Manchu Gems Ltd and Another v. Pan American World Airways Inc and Another

HCCL000141/1977

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Coram: Cons, J.

Date of Judgment: 19 February 1979

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JUDGMENT

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1. At the end of April 1976 an American jeweller trading under the name of J.P. Knight Co. of Cincinnati, Ohio (Knight) came to Hong Kong and purchased from the Manchu Gems Ltd. of Kowloon (Manchu) a substantial number of loose stones and a few that had already been mounted. The total price was US$38,876.04. This included a 5% "handling charge" on the loose stones, which were otherwise sold at cost price. It was part of the sale agreement that Manchu would arrange to ship the gems by air to Cincinnati and that Knight would in due course reimburse Manchu for the freight and insurance charges.

2. In May Manchu arranged for shipment through their forwarding agents, Sonic Air Forwarders Enterprise Ltd. (Sonic). Manchu do not always use Sonic when shipping jewellery abroad but they had employed Sonic on other earlier occasions. Sonic are IATA agents, and authorized agents of Pan American World Airways Inc. (Pan Am). Sonic picked up the gems from Manchu on the 14th May. Pan Am had no direct cargo flight from Hong Kong to Cincinnati so the gems were sent first to San Francisco. Pan Am staff there arranged for the gems to be carried on to Cincinnati by Trans World Airlines Inc. (TWA), who had a suitable flight between the two cities. The gems were accordingly passed over to TWA. But they never arrived in Cincinnati and no one has since been able to discover how or exactly where they disappeared. The questions in this action are who is liable for that loss and to whom. Manchu and Knight, the 1st and 2nd plaintiffs respectively, claim against Pan Am and Pan Am claim against TWA as third party.

3. Carriage by air between Hong Kong and the United States of America is governed by what are commonly known as the Warsaw Convention of 1929 and the Guadalajara Convention of 1961. The relevant provisions are set out in Schedule 4 to the Carriage By Air Acts (Application of Provisions) (Overseas Territories) Order of 1967, which can be found at page CH13, Vol. 22 of Laws of Hong Kong. They were considered in this court two years ago in the case of Cordial Manufacturing Co. Ltd. and another v. Hong Kong-America Air Transport Ltd.⁽¹⁾. The facts of that case were as follows: The 1st plaintiff in Hong Kong sold goods to the 2nd plaintiff who was in America. The 1st plaintiff then arranged with the defendants for the goods to be flown over. The defendants issued a waybill covering the goods for the whole journey, that is from Hong Kong to New York. The 1st plaintiff was named in the air waybill as the shipper and a New York finance company as the consignee. There was a direction to notify the 2nd plaintiff of the arrival of the goods. The defendants did not carry the goods themselves. Pan Am took them on the first leg to Los Angeles and the Flying Tiger Line Inc. carried them on the second leg to New York. The goods arrived safely. By that time the 2nd plaintiff had paid the finance company. At least I assume so, for on arrival the Flying Tiger Line issued a carrier's certificate in favour of the agents of the 2nd plaintiff. They would not have done that without the consent of the finance company. Unfortunately the 2nd plaintiff never got the goods. They were wrongly released to a stranger who came armed with a complete set of forged papers.

4. As I understand the judgment in that case three decisions were made. First that the right to bring an action in respect of the loss of or damage to goods carried by air under the two Conventions is restricted to either the consignor or the consignee. A third party with an interest in the goods has no direct right to sue. Secondly, that the right must be derived either from the Conventions themselves or, as far as England and Hong Kong are concerned, from a privity of contract given by the common law. And, thirdly, that the consignor retains his right under the Conventions only if he has exercised his right of disposition under Article 12 of the Warsaw Convention. Article 12 says this:

When applied to the facts of that case those decisions put both the plaintiffs out of court. The 2nd plaintiff was neither consignee nor consignor. The 1st plaintiff's right under the Warsaw Convention had ceased when the goods arrived in New York; the Quadalajara Convention conferred no further right. The 1st plaintiff had lost any proprietary interest in the goods long before delivery; the position therefore at common law depended on whether the 1st plaintiff could prove a special contract within the principle laid down in Dunlop v. Lambert⁽²⁾. On the facts it was held that the 1st plaintiff could not do so.

