Bank Negara Indonesia v. The Hong Kong and Kowloon Wharf and Godown Co Ltd

CACV000055/1978

Contract - warehouseman - goods delivered into storage - terms of business requiring declaration if goods exceeding $500 per package in value - no such declaration - in breach of contract defendant released goods without comparing signature on delivery order with authorised signature - signature a forgery - whether sufficiently proved that goods were of nature alleged - goods found to exceed $500 per package in value - defendants in breach of fundamental term - "fair and reasonable interpretation" of contract - terms excluding and limiting liability not applicable - defendant liable for full value of goods.

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Coram: Huggins & McMullin, JJ.A. and Cons, J.

Date of Judgment: 17 October 1979

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JUDGMENT

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McMullin, J.A.:

1. Messrs. Nam Hoi Ltd. was a Hong Kong company dealing in merchandise of various descriptions. It commenced trading in 1967 and in October of that year it opened an account with the plaintiff bank. During the next twelve months Nam Hoi employed the resources of the bank to complete a number of deals concerning goods imported by it from outside Hong Kong by means of letters of credit. In this way the bank financed the importation of a variety of goods including steel bars, blankets, and cement. As to these transactions no question is now made, and it has not been suggested that Nam Hoi failed to discharge its obligations to the bank in respect thereof. In August 1968 at the request of Nam Hoi the plaintiff bank opened an irrevocable letter of credit in favour of a company known as Central Asia Investment Co., the address of which was Cross Street, Singapore, for the importation of some 7 tons of nutmeg oil, and on September the 5th, again at the request of the company, the plaintiff bank opened a similar letter of credit in favour of the same company in the sum of $1,056,000 Singapore dollars in respect of a purported shipment of 32 tons of nutmeg oil packed in 200 kilogram steel drums. It is from the latter transaction that the present cause of action springs. It is common ground that 160 steel drums containing a liquid purporting to be nutmeg oil, and so described in the relevant contract and shipping documents, were carried from Singapore in a vessel of the Messageries Maritimes line, the vessel being known as the S.S. Var. These drums were off-loaded in Hong Kong on the 8th of October 1968. Pursuant to the agreement between Nam Hoi and the plaintiff bank the bill of lading showed upon its face that these goods were delivered to the order of the bank; the bill itself and the other necessary shipping documents such as the invoices, packing list, weight note etc. were delivered into the custody of the bank. The bank thus acquired a special property in these goods to secure its loan. A letter of credit was subsequently drawn upon by the Singapore company and was honoured by the bank's agent in Singapore to the full amount of the credit. The bank has never been repaid.

2. Upon arrival in Hong Kong the steel drums and their contents were accepted for storage in the defendant company's transit store under a contract the terms of which constitute one of the principal issues between the parties. These goods were held in storage by the defendant company between the 8th of October 1968 and the 19th of October and on the latter date they were delivered into the custody of one CHAN Kung-wo, the permanent managing director of Messrs. Nam Hoi Ltd. The goods were thus delivered to Mr. Chan upon presentation by him of a delivery order purporting to be signed by the bank's authorised signatory. The goods were then taken to another place for storage by Mr. Chan and another person who accompanied him and they have since totally disappeared. It is common ground that the signature on the delivery order was a clumsy forgery which would readily have been detected by the counter clerk who delivered the goods to Mr. Chan, had the former compared that signature with the specimen signature given by the plaintiff bank to the defendant company at the inception of their relations. It is conceded that the counter clerk was under a contractual duty to compare the signatures and that the defendant company is affected by his negligence in failing to do so.

3. The author of this forgery has never been discovered. As may be imagined, Mr. Chan himself was immediately under suspicion and after police investigation he was actually charged with uttering a forged document and obtaining goods by means of a forged instrument. Eventually, however, a nolle prosequi was entered, the Crown apparently being satisfied, upon certain statements taken from him by the police, that he was innocent of the fraud.

4. That there was a fraudulent conversion of these goods is evident. Moreover the defendants have sought throughout to rely upon items of evidence tending to show misconduct in two of the higher officials of the plaintiff bank whose acts, although not pleaded as fraudulent, are said to have contributed to the negligence of the defendants in releasing the goods. Thus, on the strength of certain statements allegedly made by CHAN Kung-wo, the defendant company maintains that the bill of lading was given into the latter's custody by Mr. Soekarno Soedirman, an assistant manager of the plaintiff bank, which enabled Chan to procure the delivery order from the shipping company which later was used to effect the release of the goods. That much is conceded by the plaintiff bank but it is denied that Soekarno had anything to do with the delivery order itself notwithstanding Chan's statement that he had given that order to Soekarno and had it returned to him for the purpose of effecting the release of the goods.

