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

HCA001141/1969

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 1141 OF 1969

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Coram: Li, J. in Court

Date of Judgment: 15th May 1978

H. Litton Q.C., Mills-Owens (J.S.M.) for plaintiff

Oswald Cheung, Q.C., A. Dicks (Deacons) for defendant

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JUDGMENT

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1. This is an action for damages for conversion. The plaintiff is the Bank Negara of Indonesia Hong Kong Branch carrying on a banking business in Hong Kong, The defendant is the Hong Kong and Kowloon Wharf and Godown Co. Ltd. which carries on business inter alia as warehouseman and wharfinger. On the 5th of September 1968 one Nam Hoi Co. Ltd (hereinafter referred to as "the Nam Hoi") applied to the plaintiff for an irrevocable letter of credit in favour of the Central Asia Investment Co. in Singapore in the sum of 1,056,000 Singapore dollars in respect of importation of what was alleged to be 32 tons of Nutmeg Oil packed in 160 drums from Singapore to Hong Kong (hereinafter referred to as "the goods"). The goods were to be held by the plaintiff as security for the money so advanced. The goods were duly shipped on board the s.s. 'Var' with a bill of lading issued by the ship's agent to the effect that the goods were to be delivered to the order of the Bank Negara Indonesia, Hong Kong. In the meanwhile the bill of lading, the sales invoice, the weight notes and the packing list were all sent to the plaintiff. The s.s. 'Var' arrived in Hong Kong on the 8th of October in 1968 and the goods were discharged to the defendant's wharf. Outturn reports given in respect of the goods were furnished to the plaintiff in document P.114,115,115 A to C. In the meanwhile a draft was drawn by the Central Asia Investment Co. of Singapore under the said letter of credit. The draft was honoured. Up to date the bill had not been retired. On or about the 22nd of October 1968 the plaintiff gave the bill of lading and the relevant documents to one Chan Kung Wo the Managing Director of Nam Hoi in order to obtain a Delivery Order from the ship's agent in respect of the goods. The Delivery Order addressed to the defendants reads as follows:

"Please deliver the undermentioned goods, upon endorsement and after payment of all charges due to you, to Messrs. Bank Negara Indonesia (Hong Kong Branch) 25, Des Voeux Road Central, Hong Kong. Telephone 246922 ex. s.s. 'Var'. Voyage Bill of Lading No. 1 from Singapore arriving on or about 8th October 1968."

2. The goods were described in this Delivery Order as 160 Steel Drums said to contain Nutmeg Oil. On or about the 24th of October 1968 Chan Kung Wo presented the Delivery Order with a forged endorsement on the back of it and obtained delivery of the goods which were carted to a business house in Shaukiwan in Hong Kong. That was the last occasion on which anyone saw the goods which subsequently disappeared. Extended police investigation drew a bank. As a result there was a total loss. One of the reasons why Chan Kung Wo was able to take delivery with a forged document was that the staff of the defendant released the goods without checking on the endorsement on the back of the Delivery Order. The said Chan Kung Wo was later charged with the offences of uttering a forged document and of obtaining goods by uttering a forged document. He made statements to the Police of the Commercial Crime Office which sufficiently showed and that he was an innocent agent as far as the Attorney General was concerned and a nolle prosequi was entered in his favour. On the 7th of November 1968 the plaintiff wrote to the shipping agent for another Delivery Order and was given one on the same date in favour of the plaintiff. The plaintiff again presented the Delivery Order to the defendant. However the plaintiff was told that the goods had already been released and were no longer with the defendant. These facts are not seriously disputed except as to the contents of the 160 drums of so-called Nutmeg Oil. Subject to this question I have found that the facts as aforesaid proved.

3. The plaintiff's case is that they were entitled to immediate possession on presentation of the Delivery Order of the 32 tons of Nutmeg Oil contained in a 160 drums of 200 kilogram each, On or about the 8th of October 1968 the goods were taken into storage by the defendant. On or about the 24th of October 1968 the defendant released the goods without the plaintiff's authority but on he strength of a Delivery Order which bore on the reverse side a forged endorsement of the plaintiff. Therefore the defendant failed to deliver the goods to the plaintiffs on the latter's lawful demand.

4. The defendant's case is that they do not admit that the goods were Nutmeg Oil. They contend that the plaintiff was negligent in releasing the bill of lading to the Nam Hoi together with other documents with the intention of allowing the Nam Hoi to take the goods away. Altermatively the defendant contends that the loss was contributed by the plaintiff for not getting back the bill of lading or the Delivery Order from Nam Hoi or Chan Kung Wo thereby enabling Chan to represent to the defendant that he had the plaintiff's authority to take delivery, By presenting the Delivery Order with a purported endorsement of the plaintiff's thereon the said Chan Kung Wo was acting in fact with the plaintiff's authority. Alternatively the plaintiff failed to inform the defendant of the loss of the Delivery Order earlier and therefore deprived the defendant the opportunity of retaining the goods so released. It is also the defendant's case that the plaintiff was bound by the Conditions of Business issued to it. One of the terms of the Conditions of Business was that the company was not liable to loss caused by forgery of document of title or negligence of the company's servants. Another term was that the defendant would not be liable for the error of judgment or negligence of their employees in checking the authenticity of the document and that the defendant was entitled to assume that the person presenting the Delivery Order was a person entitled to take delivery of the goods. Further, the plaintiff failed to give notice of the value of the cargo which was rated as valuable cargo and as such there was a limit to the defendant's liability to the extent of only $500 per package. Thus even if the defendant were liable the liability would be limited to a total sum of $200,000. Lastly it is pleaded that the defendant was not bound by a letter admitting that the defendant was at fault because the letter was written by the solicitors at the material time when they were acting both for the defendant as well as the plaintiff.