5. In deference to that authority I take the position in the present instance to be that Manchu, who have not exercised any right under Article 12 of the Warsaw Convention, have now no right to sue under the Conventions but may have a right if they can show privity of contract at common law under the principle of Dunlop v. Lambert. Are there then sufficient indications to establish that privity and to distinguish the position from that in the Cordial Case? I think there are. Firstly Manchu insisted on a first-class carrier. There was a choice. Sonic, on their behalf, particularly selected Pan Am. In the Cordial Case it was the buyer who selected the carrier. Then Manchu were directly responsible to Pan Am for the freight and extra valuation charges. In Cordial the waybill was endorsed "as arranged collect". I appreciate that during cross-examination Mr. Houseman, who is the Managing Director of Manchu, agreed that once he had received his copy of the air waybill his company was no longer concerned with the goods. But he expected the carrier to remain responsible. He did not, as did his counterpart in the Cordial Case, "wash his hands of them". I am satisfied that in the circumstances of the present instance Manchu obtained sufficient interest to sue.

6. Counsel for Manchu sought also to establish privity in three other ways:-

In view of the conclusion I have just drawn it is not necessary for me to express considered opinion on these submissions, although I think it unlikely I would have accepted them. (a) is excluded by the Cordial Case. As to (b), it would be straining the facts too far to say that Manchu was an unpaid seller just because it had forgotten to include one item in the original invoices. As to (c) the bailment to Pan Am ceased at the moment Pan Am handed the goods over to TWA. Manchu thereafter had no right to repossess.

7. There was also a claim for an implied term to take special care in view of the extra valuation charge. Again I think it would have been unlikely to succeed.

8. What then is the measure of damages that Manchu can recover from Pan Am? Should it be the invoice price of $38,876.04, which was the value declared for customs? Or should it be that amount plus 10%, which was the amount for which they were insured and which was the value declared for carriage and upon which the extra freight charge was levied? There was evidence that the consignee could have expected to make a net 10% profit upon eventual resale in America.

9. Article 22(2) of the Warsaw Convention limits to a very small amount the carrier's liability for cargo "unless the consignor has made, at the time when the package was handed over to the carrier, a special declaration of the value at delivery and has paid a supplementary sum if the case so requires. In that case the carrier will be liable to pay a sum not exceeding the declared sum, unless he proves that that sum is greater than the actual value to the consignor at delivery". That seems to me to dispose of the question. The actual value to Manchu at delivery was the price at which Manchu were willing to sell. It is suggested that at common law a reasonable profit may in addition be recovered. I am referred to Cheshire and Fifoot's law of Contract, 9th edition, at p. 595, to O'Hanlan v. Great Western Railway⁽³⁾ and to Rodocanachi v. Milburn⁽⁴⁾. However, I am not persuaded that a common law right to damages can override the express provisions of the Conventions. That I take to be the view of Donaldson J. in Corocraft Ltd. v. Pan American World Airways Inc.⁽⁵⁾ when he said:

"In a sentence, the (Warsaw Convention) provides a parcel of rights and liabilities which, in relation to actions tried in the English courts, ...... are concurrent with, but paramount to, all other rights and liabilities in respect of loss of or damage to luggage and goods."

10. The next question is whether Knight, as well as Manchu, may bring action against Pan Am. They will be able to do so if Pan Am is a "contracting carrier" within Article I(b) of the Quadalajara Convention. The right then is derived from Article VII which, together with Article II makes a contracting carrier subject to the Warsaw Convention for the whole of the agreed carriage. It is argued that "contracting carrier" in this Convention is limited to those parties who arrange air carriage around the world but do not themselves actually carry the cargo; for if a "contracting carrier" is subject to the Warsaw Convention he becomes a "successive carrier" under that Convention whenever he performs some part of the carriage and by Article 30(3) is liable only if the loss occurs during that part of the carriage which he actually performs or for the first or last part of the carriage as the case may be. I do not think this necessarily follows. In my view it is possible to have a cargo carried by more than one carrier without its being a case of "carriage to be performed by various successive carriers and falling within the definition set out in the third paragraph of Article 1" of the Warsaw Convention. That definition requires one to look at the contract rather than the carriage. If by the initial contract the parties contemplate more than one carrier then each carrier is a successive carrier within the article. It is the same if the contract is initially for one carrier only but is later amended by mutual agreement to include another carrier: of. Briscoe v. Compagnie Nationale Air France⁽⁶⁾. But it would not in my view be the same if the later variation were made unilaterally by the initial carrier. That carrier would remain a contracting carrier within Article II of the Quadalajara Convention.