5. There was also the matter of the invoice, packing list and quantity list which, according to Chan, were delivered into his possession by another official of the bank, Mr. Yiu, these documents having been required by an inspector of the Department of Commerce and Industry whose inspection of the goods was a necessary prerequisite to their release. Although the trial judge did not find these bank officials to have participated in a conspiracy to make away with the bank's security their conduct was regarded by him as dubious and dishonest and he did consider it in relation to the contention that it had at least facilitated a conspiracy to defraud the bank which, it was said, necessarily involved the importation, under the letters of credit, of valueless goods described wrongfully as nutmeg oil which, it is conceded, is a very valuable substance.

6. Neither Mr. Chan nor any other person from the Nam Hoi Company gave evidence at the trial. Nor did Mr. Soekarno Soedirman; nor did Mr. Yiu; nor was any witness called from the Central Asia Investment Co. in Singapore. The only person who actually saw the contents of the drums, the inspector of the Commerce and Industry Department, did not give oral evidence but a letter concerning the result of his inspection was put in together with several other items of a documentary nature which were tendered and received under the provisions of the Evidence Ordinance relating to the admission of hearsay evidence in civil actions. Thus there was no direct evidence at the court of trial concerning the nature of the contents of these drums. On the balance of such evidence as was before him, however, the learned trial judge found that the contents consisted of nutmeg oil. This finding constitutes the first contentious issue before the court on the hearing of this appeal.

7. Originally the trial judge considered that he had three issues to deal with. The second of those concerned certain estoppels said to operate against the plaintiff bank by reason of its having permitted CHAN Kung-wo to take possession of the delivery order upon which the goods were released. The learned trial judge, confronted by contradictory hearsay statements on this matter from Soekarno and CHAN Kung-wo, and taking into account the fact that the counter clerk of the defendant company had neglected to compare the signature on the delivery order with the specimen signature, concluded that it had not been proved that any representation had been made by the bank or its servants to the defendant company sufficient to support any of the estoppels pleaded in paragraphs 10 to 13 inclusive of the defence.

8. However, the estoppel plea was not pursued in this court and we are left therefore with two main issues. The first is that which has already been referred to viz.: whether it was proved that the substance in the drums was genuine nutmeg oil. The second is whether, assuming it to have been genuine oil, the defendants are exempted from liability for the loss of these goods either (a) totally or (b) partially by virtue of certain provisions in the contract between the parties upon which the goods were taken for storage by the defendant company. As to the latter of these issues the learned trial judge held that the defendant company was not protected by any of the exemptions or exceptions clauses upon which reliance was placed and accordingly he found for the plaintiff in the full sum claimed.

9. On the first of these issues Mr. Oswald Cheung for the appellant company seeks to show that the trial judge was in error in finding that the evidence before him was sufficient to discharge the onus, which it is conceded lay upon the respondent company, of showing on the balance of probability that the substance in the drums was genuine nutmeg oil. The weight of the evidence, counsel says, such as it was, tells the other way. A fair proportion of this argument was taken up with the attempt to demonstrate that there were abundant indications in the evidence, both documentary and otherwise, to show that the judge was wrong in concluding that Soekarno and Yiu, the bank officials, were not themselves involved in a conspiracy to cause the bank to extend credit to the Nam Hoi Company upon a security which to their knowledge would ultimately prove worthless. There was, indeed, plenty to suggest that these officials did not have clean hands. The trial judge accepted that they had received gratifications from the Nam Hoi Company for the service of causing the bank to extend credit to that company. And there was evidence, which he accepted, to show that Soekarno and the other official would be prepared in the future to accept gratifications for a similar purpose. He was not, however, prepared to conclude that Soekarno and Yiu had given the various documents to Chan for the purpose of having the bank's security spirited away and thus destroyed.

10. Now, even if the learned judge was wrong in that conclusion (and for my own part I am not disposed to say that he was) I do not think that a finding the other way would materially have affected his conclusion as to the nature of the merchandise. The real force of counsel's argument here is that it is more likely than not that the conspirators, whoever they may have been, would not have employed the credit they had gained in the purchase of an expensive substance which in due course would involve them in the hazard of having to dispose of it for profit at a time when, if the plan went according to the desires of the conspirators, that substance had been transformed into stolen property with all the attendant dangers of police investigation and detection during such period as it would have to be secretly stored before disposal for profit elsewhere. On the other hand to have imported a worthless material would have had the double advantage that the bank credit would not have significantly been depleted and in addition the bogus oil could at once be disposed of by being jettisoned in the harbour or elsewhere thus making the risk of detection negligible. The trial judge took the contrary view. He said:

"If the goods were not genuine there would be no need for the conspirators to take delivery from the defendant's godown so as to risk the chance of being found out by the Preventive Service and the uncertainty of litigation."

Presumably he meant by this that, had the goods not been genuine oil, the directors and other operatives of the Nam Hoi Trading Co., which was by then in financial difficulties, would have been content to abandon the company and disappear with their ill-gotten gains.

11. Of more substance, perhaps, in support of the contention that the oil was not genuine was the fact that both the 32 tons of nutmeg oil with which we are concerned in the present case and the previous consignment of 7 tons, allegedly purchased from the same Singapore company, were the subject of sales contracts with a firm called Yan Yang Ltd. a company which, according to the entries produced from the record of the register of companies, had ceased trading in March of 1968, its last annual return being dated 31st December 1967 although it was not formally struck out of the register until the 30th of April 1971. No witness from that company was called to give evidence.