5. In the course of the hearing it is not argued that the defendant was bound by this letter written by the then solicitors acting for both parties. It appears to me that the said letter was written by the solicitors concerned in their capacity as legal advisors to the plaintiff rather than as representative of the defendant.

6. Having regard to the pleadings however there appears to me that there are three main issues for consideration. The first is whether the plaintiff has proved that the goods in question were Nutmeg Oil to the value of two million odd Hong Kong dollars. The second issue is that whether the goods were delivered to some person authorised by the plaintiff to take delivery or with the plaintiff's consent to do so either expressed or implied. The third issue is whether the goods were delivered through mere negligence of the defendant's counter-clerk and if so whether the defendant would be relieved from liability or be entitled to limit the quantum of liability by virtue of the terms of storage contained in the defendant's Conditions of Business.

7. With reference to the first issue the plaintiff adduces no oral evidence but replies on documentary evidence including the documents contained in the Hearsay Notices served on the defendant. It is contended that the sales contract (Document 122A) dated the 11th September 1968 showed that the Nam Hoi agreed to sell to the Yanyang Trading Company Ltd. a total of 32 tons of Nutmeg Oil for the sum of HK$2,745,600. The invoice dated the 25th of September 1968 (Document 122B) issued by the Central Asia Investment Co. of Singapore to the Nam Hoi shows that 32 tons of Nutmeg Oil packed in 200 kilogram steel drums was shipped per s.s. 'Var' from Singapore to Hong Kong for the sum of 1,056,000 Singapore dollars.

8. On the 5th of September 1968 the said Nam Hoi applied to the plaintiff for an irrevocable letter of credit in favour of the said Central Asia Investment Co. of Singapore to the extent of 1,056,000 Singapore dollars for the said 32 tons of Nutmeg Oil packed in 200 kilograms steel drums and the plaintiff established the letter of credit in favour of the said Central Asia Investment Company of Singapore for that purpose. The weight note, Document 122C the packing list Document 122D were in evidence. The bill of lading, document 122 refers to the goods as Nutmeg Oil. The outturn report is sued by the defendant document 114 to 115 also described the goods as Nutmeg Oil. In addition the plaintiff also relied on a letter dated on the 27th of May 1969 written for the Commissioner of Preventive Service contained in the Hearsay Notice dated the 16th of November 1977 which reads as follows:

9. There is evidence that in Document 139 when Chan Kung Wo was charged with the offence of obtaining from the defendant 160 drums of Nutmeg Oil upon a forged Delivery Order he neaver denied in his answer to the charge that there had been no Nutmeg Oil at all. Indeed in his statements to the officer of the Commercial Crime Office of the Hong Kong Police in Items 14 and 15 in the Hearsay Notices served by the defendant Chan Kung Wo repeatedly refered to the goods as Nutmeg Oil. Learned counsel for the plaintiff therefore contends that since the goods were lost due to conversion on the part of the defendant the plaintiff in entitled to rely also on the principal of omnia praesummtur contra spolia-torem.

10. In rebuttal the defendant relies on the two statements aforementioned made by Chan Kung Wo namely Items 14 and 15 served under Hearsay Notices. Such statements were made to the Police before Chan stool trial for offences of uttering a forged document and of obtaining goods on a forged Delivery Order. His statements were to a large extent corroborated by vouchers, payment slips and account books seized from the Nam Hoi by officers of the Commercial Crime Office. So much so that Chan had satisfied the proper authority that he was nothing but an innocent agent and a nolle prosequi was entered in his favour. In his statement Chan Kung Wo alleged that two of the plaintiff's officers at the material time namely Soekarno Soedirman and Iu Wing Nin were deeply involved in the transaction of importing the goods to Hong Kong from Singapore. Soekarno was the plaintiff's assistant manager and Iu was the first officer in charge of the Import and Export Department. Both of them regularly received payments from the Nam Hoi. It was Soekarno who gave the bill of lading to Chan Kung Wo to obtain the Delivery Order for the 160 drums of the alleged Nutmeg Oil and Iu was the person who gave Chan Kung Wo the invoice, the packing list, etc, for the purpose of showing the Preventive Service Personnel so as to have the goods examined. An Insurance Policy to cover the goods between the 24th of October 1968 to the 24th of November 1968 was applied for by Iu though not ultimately effected. Chan said that Soekarno and Iu also helped in arranging the letter of credit to be granted in respect of an earlier transaction that took place in July 1968. On that occasion 7 tons in 35 drums of Nutmeg Oil was imported from Singapore to Hong Kong. The importer was the Nam Hoi and the shipper was also Central Investment Co. in Singapore. The plaintiffs were also the banker which opened letter of credit for the transaction to the sum of Singapore dollars 231,000. After the Central Investment Co. obtained the payment in Singapore the said company promptly remitted back to Hong Kong $300,000 to Nam Hoi which in turn transferred the said sum to the latter's account with the plaintiff in part settlement of an overdraft. For his help Soekarno was paid $46,000 by Nam Hoi.

