In essence the submission is that the plaintiff has to show at that stage that he is asserting facts which bring him within one of these sub-sections and which are sufficient to show to the Court that it is properly being asked to exercise its jurisdiction in an. admiralty action in rem. That is the plaintiff's submission in short.

5. The defendant on the other hand suggested that there is a much closer analogy than that between the admiralty action in rem and the other types of proceedings referred to by Lord Goff in his judgment in The Vasso⁽¹⁾. That the Court when the application is made, is not unconcerned with the merits of the claim and with the difficulties of the claim. It must be satisfied at that stage that what the plaintiff is seeking to do, (I think this is the lowest that Mr Faulkner put it in the course of his argument), constitutes no abuse of the Court in the form of the claim that is being advanced. The Court is concerned to see that the claim has sufficient merit so that it cannot be called an abuse. That basically is what separates the parties on this application.

6. The background facts are only very sketchily known, and give rise to considerable doubts and suspicions at this stage. There seem to me two very suspect areas, which I am going to call the first and second areas of potential deception without purporting to make any sort of finding in that regard.

7. The first area arises like this. The plaintiffs appears to be manufacturers of steel in Taiwan and the consignment in question was manufactured and sold by them. There also appears to be an embargo on the export of steel' from Taiwan to China. Embargos produce markets, and markets of that sort often are prepared to pay a good price. ' The strong suspicion in this case is that the plaintiffs sold this steel indirectly to a buyer in China who was prepared to pay an embargo type price, but that the documentation produced could not show this fact. It could not be revealed to the Authorities in Taiwan that this was a direct sale to China and it had to be covered by an apparent sale to Hong Kong. This could well explain the shipping documents which appear to have come into existence.

8. As far as the charter-parties were concerned, there were two back to back time charters and underneath those, the relevant voyage charter, was a charter-party from Taiwan to China. There is a rather curious clause in it, which is by no means clear; but appears to suggest that the charterers at their own responsibility, were to issue an additional set of bills of lading. This may also explain a letter of 23rd December last, written by a firm called Mizda Enterprises Ltd. who were said to be the buyers of this steel in Hong Kong. The letter was written by them to Yangtse Shipping S. A. Panama, who are alleged to be the owners' agent, giving Yangtse an indemnity against the consequences of issuing the second set. The indemnity is expressed in the plural, and is said to be joint and several. The only other signatory to the letter is some one signing for the Bank of Credit and Commerce in Hong Kong. Whether that bank was party to this, I do not know. All I do know is that the bank were the named consignees in the bill of lading. There is a strong probability here, that consequent upon that, there were other bills of lading issued in respect of this same consignment, which (I put it no higher than this) facilitated its on-shipment from Hong Kong to China. That was the first potential area of deception directed to the Taiwanese Authorities.

9. The second arises out of the contract itself. The contract was said to be oral between the plaintiff and Mizda, and payment was to be by letter of credit. The lete letter of credit called for four categories of documents. They included first of all, a clean set of on-board ocean bills of lading made out to the order of the bank I have just named, which also had to show shipment not later than 24th December: and secondly an inspection certificate issued by Taiwan Marine Survey Limited. There is a considerable body of evidence before me and indeed it is not disputed by the plaintiffs, that the ship did not arrive until 27th December and loaded on 28th. It is therefore somewhat surprising (to put it mildly) to see that the bill of lading is in fact dated h the 24th and purports to record loading on the 24th. It is even more surprising to find what is pleased to be called a "survey report" from Taiwan Marine survey Limited saying that their surveyors "did attend on 23rd and 24th December 1985 aboard "Harima" while she was berthed at Wharf No. 9 Kaohsiung Harbour in order to 100% weigh and supervise the loading of the abovementioned cargo". Their report goes on to say that the loading and weighing all happened in their presence with the results purported to be specified in that certificate. It is about as wholly dishonest as any certificate could be, if what I am told about the dates is right. That was the second potential area of deception directed on the face of it to the buyers and to their bankers.