12. There were also such matters as the failure on the part of the plaintiff bank to call for survey reports of the goods either before export from Singapore or after importation into Hong Kong. No such report was called for until the 15th of November some three days after the discovery of the loss of the goods which had been made the subject of a report to the police on the 12th of November. In relation to this the defence led the evidence of a retired Master Mariner, Captain John Herring, who said that in his experience of this trade, which extended over some 25 years, such survey reports were normally required. He also testified that a mixture of as little as 1% nutmeg oil with white paraffin plus some colouring matter could give the smell and appearance of nutmeg oil.

13. The learned trial judge carefully considered all this evidence but he concluded (a) that some positive proof of the nature of the merchandise was afforded by the documentary evidence in the form of the bills of lading, quantity and packing lists etc., in all of which the goods were described as nutmeg oil; (b) by the description of the substance by the official of the Commerce and Industry Department as a yellowish coloured oil with a strong smell of spice and (c) the many references made to it as nutmeg oil by CHAN Kung-wo in the statements allegedly made by him and admitted under the hearsay rules. Taking that evidence he put it together with the fact that it was due to the negligent oversight of the counter clerk that the goods had been delivered away from the custody of the defendants and, applying the maxim "omnia praesumuntur contra spoliatorem", found on balance that it had been proved that the drums contained genuine nutmeg oil.

14. Apart from the contention that the evidence placed before the judge should have told the other way, two principal objections are made to the judge's reasoning. Firstly, Mr. Cheung says that the judge's own conclusions were somewhat contradictory. Thus at page 7 of his judgment he says:

"Taking the evidence in their totality, including that of Captain Herring which I shall examine later, the position is equally consistent with the goods being genuine nutmeg oil or not."

Whereas on the following page he says:

"Taking the evidence generally I am inclined, on balance of probability, that the goods were genuine nutmeg oil to the value as stated in the relevant documents produced."

If the first of those passages meant what at first sight it seems to mean there would not only be a contradiction as Mr. Cheung maintains but, if that passage represented the true opinion of the judge on the evidence as a whole, then clearly he should not have found that the plaintiff had discharged the burden, which lay upon it of proving the nature of the substance. I am satisfied however that the opinion which he expressed in the first of those passages related solely to those parts of the evidence which were relied upon by the defence as showing something in the nature of a conspiracy among the officers of the Nam Hoi Trading Co., in which they were assisted by the venal behaviour of the bank officials, and which included the possibly fictitious nature of the alleged re-sale to Yan Yang and also such of Captain Herring's evidence as might show that an imposture was physically capable of being carried out with worthless materials. What I take it to mean is that a fraudulent conspiracy aimed at procuring credits with an unlawful intention of not repaying them could have been equally well served by the importation of real or of imitation nutmeg oil and that that would be so whether or not the bank officials were involved in any fraud. He was not, as I see it, at that point purporting to announce his conclusion as to the nature of the substance on the evidence as a whole. This he does in the second of the two quoted passages where he finds the somewhat scanty documentary and other evidence indicating genuine oil supported firstly by what he regarded as the inherent probabilities of the situation and secondly by the maxim "omnia praesumuntur contra spoliatorem" which may indeed have constituted a decisive determinant for his conclusion in view of the extensive quotation from the decision in Coldman v. Hill⁽¹⁾ upon which he then relies.

15. I share the learned judge's evident feeling that this evidence was somewhat tenuous but in the end it seems to me that he came to the right conclusion upon this issue. So far as proof positive is concerned some weight is to be found in the fact that the only physical examination of the material did disclose that it was oil of an aromatic nature, yellowish in colour, which fits the description of nutmeg oil. As to the documentation, both sides were content to rest very largely upon hearsay evidence admitted under the special legislation. And both sides relied upon certain portions of the hearsay statements of CHAN Kung-wo. As to this I found some substance in Mr. Litton's objection that much of Chan's statement in which he suggested a conspiracy including the bank officials and the officers of the Nam Hoi Company was evidence which had he been called as a witness, he might not have been able to give without infringing the ordinary hearsay rule. Such portions of his statements would therefore infringe the provisions of section 47(1) of the Evidence Ordinance which makes hearsay statements admissible as evidence of any facts stated therein only if the persons making the statement could have given direct oral testimony of such facts. There had, of course, been an argument as to admissibility at the trial and the point before us was really to the effect that the decision on the matter had, to the prejudice of the respondent, gone the wrong way.