11. In addition the defendant also called one Captain John Herring, a retired master mariner who turned to the business of quality and quantity surveying and loss adjusting from 1955 to 1976 in Singapore. His evidence is that Nutmeg Oil is obtained by the simple process of boiling the kernal and the maze of the fruit of nutmeg. However, only 1% of oil can be so obtained from the raw material viz; one pound of nutmeg oil can be obtained from 100 pounds of nutmeg kernal or maze. Only three nutmeg trees were found in Penang and one in Singapore. The total production was one to two tons per year in this area. He said that it was a home industry. There were only two dealers in Penang and three in Singapore. He never heard of the company by the name of Central Asia Investment Co. He had been instructed by buyers and bankers before to survey nutmeg oil purchased in the area for shipment abroad. His practice was to go through an intricate process of lab-test, issuing certificates with marked samples for the buyers and the bankers. He would take the samples from the containers immediately prior to shipment and would go to the extent of accompanying the cargo alongside the ship and supervise the loading. He said that export of nutmeg oil consignment required survey report, analysis report and export declaration. He further said that the nutmeg oil could mix easily with a variety of other oils. A mixture of this sort with a very small percentage of nutmeg oil would still give a very strong spicy smell. In his 25 years of experience as a surveyor the largest consignment he ever heard of was between five to nine 44 gallon drums. He never heard of 32 tons in a 160 drums being exported in one consignment In cross-examination Captain Herring admitted that analysis or examination of nutmeg oil form a very small part of his experience in survey of goods and that nutmeg oil could also be purchased in Indonesia in much bigger quantity, He further admitted that the yield of oil from Indonesian nutmegs were as high as 13%. He handled exports of nutmeg oil from Singapore only. He never handled nutmeg oil exported from Indonesia and transhipped at Singapore or nutmeg oil imported into Singapore for re-export to other places.

12. Finally, the defence witness John Terrance Hung testified that when the goods were taken to the defendant's godown for storage their full value was never declared by the plaintiff.

13. The statements of Chan Kung Wo in Items 14 and 15 of the Hearsay Notice as corroborated by the evidence given by Lau Kar Wing, Chow Sun Yau and Kwan Chun Leung certainly indicated that the goods were lost or stolen as a result of a conspiracy between one Chan Lip Giong and S.K. Lee. They also indicated that Soekarno and his brother Soekartono and Yiu Wing Nin were bribed so that Soekarno and Yiu Wing Nin abused their authorities as officers of the plaintiff's so as to give the Nam Hoi credit facilities without taking care to ensure any adequate security for the plaintiff. The so-called re-sale by the Nam Hoi to the Yanyang Co. Ltd. might even be a fictitious sale. This of course could be part and parcel of conspiracy between Chan Lip Giong and S.K. Lee. 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, There is no allegation that the plaintiff was implicated in this plot. No fraud has been alleged against anybody in this case-not in the pleadings at least. Thus the question of fraud is irrelevant (See Wallingford v. Mutual Society in (1880) 5 A.C. 685 at page 701) except for the point that the fraud of Chan Lip Giong and S.K. Lee and the third parties, might be relevant to the question whether the goods were in fact nutmeg oil. But I find that a fraud practiced by third parties in the present case would not indicate necessarily that the goods were not nutmeg oil. As it was the whole lot of the goods had been lost, whether the goods were of genuine nutmeg oil and to the value as claimed in the plaintiff's Statement of Claim is of little significance. The conspirators could have disposed of genuine nutmeg oil since the price quoted for them was no more than the market price. 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. There was no suggestion that the conspirators chose a particular victim. I presume that as far as conspirators were concerned they would not care whether the victim should be the plaintiff or the defendant.

14. The significance of Captain Herring's evidence is that such a large consignment of 32 tons of nutmeg oil in 160 drums from Singapore to Hong Kong was quite improbable if not impossible. However, he frankly admitted that he had very little experience as to the quantity of nutmeg oil produced in Indonesia and that he had never been asked to survey import of nutmeg oil into Singapore. He said in re-examination that on transhipment of nutmeg oil at Singapore the bill of lading would still show the original port of export namely Indonesia had the oil come from Indonesia. But he also admitted that there could be exceptions, Again in cross-examination he agreed that there was a period of confrontation between Singapore and Indonesia in 1968. It is not difficult to imagine that there could be a suspension of trade between these two countries and that the ingenuity of merchants could arrange for re-export or re-sale of original Indonesian products as exports from Singapore. Captain Herring admitted that he obtained most of his technical knowledge about nutmeg oil from the Encyclopaedia Britannica which published that exports from Indonesia in 1968 including nutmegs amounted to 31,467 metric tons though he doubted the Indonesian statistics. In view of the foregoing, I am of the opinion that Captain Herring's evidence is not sufficient to show that the cargo could not have been genuine nutmeg oil from Indonesia via Singapore.