11. I have no doubt that the agreement in the present instance was one to be performed by successive carriers. Sonic, acting as agent for Manchu, were well aware that Pan Am would take the goods only part of the way. Possibly Mr. Houseman also knew this. He is well experienced with air freight to the United States. I do not think it makes any difference that at the time of the initial contract neither the identity of the second carrier nor the exact route by which the goods would go was agreed upon. Those were matters which Manchu, through Sonic, were content to leave to the discretion of Pan Am. Pan Am were not the last carrier or the carrier who performed the carriage during which the loss took place. I find therefore that Knight has no right of action against Pan Am.

12. I turn then to consider whether Pan Am may recoup their loss from TWA. They claim an indemnity by virtue of Article IV(4) of the Manual of Traffic Conference Resolutions, Cargo, which has been generally referred to throughout as "the Interline Agreement". This is a set of rules and regulations published by IATA and which govern all members of that association. These include Pan Am and TWA. Article IV(4) provides as follows:

"INDEMNITY DUE TO LOSS, DAMAGE OR DELAY

Pan Am by its third party action also claim by way of implied contract quasi contract and for contribution under the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23. In argument they further add the allegation that TWA is a common carrier. I do not think any of these take the matter any further. Pan Am have a clear right to recover unless TWA can show some good reason why they should not. TWA admit some part of the liability but argue that they should not be responsible for the whole of the loss because Pan Am failed to observe the correct trade practice in relation to valuable goods.

13. That trade practice is to be found in the Interline Agreement to which I have just referred, in The Air Cargo Tariff (TACT) and in the International Local and Joint Air Cargo Rules Tariff No. 1 (C.A.B. No.3). The last two mentioned are sets of rules and regulations which, like the Interline Agreement, govern the carriers who are party to them, which again in this instance include Pan Am and TWA. In this way the carriage of Manchu's gems from San Francisco to Cincinnati was governed by three separate airline agreements, although in substance there is little difference between them and, as far as I can see, no conflict. In practice the man on the spot in the airline cargo business usually relies upon TACT alone. This is the most convenient. In addition to the general rules it has a section dealing with the special requirements of each participating carrier. Those of TWA appear at p.222 of the April, 1976 issue.

14. There is no doubt that the present shipment falls into the general category of "valuable cargo": Article I(31) of the Interline Agreement and p.21 of TACT. Pan Am accepted that and took special care of the cargo while they had it within their own custody. This is reflected in documents 11 and 12 in the Agreed Bundle. But that is all they did. TWA say Pan Am should have gone further and:-

15. I find no substance in the first two suggestions. They are mentioned as requirements by Mr. Perez, the Field Manager for Cargo in TWA and who is a most experienced, and, I should think, respected gentleman in the air cargo industry. However, there is nothing in any of the three agreements which imposes these requirements. It is possible that they are necessary only for internal U.S.A. and Canadian domestic flights. As to Items 3 and 4 TWA are on firm ground. Page 222 of TACT says this:

It is repeated word for word in C.A.B. No.3 as rule 4D(3). Pan Am simply did not comply with this requirement. They gave no advance notice whatsoever. Nor did they comply with the note to C.A.B. rule 4A:

"NOTE

Shipments containing articles of extra-ordinary value must be packed in outside containers with measurements of 1500 cubic inches or more, when any portion of the transportation is via AA, FT, TWA OR WA."

The actual dimensions were no more than 400 cubic inches.