16. It was common ground that if this oil was genuine nutmeg oil by far the greater bulk of it cannot have come from Singapore but must have been produced in Indonesia (the Moluccas was said to be the main source) and shipped to Singapore. But whether produced in Singapore or in the Moluccas it is, excluding for the moment the possibility of fraud at the Singapore end, unlikely that any exporter would not have examined the goods before either packaging them in Singapore or onward shipping those received from elsewhere. In other words, the officials of the Singapore company who signed the weight note and packing list and other documents would have had direct knowledge of the nature of the contents before signing such documents. That would give the hearsay testimony contained in such documents a higher value as proof of primary fact than could be attributed to many of the statements relating to conspiracy allegedly made by CHAN Kung-wo. No doubt the matter may seem finely balanced enough - and no doubt so seemed to the learned trial judge - when It comes to estimating the weight of one sort of hearsay against the other. But I think that the judge was, with respect, justified in adding to the estimate he had made of these competing hearsay statements, and the other scanty evidence available, the consideration that it was through the negligent default of the servants of the defendant company that the goods had been removed beyond the possibility of inspection as to their nature.

17. In this he took the line adumbrated in Armorv v. Delamirie⁽²⁾ and certain other old authorities in which the courts have resorted to the maxim "omnia praesumuntur contra spoliatorem" in refusing to allow a plaintiff's claim to be defeated where the plaintiff was unable to establish the nature or value of property wrongfully converted by the defendant as a result either of malfeasance or misfeasance of the defendant. Mr. Cheung did not have too much difficulty in establishing the difference between the circumstances in the case of Armorv v. Delamirie where the court attributed maximum value to a ring with a precious stone which had been made away with by the criminal act of the defendant, and the present case where the worst that can be said is that goods have been totally lost through an act of negligence. Counsel was however in more difficulty with the decision in Coldman v. Hill⁽¹⁾. Although the trial judge cited the older authorities it was upon this case of Coldman that he specifically relied in forming his opinion. He quotes a passage from the judgment of Scrutton L.J. in which that eminent judge refers to the older decisions including the case of Armory and deploys the selfsame maxim to cover circumstances materially different from those in Armory and significantly closer to the circumstances we are concerned with here.

18. In Coldman the plaintiff, a farmer, left certain cattle with the defendant under an agreement for agistment. Some of them were stolen without negligence on the defendant's part but upon being informed by his stockman of the theft, some 16 hours after it had occurred, he took no steps to inform either the police or the owner of the theft. The judge at first instance found that had he done so there would have been a reasonable prospect of the cattle being recovered. The Divisional Court upon appeal reversed this finding of the trial judge but the Court of Appeal, upon a further appeal, reinstated it. It was held that the defendant had not discharged the onus, which had shifted to him, of showing that the cattle had been finally lost without any fault upon his part. Although in that case the question at issue was the onus of proof as to negligence or no negligence in relation to the loss of the cattle, and though no question arose as to proof of the value of what had been lost, the Court of Appeal had no difficulty in applying the principle of Armorv v. Delamirie⁽²⁾. Mr. Cheung seeks to distinguish the case on the basis that in Coldman⁽¹⁾ the defendant was guilty of a positive dereliction of his duty in failing to inform the plaintiff or the police and that therefore he was rightly regarded as a "spoliator" within the meaning of the maxim. I think that is true but I think that the present case is in that particular identical. It is not denied that it was failure to check the signatures which occasioned the misdelivery and hence the total loss to the plaintiff of these drums. Thus, in the present case, as in Coldman, there was a failure on the part of the defendants to carry out an obligation attaching to their custody of the plaintiff's property. Indeed the only difference between the cases would seem to be that in the present case the duty is clearer - being of an express contractual nature - and the failure to perform it occurred at an earlier and more culpable stage in the proceedings. In the upshot therefore I cannot find any good reason to disturb the finding of the learned trial judge that the drums contained genuine nutmeg oil.

19. What remains to be considered is whether any term in the contract of bailment between the parties can be said to be sufficiently wide to prevent liability attaching to the wharf company notwithstanding its delivery of these goods into hands other than those authorised to receive them. At one point Mr. Cheung seemed prepared to concede that the failure by the counter clerk to compare the signatures did amount to breach of a fundamental term of the contract. But it is some measure of the lingering confusions that surround this much debated term that, following a brief reflection thereon, he preferred, very shortly thereafter, to withdraw that concession and to say only that it was admitted that the defendant company had, through its servant, been guilty of gross negligence.

20. It is not, I think, denied that at common law, and apart from any special contractual arrangements between the parties, the liability of a warehouseman or wharfinger for loss of that description in relation to goods held by him for another for loss of that description in relation to goods held by him for another for reward would be to reimburse that other for any loss so caused. We are however concerned with three particular provisions in a booklet put out by the defendant company and supplied to its various customers which is said to contain the detailed contractual conditions applying to the storage of goods by the company on behalf of its customers. The first of these conditions is Condition 42(a) which is contained in a section of that booklet headed "Conditions of Business". It is in the following terms:

"Delivery of Cargo And Responsibility

It is this condition which is said by the plaintiff company to constitute the fundamental term, or term of fundamental importance, the breach of which constitutes such fundamental breach of contract as to deprive the defendant company of the benefit of the two exceptions clauses upon which it, in its turn, relies by way of defence. Of these two clauses the less radical is that which follows immediately upon the clause already cited above. It does not purport to exclude liability altogether but merely to limit it. It is in the following terms:

Mr. Cheung however also relies upon a clause which appears on the opening page of the booklet under the general heading "Conditions and Explanatory Notes Scale of Rates and Charges". Clause 3(b) on that page runs as follows:

It is common ground that no such declaration of value was ever made. If Mr. Cheung's interpretation of that clause is correct then, notwithstanding what has happened, the company is relieved of liability altogether. Mr. Litton takes an initial objection to any consideration of this provision by the court. He admits that the point is purely one of pleading and Mr. Cheung in reply, while not admitting the validity of the point, asks that if we should find ourselves impressed by it, he should be permitted, even at this stage, to amend his pleadings. If it were necessary to do so I should have no hesitation in permitting such an amendment in view of the manner in which the case has been argued throughout, both in the court of first instance and upon this appeal. The objection is this: paragraph 16 of the defence in raising the ground of defence which is adumbrated in Clause 3(b) (above) refers not to that clause but to a clause 19G. We now understand that Clause 19G (which is in terms identical with Clause 3(b)) was introduced into the section headed "Conditions of Business" by a revisionary booklet published in 1964 which for reasons that need not concern us was never proved at the trial. No amendment was asked for and the present Clause 3(b) was argued on behalf of the defendant company as part of the general conditions of the contract.

21. Mr. Litton argues that there are many provisions in this extensive booklet (which is revised from time to time and supplied to the defendant company among other customers) which simply cannot apply to the present contract of bailment. He points out that Clause 3(b) occurs in a section which is largely taken up with the scale of rates and charges and he points to part of the legend on the cover of the booklet which states : "This tariff and scale of rates and charges is subject to alteration without notice".

22. It is true that the defendants' own pleading specifically recites the section headed "Conditions of Business" but on the whole I do not think that any amendment was or is necessary. The arrangement of the many provisions in the booklet is neither particularly logical nor tidy but it is to be noted that the opening portion in which 3(b) appears includes in its heading the word "Conditions" and I think it must have been well understood between the parties on entering upon this contract of bailment that such of the conditions in the booklet as would be relevant to the circumstances of that particular contract would necessarily apply in the absence of express terms, specifically agreed between the parties, which might modify those general conditions. I think therefore that this total exclusionary clause, equally with Clause 42(b), falls to be considered by this court.

23. We have had the advantage of a lengthy and thorough excursion through the many decided cases dealing with the development of the comparatively recent concept of fundamental breach of contract. These decisions, occurring both prior to and subsequent to the year 1967, form a growing constellation of authority revolving around the important decision of the House of Lords in Suisse Atlantique Societe D'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale⁽³⁾, and most of the later decisions on the topic reflect, and perhaps occasionally refract, the illumination shed by that case.

24. That difficulties remain in this area of the law is evident in the manner in which the courts in subsequent cases have discussed such related terms as "discharge by breach", "fundamental breach", "breach of a fundamental term", "fundamental breach of a term" etc. The notion with which we are concerned however is that of fundamental breach of this contract in relation to the exceptions clauses contained therein and the possibility of these clauses surviving the occurrence of such a breach. In the Suisse Atlantique case Lord Wilberforce at page 431 points out that a fumdamental breach of contract denotes two quite different things:

"Namely (1) a performance totally different from that which the contract contemplates, (2) a breach of contract more serious than one which would entitle the other party merely to damages and which (at least) would entitle him to refuse performance or further performance under the contract."

Later, on the same page he says:

"There is in fact no necessary coincidence between the two kinds of (so-called 'fundamental') breach. For, though it may be true generally, if the contract contains a wide exceptions clause, that a breach sufficiently serious to take the case outside that clause, will also give the other party the right to refuse further performance, it is not the case, necessarily, that a breach of the latter character has the former consequence. An act which, apart from the exceptions clause, might be a breach sufficiently serious to justify refusal of further performance, may be reduced in effect, or made not a breach at all, by the terms of the clause."

Dealing with the same passage Donaldson J. in Kenvon Son & Craven v. Baxter, Hoare & Co.⁽⁴⁾ says:

"As I understand Suisse Atlantique it is only in cases in which the performance is non-contractual in the sense that it is totally different from that which the contract contemplated, that one can ignore the construction of the exception clause or treat it as inapplicable notwithstanding that, as a matter of construction, it covers the loss which has occurred. If, of course, the innocent party affirms the contract with the knowledge of the breach, or is deemed to have done so by reason of a failure to disaffirm, the performance is taken out of that class and becomes a contractual, albeit wrongful, performance to which the exception clauses apply or do not apply as a matter of construction."