15. 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. It is well to say that none of the documentary evidence could be of much value for the author of such documents had no direct knowledge as to the nature of the goods. On the other hand, as I have said, there were at least two propositions to counter this argument, First of all, if the goods were not genuine nutmeg oil there was no need for the conspirators to take delivery from the defendant so as to risk the chance of detection by the Preventive Service of the Department of Commerce & Industry. Even if the conspirators were able to choose their victims of fraud namely the defendant they must be accredited with the knowledge of law and presumed to take the risk of uncertainty of litigation. Had the goods been water or substitutes it would have been simpler to leave them with the defendant. One way or another the role played by Soekarno if he were one of the conspirators would be known to the proper authority, and there would be no way to protect him. Secondly, and in addition, the Loss was occasioned by a tort of conversion committed by the defendants. In the case of Coldman v. Hill (1919) 1 K.B.443 Sorutton L.J. quoting the case of Travers (Joseph) & Sons v. Cooper at (1915) 1 K.B.73 said at page 457 as follows:

"Pickford J. held that the burden of proof was on the bailor to show that there was negligence which caused the loss, and that as he left the matter in doubt, he failed, All the members of the Court of Appeal thought this was wrong. They took the view that it was incumbent upon the defendant, the bailee, when the goods were lost, to prove that he had taken reasonable care to keep and preserve them."

16. Later he cited the unreported case of Morison v. Walton before the House of Lords and said at page 458 that:

17. In view of the foregoing dicta I hold that on balance of probability the goods were genuine nutmeg oil to the value as indicated in the commercial documents. See also Armory v. Delamirie in (1843) I Strange Law Report page 504; Mortiner v. Cracdock in (1843) 12 L.J.C.P. 166 and also Hammersmith and City Railway Co. v. Brand in (1689) 4 L.R.H.L.171 at page 242. There is evidence that the goods examined by Inspector Leung of the Preventive Service were oil yellowish in colour with a spicy smell. These being attributes and characteristics of nutmeg oil it is proper to presume that they were nutmeg oil in view of the aforesaid authorities.

18. With reference to the second issue the defence is founded on the allegation that the plaintiff allowed Chan Kung Wo to have the delivery order in his hand and instructed Chan Kung Wo to take delivery see paragraphs 10 to 13 of the Defence. It is contended that, for this reason, the plaintiff is estopped from denying that Chan Kung Wo was the authorised person to take delivery of the goods. In support of this allegation the defendant relies on two statements by Chan Kung Wo served on the plaintiff under Hearsay Notices and marked items 14 and 15. In paragraph 3 at page 4 of Item 14 which is to be found at document 107 of Vol.5 of the Bundle of Documents before this Court. Chan Kung Wo said:

"After Sokarno gave me the bill of lading of Kowloon Godowns in his room at the Indonesian Bank at about 2 p.m. on October 22nd I at once went with Mr. Wong of Leung Yau Co. to Kowloon Godowns across the harbour On arrival at Kowloon Godowns I found that I had to go to the Preventive Service Department to complete the formalities first. I then returned to Hong Kong and went to the Preventive Service Department on the Waterfront. An inspector, surnamed Ip, interviewed me and told me that I should bring along the invoice for the batch of oil (meaning the 160 drums of oil) from Singapore and the package bills. As it was about 4.30 p.m. it was too late to get them from the Indonesian Bank, and I returned to my company. As the bank had closed I had to wait until the next day October 23rd. At about 10 a.m. some friends came to the company to visit me. I asked them to assist me in writing out a chit in Chinese because my friend also do not understand English. The chit was written to Iu Wing Nin. As far as I can remember its contents read like this:' Please give the bearer the invoice and the package bills for the 160 drums of nutmeg oil because the Preventive Service of D.C. & I wants to examine them before the oil can be taken delivery of and removed. To O/C Iu. Signed by me.' This was written on a memo form of Nam Hoi Co. As it was a chit I did not keep a copy of it, This letter was delivered to O./C. Iu at the Indonesian Bank by Fung Tak Kwong who was an employee of my company O/C Iu gave Fung Tak-kwong an invoice and a package bill for him to take back to Nam Hoi Co. and give to me. For proof these two bills should be together with the BL. Therefore, when I wanted to take delivery of the oil on October 23rd O/C Iu should be aware of it and this cannot be denied."

19. In paragraph 14 of Item 15 Chan Kung Wo said:

20. Then in paragraph 10 of the same statement Chan Kung Wo said:

"Besides the subject matter shipment (160 drums of Nutmeg - oil) there was another shipment of 35 drums of Nutmeg-oil in August, 1968, the application of Letter of Credit (L/C) made on 29th July, 1968, L/C opened on 1st August, 1968. The arrangement was made by Lee Sing Kwong, Chan Wai Ching, Mr. Soekarno and Messrs. Central Asia Investment Company of Singapore. From my knowledge Mr. Soekarno's share in the 35 drums shipment had already been paid over to him through Mr. Lee Sing Kwong on or about 28th August, 1968."