10. What happened then seems to be this. The steel was loaded on 28th. The documents seem to have been presented to the bank and rejected for reasons unknown. It may be that the bank, from what I am now told, had very good reason for rejecting them. The result was that the plaintiffs were not paid in the manner intended by the contract. But the goods duly arrived in Hong Kong where it would seem that a second set of bills was prepared by someone unknown. The steel was then sent on to China and unloaded. The recipient may or may not have had the second set of bills in his possession. There was then a dispute about quality.

11. That leaves the plaintiffs in the unhappy position of having parted with their steel and having recovered no money. But they have still got their (first) set of bills of lading. What they are saying in essence is this. Those bills should have protected us. We should either have had those bills or our money. As it is, the bills have been sent back by the bank. We have got the bills, no money, and no goods. That is because you, the owners of this ship, permitted other bills to be made out, and you permitted someone else with or without bills but certainly not with our bills to take possession of this steel in China. They rely in particular upon the felicitous language of Lord Denning delivering the opinion of the Privy Council in Sze Hai Tong Bank Ltd. v. Rambler Cycle Co. Ltd.⁽³⁾ at page 586 where he said:

"It is perfectly clear law that a shipowner who delivers without production of the bill of lading does so at his peril. The contract is to deliver, on production of the bill of lading, to the person entitled under the bill of lading ............ And they (the shippers) delivered the goods, Without production of the bill of lading to a person who was not entitled to receive them. They are therefore liable in conversion unless likewise so protected. "(my emphasis)

12. Upon that basis, these plaintiffs came before the Court here. They issued a writ in rem. The Statement of Claim founds upon

1)    the bill of lading;

2)    the failure to deliver, so it is alleged; to the consignee in Hong Kong;

3)    the conversion or misdelivery by the delivery in China.

I should point out that the consignee in the bills was to the order of the bank. The affirmation filed under 0.75, r.5 in support of the application for the warrant repeated those facts; relied on the bills of lading which was exhibited; did not specifically draw attention to the false date in the bill of lading, although it is apparent that that was known to the defendant; and said that reliance was placed upon subsub-section (h) of in fact the wrong Act. That was the information which was put before the Court at the time of the application for a warrant and upon which the warrant was granted.

13. Mr Clifford-Smith for the plaintiffs says that is perfectly sufficient. "The nature of the claim" here is all that is required. The nature of the claim here was a claim under sub-section (h) because what was relied upon was "a claim arising out of any agreement relating to the carriage of goods in a ship". That position was perfectly sufficiently stated. It shows that the plaintiffs have a valid claim in rem. That is the claim which they are advancing and entitled to advance. Nothing further was called for here, because there was nothing exceptional, and nothing to show or suggest that what was being done was in fact an abuse of process.

14. "Not so" said the defendants. The disclosure in their affirmation they say is really quite insufficient and inadequate, having regard to what they submit was the lack of merit and the great difficulties in the plaintiffs' way in maintaining this claim. First, they say that the claim is put as though the plaintiffs were the simple consignees of the goods. That only presents half of the story. They were in fact the sellers. They were the sellers of the goods under a contract FOB Kaohsiung. There is a strong suspicion, so the plaintiffs say, that the property in the steel passed when those goods were put on board, and they have got no title upon which to hang their claim in conversion at all.

15. Secondly and more fundamentally, they say, Look at this bill of lading. This bill of lading was a fraudulent document. It was falsely dated. It was falsely dated to deceive consignee bankers; to make them think that this bill compiled with the requirements of the letter of credit when it did not. They rely upon the illegality line of cases, in particular Alexander v. Rayson⁽⁴⁾ and the passage at p. 189 when the Court says this:

"We cannot think that the plaintiff is entitled to bring these documents into a court of justice and ask the Court to assist him in carrying them into effect. "

Their strictures were directed to documents which were drawn in such a way as to deceive, not the buyer or the other party to the document, but a third party. Mr Faulkner submits that the same principle should surely apply here. He goes on to submit, that this is absolutely fundamental because it means that the plaintiffs here have no agreement relating to the carriage of goods upon which they can rely. And as to the suggestion that they can rely on their property, the only way they can do that, he submits, is under sub-paragraph (g), not (h). That is another story. It has not yet been asserted. I should not consider that at all at-this juncture.