The idea in that passage, that even after fundamental breach, if the innocent party affirms the contract with knowledge thereof, then the exclusion clauses may yet have to be construed, would seem to be at variance with the view of Lord Denning M.R. in the latest of the cases put before us, Photo Production Ltd. v. Securicor Ltd. (C.A.)⁽⁵⁾. At page 863 having said that there are two ways of avoiding the impact of an exemption or limitation clause he goes on:

"The first is by way of fundamental breach. In this way the court itself deprives the party of the benefit of an exemption or limitation clause if he has been guilty of a breach of fundamental term or of fundamental breach of one of the terms of the contract .... It applies whether or not the injured party affirms or disaffirms the contract, as this court held in Wathes (Western) Ltd. v. Austins (Menswear) Ltd. (1976) 1 Lloyd's Reports 14."

However what Sir John Pennycuick said (at page 25) in the latter case is to the following effect:

"The current of authority has now set, as I read the cases, in favour of the view that where a contract is affirmed after fundamental breach, an exemption clause is treated as inapplicable to liability resulting from the breach, not upon a substantive principle of law, but upon construction, the clause being construed, in the absence of some plain indication of a different intention, as by implication inapplicable to such liability."

In other words the latter judge would seem to take the view that notwithstanding the occurrence of fundamental breach (or breach of some fundamental term) the effect of an exception clause may nevertheless, have to be construed when the injured party affirms the contract if such an intention is manifest in the language used by the parties. The appearance of discordance between these passages may however be removed by what Lord Denning then went on to say concerning the second method of avoiding the impact of an exemption clause. The second way, he said, was by construction of the contract. Adopting this method what was to be ascertained was the presumed intention of the parties (page 864):

"In this second way, it is important to notice that, in order to decide whether the exemption or limitation clause applies, you must construe the contract, not in the grammatical or literal sense, or even in the natural and ordinary meaning of the words - but in the wider context of the 'presumed intention' of the parties - so as to see whether or not, in the situation that has arisen, the parties can reasonably be supposed to have intended that the party in breach should be able to avail himself of the exemption or limitation clause."

At page 865 he comes to the following conclusion:

"It seems to me that the two ways can be seen to meet in practice so as to produce a result in principle which may be stated thus : although the clause in its natural and ordinary meaning would seem to give exemption from or limitation of liability for a breach, nevertheless the court will not give the party that exemption or limitation if the court can say : 'The parties as reasonable men cannot have intended that there should be exemption or limitation in the case of such a breach as this'. In so stating the principle, there arises in these cases 'the figure of the fair and reasonable man'; and the spokesman of this fair and reasonable man, as Lord Radcliffe once said, is and 'must be the court itself' : See Davies Contractors Ltd. v. Fareham Urban District Council (1956) A.C. 696, 728-729."

All of this would seem to leave open the possibility that liability for fundamental breach may yet be excluded by a clause sufficiently carefully and widely drafted to make it clear that such was the intention of the parties. It may be, however, that there is a limit to this possibility. All the judges in the Suisse Atlantique case⁽³⁾ favoured the restriction of wide exceptions clauses in cases of fundamental breach by means of what may be termed a robust construction of the presumed intention of the parties, and one of them at least, Lord Wilberforce, goes further than the other members of the court in the fortification of that approach by resorting, if somewhat tentatively, to the idea (eschewed by the majority) of a substantive rule of law whereby any exceptions clause would be automatically dissolved upon the occurrence of fundamental breach or breach of a fundamental term. He said (page 431-432):

"I treat the words 'exceptions clause' as covering broadly such clauses in a contract as profess to exclude or limit, either quantitatively or as to the time within which action must be taken, the right of the injured party to bring an action for damages. Such a clause must, ex hypothesi, reflect the contemplation of the parties that a breach of contract, or what apart from the clause would be a breach of contract, may be committed, otherwise the clause would not be there; but the question remains open in any case whether there is a limit to the type of breach which they have in mind. One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exceptions clause to a particular type of breach. But short of this it must be a question of contractual intention whether a particular breach is covered or not and the courts are entitled to insist, as they do, that the more radical the breach the clearer must the language be if it is to be covered."

I should note, by way of disposing of the point, that no complication relating to the effect of affirmation by the injured party after fundamental breach by the other party arises in the present case. This is one of those cases in which the act of the defendant has resulted in a total loss of the goods thus depriving the other party of any possibility of affirming or non-affirming.

25. I have not referred by name to the many other decisions involved in the course of the argument. We were however referred to a comprehensive survey of judicial authority on the effect upon exceptions clauses of discharge by breach which appears in the Cambridge Law Journal (1970) at page 221. The author (Mr. Brian Coote) comments critically upon the development of the doctrine of fundamental breach which he regards as the unfortunate result of the miscegenation of two distinct and incompatible strains in the law of contract viz.: the law relating to discharge by breach and the law relating to deviation deriving ultimately from the shipping cases. He suggests that the concept of fundamental breach has in fact been, as he puts it "decently interred" by the House of Lords in the Suisse Atlantique case⁽³⁾. He proposes that the court should

"complete the process begun by the House of Lords in that case and move directly to the acceptance of a universal rule that the effect of exception clauses depends on their proper interpretation, and on that alone (questions of fraud, illegality and the like, apart)."