21. To refute this evidence the plaintiff relies on the statement by Soekarno Soedirman to the Police dated the 13th of December 1968 and served under the Hearsay Notice by the defendant to the plaintiff filed on the 3rd day of December 1977 and kept in Document 78 of Vol.5 of the bundles presented to Court. In this statement Soekarno said to the Police as follows:

"I have been shown a Delivery Order, by Inspector Strachan, dated the 22nd October 1968. It was never given to me by Mr. Chan Kung Wo. I first saw a photostat copy of this Delivery Order when Mr. Bokhary of Kowloon Godowns came to see me on the 20th of November in the afternoon. I have closely examined the signature on the reverse side of this Delivery Order and it is not one, which is used by this Bank to endorse any Delivery Order. The chop is similar to one used by the Bank. However, in the word "BRANCH", the 'C' looks like a 'G'. I therefore believe that the signature in question is a forgery."

22. I view all these statements with certain reservations. They were made after the goods were lost. Both Chan Kung Wo and Soekarno had an interest to exculpate themselves and blamed the other people. This is particularly true of Chan Kung Wo who then had to face two criminal charges at the time when the statements were made. He said that he knew no English and a very little written Chinese, He claimed that the documents were typed for his signature. Yet from his statement it appears to me that he knew the contents and the general purport of every document he signed. Despite the nolle prosequi entered in his favour I am of the opinion that he knew far more than he admitted he did and that he exaggerated in certain aspects as to the culpability of Soekarno and as to himself being an innocent agent. He might be uneducated but he was certainly not a fool. The office boy Fung Tak Kwong was not called to give evidence. Anyway his statements were not available. In the face of these contradictory statements I find, on probability, that Soekarno might have given Chan Kung Wo the bill of lading in order to obtain the Delivery Order for the goods and that Iu Wing Nin gave Chan the weight note and the packing lists and invoices. However, I do not find that Soekarno instructed Chan to take delivery. This is apparent in the document in the form of a letter signed by Chan Kung Wo for and on behalf of Nam Hoi to Bank Negara Indonesia which is recorded in Document 116 of Vol.2 of the bundle of document which reads:

and it was signed by Chan Kung Wo. Thus the place of storage to start with was not in Shaukiwan but with the Companion Godowns Co. Ltd. Even if I were to take that Soekarno intended that Chan Kung Wo should take delivery of the goods on behalf of the plaintiff then the stamp and the endorsement on the Delivery Order should be the proper stamp of the plaintiff and the genuine signature of Soekarno. Fraud apart, there was no reason to give the Delivery Order to Chan Kung Wo with a forged endorsement. Yet fraud has not been pleaded in the present case. The question then is whether the plaintiff by leaving the Delivery Order in Chan's hand for a long time may be regarded as having misrepresented to the defendant that Chan Kung Wo had authority to take delivery. On this point, however, I observed that the mandate of the Delivery Order was to deliver the goods to the order of the plaintiff. The plaintiff never endorsed the Delivery Order. Further, the counter-clerk of the defendant never compared the purported endorsement with the authorised list of signatures in possession of the defendant. As such there was no representation to the defendant who never acted upon any authorisation. This is not a proper case that the plaintiff should be estopped from alleging that the endorsement was a forgery. Nor do I find that the plaintiff should be estopped from pursuing their claim against the defendant.

23. Even if my assessment of Soekarno's evidence is wrong in saying that Soekarno was not one of the co-conspirators, the defendant could hardly escape liability in this issue for its failure to compare the signatures on the endorsement. No argument had been advanced that the plaintiff could be bound by the criminal act of its servants. Nor do I hold that the plaintiff is so bound. For this reason on the second issue the defendant must fail.

24. The third issue depends very much on whether the plaintiff is bound by the Conditions of Business. In this connection I find that the plaintiff and the defendant had long dealings over the years. As early as 1963 the Conditions of Business governing the terms of storage were made known to the plaintiff. The relevant clauses in the Conditions of Business are as follows:

25. Clause 3 of the Conditions of Business reads:

"Weight, Measurement and Ad Valorem Rates -

26. Clause 21(b) of the Conditions of Service comprises of no less than 391 words but the gist of it provides:

"That the cargo for the storage or ready for delivery is received upon the express condition that the Company shall not be responsible for any loss of the cargo caused by misfeasance, error of judgment, theft, forgery of documents of title, negligence or default of the Company's servants etc."

27. Reading Clause 21 as a whole I find, as a matter of construction, that this clause applies to the goods on storage and probably on the goods on delivery.