16. By way of riposte to that on the illegality point, Mr Clifford-Smith comes back and submits that there is a totally different line of authorities starting with Bowmakers v. Barnet Instruments ⁽⁵⁾ and Belvoir Finance v. Stapleton⁽⁶⁾ where the Courts have permitted a party to rely upon its proprietary rights notwithstanding the existence of some illegal or unenforceable contract. The Courts have, I think, got themselves into problems with their attempts to reconcile two conflicting aims; their determination not to enforce contracts intended for illegal or fraudulent purposes; and equally a determination not by a side wind, unjustly to enrich the person who finds himself in the possession of property.

17. In these circumstances, it is plain that there are obvious difficulties in the plaintiffs' path in this case, but I do not think it is possible' to say that they have no arguable case. They own the steel. They put the steel on board this ship. They have got the original bill of lading, and they can point to the fact that this was delivery by a ship owner to someone who never produced the relevant bill of lading. In my judgment, this is not a claim which is demurrable. There is in fact no application before me to strike out and if there were, I would not have acceded to it.

18. In those circumstances, says Mr Clifford-Smith, that is the end of the matter. There are only two issues which arise in actions in rem. The first issue is : is there sufficient material put before the court as to the nature of the claim? That is the issue which arises when a warrant is issued. You do not go to the merits at all at that time. The merits will arise upon an application to strike out if the matter is vexatious. That is the time to consider the merits and there is no such application and no grounds for it at all. He reminds me that the writ in rem is no more than the modern equivalent of the old fashioned' form of arrest of a ship where the arrest was in fact the start of the action; and that admiralty jurisdiction which necessarily provides security pending suit for the benefit of the plaintiff is rather special and arose as a means of protecting static creditors, the land lubbers, against the machinations or wanderings of mobile debtors. This was a historical necessity and there is no sort of analogy here between that position and the position of Mareva injunctions at all.

19. The purpose of 0.75, r.5 he submits, is simply to insert a very coarse filter; to require the plaintiff to show that he has a prima facie case falling within the admiralty jurisdiction which then proceeds to operate in the ordinary way by arresting the ship. This is born out, he submits, by the terms of the rule itself and particularly, the use of the single phrase "nature of a claim" in the context of a case like this. I have not overlooked the other requirements but they are irrelevant for this purpose. He points also to the draft affirmation set out in the whitebook which was devised in London by; I think, Master Rochford, and those forms which are also set out in Atkin. He submits that The Vasso⁽¹⁾ was really no authority to the contrary. The Vasso⁽¹⁾ says that where there were circumstances in which it might be said that what was being done constituted an abuse of process, that is the matter which should have been revealed. The Vasso⁽¹⁾ is no authority for saying that, the merits of the case have got to be revealed or indeed gone into at all.

20. In answer to that Mr Faulkner submits that there is in fact a middle course. There are not simply two extremes such as being suggested by Mr Smith. There is a third, a middle course, which will be reached by a failure to disclose material facts. I think Mr Faulkner accepts that it would be difficult on the facts here for me to strike out. He says he does not have to go that far. He also accepts that under the terms of the Rule, the affirmation must show "the nature of the claim". But he says that that is the minimal requirement. The applicant is not entitled simply to ignore the merits. If there are difficulties known or which ought to be known to him, he must bring them out and show that what is being done does not constitute an abuse. He relies upon The Vasso(1) for that purpose. That, he submits, lets in an aspect of the merits.

21. Further in this case, he says that the deficiency in the bill of lading and its fraudulent back-dating go to jurisdiction itself because it means that the plaintiffs cannot properly rely upon that bill of lading. This really means, in his submission, they cannot really sue in rem in this case at all, because the only way they can do it was to come forward and reveal the fraudulent back-dating of the bill and the Court in those circumstances will almost certainly refuse leave. In this particular way, you arrive at the result that the arrest fails and the security fails by a process short of being struck out as vexatious. That then produces this third alternative. It is really the existence of that third alternative which is the real issue before me.