16. Pan Am's answer to these allegations is that they are matters that go to acceptance rather than liability; that they give a right only to reject cargo that may be tendered; and that by accepting the cargo with knowledge of its nature TWA waived that right. There is some force in this argument, but it does not cover all the circumstances. If Pan Am had given advance notice TWA would not have sent an ordinary everyday serviceman from their Cargo Department to receive the shipment; they would have sent at least two men, one of whom would have held the senior rank of Supervisor. The Supervisor would have assumed responsibility for the shipment and would have immediately adopted the high security procedure laid down by TWA. If that had been done I think that in all probability the shipment would never have been lost. When it comes to valuable cargoes TWA have a record of which they may justifiably be proud. Since their inception they have not lost a single one. However, because of the lack of advance notice matters did not proceed like that. They proceeded as though the shipment were normal cargo. That is the Pan Am representive delivered the shipment to the TWA serviceman and at the same time handed over the documents. These consisted of the waybill, invoice, customs declarations and so on, with the Cargo Transfer Manifest placed on top. It is the TWA practice for the serviceman to check the cargo that is handed over, but only in the sense that he counts the number of packages to ensure that they agree with the number shown on the Transfer Manifest. He does not look at the other documents at all. If the number of packages physically complies with the number on the Cargo Transfer Manifest he signs that document to acknowledge receipt and takes the cargo to the TWA cargo shed. Then he hands all the documents to TWA office staff who process them in due course. When the processing is actually done depends upon the amount of work in hand. It may vary from 15 minutes to two hours after the actual reception of the cargo. Indeed it may even happen that the cargo itself has already left San Francisco for its next destination before the office staff come to deal with the actual documents.

17. The person who processes the documents in the office will become aware of the nature of the shipment. What he should do then, according to Mr. Perez, if the shipment is "valuable cargo", is to alert the Supervisor to ensure that the proper precautions have in fact been taken. It is clear that in the present instance the officer did become aware of the nature of the shipment for the word "valuables" is inserted at the foot of the waybill TWA prepared. It seems equally clear that the officer did not alert the Supervisor as he should have done. TWA is therefore at this stage at fault. That is probably why they insist on accepting some of the responsibility. It is suggested that they were at fault even before that; that their serviceman should have appreciated the nature of the goods as he received them; that he ought to have done more than just count the number of packages. I agree with this suggestion. Article III(2)(c)(v) of the Interline Agreement requires him (on behalf of TWA) to endorse on the Transfer Manifest "any apparent defects of the goods and/or packing or irregularities in the documentation". To my mind this indicates a duty to check all the documents and not just the number of packets on the Transfer Manifest. This would reveal immediately the nature of the cargo and in appropriate cases the serviceman would refuse to accept, at least without the confirmation of his Supervisor. I appreciate that the ordinary serviceman is not highly trained, and that TWA may in the long run find it more convenient to rely on the transferring carrier. But that does not excuse them in the odd case where things go wrong.

18. For these reasons I find both companies at fault. In what proportion should they bear the blame? I think that in all the circumstances Pan Am was the greater offender. If they had acted correctly there would probably have been no loss at all. They should therefore bear two-thirds of the responsibility and TWA one-third.

19. I have not yet mentioned rule 4E of C.A.B. No.3, on which TWA relied. This provides:

I doubt whether the framers of this rule ever intended it to apply to circumstances like the present. I feel they had in mind the sanctions that might be applied by aviation authorities in the United States of America and elsewhere or by IATA and other similar associations. But in any event I think that upon its true construction it does not apply here. The liability of TWA does not arise in the present instance because it "transported" the goods, the liability arises because TWA "lost" them.

20. It only remains for me to express my indebtedness to counsel who led me with great patience through fields of law which were largely unknown to me. I hope I have dealt with or mentioned every argument that was put before me. But I fear that at times I may have lost the path.

21. Judgment is therefore entered for the 1st plaintiff Manchu against the defendant Pan Am in the sum of US$38,876.04, the claim of the 2nd plaintiff Knight is dismissed; judgment is entered for the defendant Pan Am against the third party TWA in the sum of US$12,958.68.

Representation:

Mr. A. Dicks (Johnson, Stokes & Master) for 1st and 2nd plaintiffs.

Mr. R. Tong (Wilkinson & Grist) for defendant.

Mr. H.L. Wong (Lo & Lo) for third party.

(1) [1976] H.K.L.R. 555

(2) [1839] 6 cl. & F. 600

(3) [1865] B. & s. 484

(4) [1887] 18 Q.B.D. 67 at 76

(5) [1986] 3 W.L.R. 714 at 725

(6) [1969] Vol. 63 American Journal of International Law 338