28. Clause 42 of the Conditions of Business provides that:

"Delivery of Cargo and Responsibility

29. In this connection I find the following facts:

30. It is also my opinion that if the plaintiff were bound by these conditions then the defendant would be absolved from all liabilities. The alternative consideration is even if the plaintiff were bound by some of these conditions whether the defendants would escape liabilities to the full amount and such liabilities would be limited to $500 per package in view of condition 3 of the Conditions of Business. It is contended by the plaintiff that because of a fundamental breach of contract or a breach of the fundamental terms in the contract the defendants were not entitled to rely on these exclusions or limitation clauses for their protection. In this connection a long list of authorities has been cited in support of the plaintiff's as well as the defendant's contentions. The proposition that where there has been a fundamental breach or breach of a fundamental term the guilty party cannot successfully rely on the provisions in the contract signed for their protection in the performance of the contract is well supported by the high authorities. In the case of Suisse Atlantique Societe D'armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale (1967)A.C.361 Viscount Dilhorne said at page 393 as follows:

"I think that the legal position was most clearly and accurately stated by Pearson L.J. in U.G.S. Finance Ltd. He said:

'As to the question of 'fundamental breach', I think there is a rule of construction that normally an exception or exclusion clause or similar provision in a contract should be construed as not applying to a situation created by a fundamental breach of contract. This is not an independent rule of law imposed by the court on the parties willy-nilly in disregard of their contractual intention. On the contrary it is a rule of construction based on the presumed intention of the contracting parties. It involves the implication of a term to give to the contract that business efficacy which the parties as reasonable men must have intended it to have. This rule of construction is not new in principle but it has become prominent in recent years in consequence of the tendency to have standard forms of contract containing exceptions clauses drawn in extravagantly wide terms, which would produce absurd results if applied literally.'

Although the terms are sometimes used as if their meaning was the same, a fundamental breach differs from a breach of a fundamental term. In Smeaton Hanscemb v. Sassoon I. Setty, Son & Co. (No.1), Devlin J. said that he thought a fundamental term was 'something which underlies the whole contract so that, if it is not complied with the performance becomes something totally different from that which the contract contemplates."

31. Having examined a series of the cases of carriage by sea in reference to this subject matter Lord Upjohn at page 424 of the same case said as follows:

"The warehouse cases and cases of carriage by land have developed on parallel lines. The principle on which these cases proceeded originally is well stated by Scrutton L.J. in Gibaud v. Great Eastern Railway Co. where he said:

'The principle is well known, and perhaps Lilley v. Doubleday is the best illustration, that if you undertake to do a thing in a certain way, or to keep a thing in a certain place, with certain conditions protecting it, and have broken the contract by not doing the thing contracted for in the way contracted for, or not keeping the article in the place in which you have contracted to keep it, you cannot rely on the conditions which were only intended to protect you if you carried out the contract in the way in which you had contracted to do it."

32. Then at page 425 he said:

"If I am right in drawing this conclusion then the necessary result, in my opinion, is that the principle upon which one party to a contract cannot rely on the clauses of exception or limitation of liability inserted for his sole protection, is not because they are regarded as subject to any special rule of law applicable to such clauses as being in general opposed to the policy of the law or for some other reason but, just as in the deviation cases, it is the consequence of the application of the ordinary rules applicable to all contracts, that if there is a fundamental breach accepted by the innocent party the contract is at an end; the guilty party cannot rely on any special terms in the contract. If not so accepted the clauses of exception or limitation remain in force like all the other clauses of the contract."

33. And finally at page 427 Lord Upjohn said:

"But where there is a breach of a fundamental term the law has taken an even firmer line for there is a strong, though rebuttable, presumption that in inserting a clause of exclusion or limitation in their contract the parties are not contemplating breaches of fundamental terms and such clauses do not apply to relieve a party from the consequences of such a breach even where the contract continues in force. This result has been achieved by a robust use of a well-known canon of construction, that wide words which taken in isolation would bear one meaning must be so construed as to give business efficacy to the contract and the presumed intention of the parties, upon the footing that both parties are intending to carry out the contract fundamentally."

34. Other authorities have been cited by learned counsel for both parties. Some of them are of assistance to illustrate the principle of law concerning fundamental breach or breach of a fundamental term. I shall refer to some of them. Great reliance is placed by learned counsel for the defendant on the case of The China State Bank, Ltd. v. The Dairy Farm, Ice & Cold Storage Co. Ltd. in (1967) H.K.L.R. page 95 the facts of which were somewhat similar to the present case. The difference is that in the China State Bank case deliveries were made by means of warehouse warrants. No endorsement was required of the China State Bank of by the defendant in that case and therefore there was no signature to be compared. The learned trial judge, on the evidence, came to the conclusion that loss was due to dishonesty or negligence but he said at page 106:

35. Having considered the authorities relevant to the question of fundamental breach he said at page 110:

36. Having come to the conclusion that the loss was due solely to negligence during storage the finding was not surprising. This clearly is distinguishable from the fact of the present case in that it was decided purely on loss due to negligence in the course of storage and no consideration was given as to delivery to the wrong persons.