22. There are two cases upon this which seem to me to be of decisive importance and to support the conclusion which I was already minded to reach by reference to the apparent practice as revealed in the current documentation used in England. The first of those cases is The St. Elefterio⁽⁷⁾ where a very similar argument was advanced to Willmer, J. as he then was, under what was then section 3(4) of the 1956 Act. Indeed it was being said there that there were so many difficulties in the way of the plaintiff, and the difficulties which were being advanced, are in two respects very similar to the difficulties relied upon by the defendants here, that in the light of that, the action should be struck down in limine. It was being argued that either the Court had no jurisdiction to arrest or that it should not exercise such jurisdiction. Willmer, J. rejected that. He said that these obstacles "furnished no good reason for setting these proceedings aside in limine and thereby depriving the plaintiff of the right to have these issues tried. " p. 185. He was saying in substance; if it was not vexatious and it could not be struck out on that basis, then the matter had to go to trial and there was no middle course.

23. This view was likewise taken by Brandon, J. as he then was, in The Moschanthy⁽⁸⁾, where the first question raised was whether the Court had jurisdiction to entertain the plaintiff's claim in rem. When Brandon, J. uses the word 'jurisdiction', I think he is encompassing both (1) the . existence of a jurisdiction and (2) the Court's exercise of such jurisdiction. He said at page 42:

"That question must, in my view, be answered by reference to the nature of the plaintiff's claim as put forward, without reference to the further point whether it is likely to succeed or not. "

I think it is striking that he uses the` phrase of the Rule "the nature of the (plaintiff's) claim" and he rejects any question of enquiry into the merits of that stage altogether. That, he says, arises on an application to have the proceedings stayed on the grounds that they are vexatious and not at the first stage. He derives that in part from Willmer, J.'s decision.

24. I therefore, find myself totally persuaded by those two authorities and to the acceptance of Mr Clifford-Smith's submission. It seems to me that on an application for a warrant under 0. 75, r. 5, the Court's first concern is to see whether the facts alleged prima facie bring the plaintiff within one or other of the relevant subsections in section 20(2). That is the main purpose of the filtering process established by Rule 5. It also concerned at that stage, with the absence of any other facts which might show that the power is being abused or misused. But in my judgment, such power is not being abused or misused if a plaintiff is bringing an action which prima facie falls within the subsection but which may hereafter fail, so long as the action itself cannot be said to be an abuse of process or vexatious or demurrable. Further that is a separate process. If it is being asserted that the claim is demurrable, that must be asserted properly and openly by the defendant on the appropriate application, and you do not reach the same result by the indirect or backdoor route of a process of non-disclosure. In other words, in my judgment at least, although the same principle about disclosure on ex parte applications, plainly applies to this process as to any other, the material facts which have to be considered at the time on an application under 0.75 are very different, for example, to the materal facts which would be considered on an application for something like a Mareva injunction, where the whole relief largely turns upon the apparent validity of the plaintiff's claim. In these circumstances, in my judgment, the defendant's application fails.

25. I should, for completion, also add this. It necessarily follows from that, that I do not accept what is submitted in relation to the bill of lading and the imperfection of the bill of lading as going to jurisdiction are in fact well founded in a case like this. There may be something in the point when it is investigated at the trial, but it cannot be said that this claim is vexatious because reference is made to the bill of lading in the pleading as it stands. Because there is good authority for the proposition, that the Court will consider proprietary interests even though for that purpose they may have to look at an unenforceable contract. That was said in terms by the Court of Appeal in England in the Belvoir Finance case⁽⁶⁾. Therefore I cannot accept Mr Faulkner's alternative way of putting his submission by hanging on jurisdiction in relation to this bill of lading. I thought, in fairness to him, I should add that, having realized I had not done so earlier. 

26. Finally I should add this. If someone says that, I have changed my mind since 21st July, they are right. I then delivered judgment in another case, The Hong Kong & Shanghai Shipping case, which is now on its way to the Court of Appeal, where I rejected a complaint about non-disclosure on a totally different basis. I now realise that I was wrong in approaching it on the basis of the merits. I now claim to have found a better way of reaching the same conclusion. Since that is almost certain to be before the Court of Appeal, I have added that by way of postscript.

(1)    [1984] 1 Lloyds Rep. 235

(2)    [1977] 1 KB 486

(3)    (1959) AC 576

(4)    [1936] 1 K5169

(5)    (1945) 1 KB 65

(6)    (1971) 1 QB 210

(7) (1957) PR 179

(8)    [1971] 1 Lloyds Rep. 37