26. My reading of the judgments of the Court of Appeal in Photo Production Ltd. v. Securicor Ltd.⁽⁵⁾ (but especially that of the learned Master of the Rolls) conveys to me that whether or not we are now to regard the doctrine as "decently interred" the principle stated in the judgment of Lord Denning "the fair and reasonable interpretation" principle -may most conveniently be applied to the circumstances of the present case.

27. For a start, I have no doubt whatsoever that the provision contained in Clause 42(a) upon which the plaintiff company relies is one so basic to the due operation of the contract between the parties as to be properly referred to as a fundamental term. Failure to make due comparison of the signatures must be regarded as a fundamental breach of a fundamental term. Such was the view taken by Zimmern J. of a very similarly worded provision in Burwill Trading Ltd. v. Hongkong and Kowloon Wharf & Godown Co. Ltd.⁽⁶⁾ in which the bailee sought unsuccessfully to rely upon an exception clause in terms identical with those appearing in the present clause 42.

28. The principal difficulty raised by the present case resides in the fact that the plaintiff bank was itself in breach of one of the terms viz. : Clause 3(b). But when we contrast these several terms I think it is apparent that they could scarcely have been regarded - if considered - as having equal importance for preserving the substance of the contract. I may have mistaken the emphasis of counsel's argument but it did appear to me that Mr. Cheung did not place the same reliance upon the total exclusion clause as he placed upon the limitation of liability clause 42(b). If such was the case I would think that such modesty of emphasis was well justified. Though evidence was led to show that in the case of what is termed "valuable goods" greater precautions are normally taken by the defendant company in storage and custody of such goods there is nothing in the contract terms anywhere to suggest that the defendants are to be entitled to take a liberty of this magnitude in respect of their declared intention in 42(a) should the other party fail to declare the valuable nature of the merchandise.

29. No doubt as a matter of practice more care is taken of valuable cargo and more revenue derived thereby. But the failure on the part of the plaintiff bank to declare the value of the goods is in no sense a breach of contractual obligation commensurate with the failure on the part of the defendant company to observe the elementary precaution of comparing signatures which is cast upon it as a fundamental duty under 42(a). When I ask myself the question: Would the plaintiff bank have been content to agree that, in the event of its not declaring the value of the goods, the defendants should regard themselves as absolved from all observance of that precaution which was the essential mechanism to ensure proper delivery? I can only say that I do not believe that such assent would have been given by the plaintiff or expected of it by the defendants.

30. The real substance of Mr. Cheung's submission was however in relation to Clause 42(b). At first sight it seems certainly not unreasonable that where the plaintiff bank had failed to declare the goods as valuable goods then the defendant company's liability should be restricted in the manner provided by Clause 42(b). To this again, however, one must apply the principle of fair and reasonable interpretation on the basis of what the parties must be presumed to have intended.

31. There is, as Mr. Coote points out in his essay: "already in existence an impressive array of interpretative devices for containing exception clauses, and they are open to still further development." I take, therefore, as my point of departure in the consideration of this issue one of the most familiar of those devices : the maxim that every exception clause is to be interpreted, in case of ambiguity, contra proferentem. Taking these drums to have contained genuine nutmeg oil, a return of $500 per drum in place of the expected $12,000 odd while not in itself a negligible sum is yet so wholly disproportionate to the value of the desired security that I think the defendant company can be absolted from liability to such a drastic degree only if its own terms can be interpreted as meaning nothing other than that such a reduction was the obvious presumed intention of the parties. I think Mr. Litton is right to maintain that there were not two possible sorts of contract in view at the time these goods were delivered to the custody of the defendant company viz.: (1) a contract for the storage of valuable goods in respect of which stringent precautions would be taken or alternatively, (2), a contract for non-valuable goods storage of which would attract no such special precautions. It was, as he pointed out, not the case that in respect of a contract of the first sort the company had undertaken to compare the signatures and in respect of one of the latter sort only to instruct its clerk to do so. Clause 42(a) says in the clearest terms:

"The Company will compare the said endorsement signatures or chop with specimens of which (sic) the said party shall have supplied to the Company, ...."

The extent of the duty created by this express undertaking is thereafter carefully defined in language of limitation:

"The Company shall not be liable to the said party for any loss of, or damage to, the said package resulting from any misdelivery thereof in consequence of any error of judgment or negligence of any of its employees in the making of the said comparison, or of the drawing of any conclusion therefrom, as to the authenticity of the said endorsement or signatures ..."

Now although Mr. Litton was unwilling to restrict his argument so narrowly it seems to me that the misdelivery referred to in paragraph (b) is to be understood in no different or wider sense than the misdelivery referred to in the preceding paragraph. The latter clause cannot therefore relieve the defendant company, even to this limited extent, of liability since the particular misdelivery as it occurred was the result of an error of an altogether more fundamental kind and one not covered by the exception provided in 42(a).