37. The case of Smith Ltd. v. Great Western Railway Co. in (1922) A.C.178 was a contract for carriage of goods. The terms were that the carrier should not be held liable for loss of the goods except upon proof that the loss arose from wilful misconduct of its servants. The carrier refused to disclose how the goods were lost. The question of fundamental breach was not considered. In his short judgment Lord Sumner said at page 189:

38. As such this case offers me no assistance at all. In the case of Alderslade v. Hendon Lanundry, Ltd. in (1945) 1 K.B.189 the essence of the contract was one of laundering handkerchiefs. The exercise of due care relating to the safe custody and to redelivery were held to be ancillary obligations. Again there was no question of any fundamental breach. Lord Greens said at page 194:

"In the present case all that we know about the goods is that they are lost. There seems to me to be no case of lost goods in respect of which it would be necessary to limit liability, unless it be a case where the goods are lost by negligence. Goods sent to the laundry will not be lost in the act of washing them. On the other hand, they may be lost while they are in the custody of the defendants before washing or after washing has been completed. They may be lost in the process of returning them to the customer after they have been washed, but in each of those two cases, if my view is right, the obligation of the defendants is an obligation to take reasonable care and nothing else. Therefore, the claim of a customer that the defendants are liable to him in respect of articles that have been lost must, I think depend on the issue of due care on their part. If that be right, to construe this clause, so far as it relates to loss, in such a way as to exclude loss occasioned by lack of proper care, would be to leave the clause so far as loss is concerned I say nothing about damage without any content at all. The result is in my opinion is that the clause must be construed as applying to" the case of loss through negligence."

39. The duty of a bailee is candidly put by Lord Denning in Spurling Ltd. v. Bradshaw in (1956) 1 W.L.R. page 461 where he said at page 456:

"The essence of the contract by a warehouseman is that he will store the goods in the contractual place and deliver them on demand to the bailor or his order. If he stores them in a different place, or if he consumes or destroys them instead of storing them, or if he sells them, or delivers them without excuse to somebody else, he is guilty of a breach which goes to the root or the contract and he cannot rely on the exempting clause. But if he should happen to damage them by some momentary piece of inadvertence, then he is able to rely on the exempting clause: because negligence by itself, without more, is not a breach which goes to the root of the contract (see Swan Hunter and Wigham Richardson Ltd. v. France Fenwick Tyne and Wear Co. Ltd., The Albion), any more than non-payment by itself is such a breach: see Mersey Steel & Iron Co. v. Naylor, Benzon & Co. I would not like to say, however, that negligence can never go to the root of the contract. If a warehouseman were to handle the goods so roughly as to warrant the inference that he was reckless and indifferent to their safety, he would, I think, be guilty of a breach going to the root of the contract and could not rely on the exempting clause. He cannot be allowed to escape from his obligation by saying to himself: 'I am not going to trouble about these goods because I am covered by an exempting clause."

40. The decision in the case of Karl Widenman v. Banque De L'Indochine in (1974) H.K.L.R.97 was one of mine. It was not contended in that case that the defendants or their sub-agents diverted from the contract or committed a breach in a radical aspect. It was founded on negligence which I found proved but that such negligence was also covered by the exempting clause. I said at page 109:

"The principle, as I can gather from these authorities, is that where the words in an exemption is so wide as to be capable of exempting from all liabilities they will be construed as exempting liabilities for causes other than those for negligence unless they refer, expressly or by implication, to acts for negligence, Further, in aid of the construction of an exemption clause, it is necessary to consider the nature of the contract and the parties thereto. The words in the exemption clause in this case are:

'You shall not be responsible for any act, omission, default, suspension, insolvency or bankruptcy of any such correspondent, agent or sub-agent.'

While the wards 'act or default' may be interpreted , as wilful or deliberate act of non-feasance the word 'omission' clearly refers to and includes acts of negligence. From the nature of the contract and the conduct of the parties it was clearly the intention that the defendant agreed to provide" finance facilities to the plaintiff, that the collections of the proceeds of sales was to be effected by a banker in Europe and that defendant would be free from any involvement from acts and/or negligence of its collecting agent."

41. The case of Hunt and Winterbotham(West of EngLand Ltd.) v. B.R.S. (Parcels) Ltd. was another case relating to contract of carriage and to lost parcels. No fundamental breach of contract was alleged. As such it was held that the limitation clauses applied. This case again is of no assistance.

42. The case of Kenyon Son & Craven v. Baxter, Hoare & Co. in (1971) 1 L1.L.R.232 only serves to reiterate the principle laid down in the Suisse Atlantique case where Mr. Justice Donaldson said at page 242:

"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 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. In all other cases it is a problem of construction whether the exception clauses apply to the breach which has occurred and whether the breach, viewed in the light of all the terms of the contract, is or is not one which gives the innocent party a right to treat the contract, as not being binding upon him after the breach. If the innocent party can and does treat the contract as no longer binding upon him, the exception clauses obviously cannot protect the wrongdoer thereafter."

43. The learned judge found in that case that the defendant had not deviated from the performance of the contract, and that the defendant's negligence did riot amount to wilful neglect or breach of a fundamental term. For this reason it was held that, the limitation clauses were applicable.

44. The two decisions in the cases of Woolmer v. Delmer Price Ltd. in (1955) 1 Q.B.291 and Levison v. Patent Gar pet Cleaning (C.A.) in (1977) 3 W.L.R.91 in which the defendants were held not entitled to rely on the limitation clauses seemed to rest on the burden of proof. In both cases the defendants failed to show cause how the loss occurred. As such it was held that the clauses to the effect that all merchandise were accepted at the owner's risk, on true constructions, were not wide enough to protect the bailee.