32. A final and a separate consideration is this. It seems clear that the judges in the Suisse Atlantique case⁽³⁾ equate the notion of fundamental breach with such breaches as occurred in the deviation cases concerning the loss of cargoes carried aboard ships whose masters had departed from contracted voyage routes. In many cases since the Suisse Atlantique one finds the same identification of principle as one underlying shipping and other bailment situations. In the deviation cases it has generally been held that exception clauses have no application once the bailee exceeds any limitation on his authority. The wharf company in the present case had a duty not merely to store these goods but to deliver them in due course and upon proper presentation of documents to the rightful owner. Its authority to make delivery was limited by its duty to examine the signatures on the vital documents before releasing the goods. In choosing to release them without taking that necessary precaution the company's servant exceeded the limitation thus placed upon that authority. In this regard I find wholly apposite the extended passage from the judgment of Lord Denning in Spurling Ltd. v. Bradshaw⁽⁷⁾, relied upon by Li J. in the present case, wherein is emphasized the double duty of a warehouseman to store safely and to deliver properly on demand. I shall repeat only the concluding sentence where the learned Master of the Rolls having said that a serious breach of either duty would be one going to the root of the contract, concludes, in relation to the position of a warehouseman who has so behaved,

"He cannot be allowed to escape from his obligation by saying to himself:

33. Of the deviation cases one in particular speaks directly to the circumstances here and counsel for the respondents specifically relies upon it. It is the decision of the House of Lords in Cunard Steamship Co. v. Buerger⁽⁸⁾. Eight cases of textile goods belonging to the respondents had been lost in the course of a voyage aboard the S.S. Verentia, owned by the appellant company, under circumstances which were found to constitute deviation from the provisions of the Bill of Lading. That contract contained a clause under which the appellants became not accountable for any goods of whatever description above the value of £20 per package unless the value should be expressed in the Bill of Lading and extra freight agreed on and paid. The Court of Appeal, and later the House of Lords, concluded that that clause was insufficient to protect the steamship company from the effects of its acts of deviation. In essentials the circumstances of that case seem to me to be indistinguishable from the circumstances with which we are confronted here. Although in that case the House of Lords was considering a total exclusion clause in terms very similar to Clause 3(b) in the present case and did not have to consider any clause similar in terms to Clause 42(b) I would think that the authority of that decision must extend equally to both the clauses in dispute in the present case. For these reasons I would dismiss the appeal with costs.

Cons, J.:

34. I have had the advantage of reading in draft the judgment just delivered on behalf of my brother McMullin. With the very greatest respect I am not sure that I would myself have extended the principle of Armory v. Delamirie⁽¹⁾ to the circumstances of this case, but I express no considered opinion for the other arguments to which he has referred do not persuade me that the learned trial judge came to a wrong conclusion of fact.

35. I agree with the conclusion on fundamental breach. I would only add that I dismiss the appeal completely with some reluctance. It seems to me the result is a good illustration of what was feared by Lord Reid in the Suisse Atlantique Case⁽²⁾ when at p. 406 he said:

"And it does not seem to me to be satisfactory that the decision must always go one way".

36. The bank ought to have declared the value of the goods. They have no excuse for not doing so. The declaration would have put the wharf company on the alert. Then it would have been up to the wharf company whether or not to impose more stringent precautions and the goods might well not have been lost. It would be reasonable accordingly to limit the amount which the bank should recover. However, authority does not allow this. In my opinion the case of Cunard Steamship Co. Ltd. v. Buerger ⁽³⁾ is decisive. The appellant has not been able to circumvent it.

Huggins, J.A.:

I had embarked upon a judgment but, having now had the advantage of reading the judgment prepared by McMullin, J.A., I am satisfied that he has reached the right conclusion in law and do not think I can usefully add anything to his reasoning. Nevertheless, I share Cons, J.'s anxiety and am not convinced that justice is being done. I do not think Cunard Steamship Co. Ltd. v. Buerger 1927 A.C. 1 can be effectively distinguished and its persuasive authority is such (see De Lasala v De Lasala 1979 H.K.L.R.) that it is not open to us to limit the damages to $500 a drum. For my part I would have thought that, on any view of justice, where a bailment commences on the basis of a representation, express or implied, by the bailor that the goods do not exceed a stated value, then compensation for any loss resulting before the goods have been returned to him - whether such loss is caused by a fundamental breach of contract by the bailee or not - should be assessed upon the value so represented, provided only that there has been no deliberate fault on the part of the bailee.

17th October 1979.

Representation:

(1) (1919) 1 K.B. 443.

(2) (1722) 1 Strange Law Reports 504.

(3) (1967) 1 A.C. 361.

(4) (1971) 1 Lloyd's List Reports 232, at 242.

(5) (1978) 1 W.L.R. 856.

(6) Action No. 1275 of 1974.

(7) (1956) 1 W.L.R. 461.

(8) (1927) A.C. 1.

(1) (1722) 1 Strange L.R. 504

(2) (1967) 1 A.C. 361

(3) (1927) A.C. 1