45. The case of Harbutt's Plasticine Ltd. v. Wayne Tank And Pump Co. Ltd. (1970) 2 W.L.R.198 is the authority for the proposition that to determine whether a fundamental breach of contract occurred it is not only the breach itself which counts but the event resulting from the breach must also be taken into consideration. Thus at page 211 Denning M.R. said:

"The one question in this case is, therefore: Were the defendants guilty of a fundamental breach which, brought the contract to an end? for, if so, they cannot rely on the limitation clause. It was suggested that, in order to determine whether a breach is fundamental or not, you must look at the quality of it, and not at the results, I do not accept this suggestion. It is not the breach itself which counts so much, but the event resulting from it. A serious breach may have slight consequences. A trivial breach grave ones. Take this very case. The specification of durapipe was, no doubt, a serious breach; but it would not have done much harm if it had been discovered in time and replaced by stainless steel. In that event the plasticine company could not repudiate the contract or treat it as at an end. But id did, in fact, do great harm because of the consequences. The results were so grave as to bring the contract to an end. You must, therefore, look not only at the breach but also at the results of it."

46. Lord Justice Widgery as he then was, having applied Lord Justice Diplock's analysis in the case of Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. in (1962) 2 Q.B.26, said at page 216 as follows:

"Now, adopting this analysis, it follows that the first step is to see whether an 'event' has occurred which has deprived the plaintiffs, of substantially the whole benefit which they were to obtain under the contract. The fire was such an event because not only did it destroy the equipment installed by the defendants, but it also destroyed the factory, thus making replacement impracticable. The fire was caused by the defendants' breach of contract and the plaintiffs say that the contract is at an end on this account. It appears to follow from Diplock L.J.'s reasoning that if the event which occurs as a result of the defendants' breach is an event which would have frustrated the contract had it occurred without the fault of either party, then the breach is a fundamental breach for present purposes. In the present case the plaintiffs must be treated as having accepted the breach as a repudiation of the contract, since they had no alternative but to do so. In my judgment, therefore, the defendants are not entitled to rely on the limit of liability in clause 15."

47. The same proposition finds support in the judgment of Lord Justice Stephenson in Wathes v. Austins (1976) Vol. L1. Law Report 15 at page 23 he said:

48. If I understand these authorities correctly the position appears to be that whenever loss is alleged to have been caused by a fundamental breach or breach of a fundamental term the first step is to construe the contract to find put the essence of it. "The next step is to find out the nature of the breach namely how the loss was caused, If the nature of the breach takes the form of deviation from the performance of the contract there is a fundamental breach and that is the end of the contract. None of the protective or limitation or exclusion clauses in the contract can exempt the party in breach from liability. If the nature of the breach is not in deviation but only a breach of a term, however fundamental, one must then look at the contract as a whole and find out whether the limitation, protective or exclusion clauses are wide enough to exempt the guilty party from liability. In this connection, the burden is always on the party in breach to account for how the loss was caused so that it can be ascertained, whether the limitation clauses will be wide enough to exempt the guilty party. Further, in deciding, whether the breach is fundamental regard must be had not only to the nature of the act in breach but also to its consequences. If the loss occasioned by the breach of a fundamental term of the contract is such as to render further performance of the contract utterly impossible then the contract is again at an end. No protective clause can apply to protect the party in breach.

49. In the present case the goods were accepted by the defendant for storage to be redelivered to the order of the plaintiff. Thus the essence and foundation of the contract was one of bailment on terms namely the Conditions of Business. One of the fundamental terms is contained in a clause of 42 for the Delivery of Cargo and Responsibility. I shall not repeat its contents. The release or redelivery of the cargo depended on the following steps:

50. The evidence of defence witness John Terence Hung confirmed this. He said in his evidence-in-chief that the clerk at the counter was obliged to compare the signatures though not the chop. Since the case started he had occasion to compare the signatures. He said he would not have passed the endorsement as acceptable. He would not have released the goods so easily and he would investigate first, check with the higher official of the bank Negara or might even go to the. Police. Obviously the cleric did hot check the signatures. He, should. It was his job. He said that in his experience goods were not to be released unless there had been comparison of signatures. He had never received any complaint of this nature before. Yet the defendant's clerk at the counter did not compare the signature of the endorsement on the back of the delivery order with the list of authorised signatures supplied by the plaintiff.

51. This clerk Chan Hon Chi in his statement to the Police admitted under Hearsay Notice dated the 2nd of November 1977 said:

"I turned over to the reverse side of the Order and saw that the Bank chop was stamped on the Order, with a signature below it. I checked the charges for warehousing and saw that these had not yet been paid by the consignee."

52. Then he was asked the question:

53. His answer was:

54. In another of his statement to the Police admitted under Hearsay Notice dated the 12th of November 1977, he said:

"The first time I saw the Delivery Order in question I looked at the face to see if it bore the correct Messageries Maritime signature. I saw it did - not bothering with the specimens as I know them well."

55. Then he said:

" Several days later the same man returned with the Delivery Order. I saw that it had been released by Revenue, and on turning over the rear, I saw the shroffs machine receipt to show that the charges had been paid. I saw that the cargo was consigned to BIN and that there was a Bank chop and signature on the rear. I took these to be genuine and did not check in their specimen book. We don't have much dealing with BNI."

56. From the aforesaid evidence it is patent that the release of the goods which resulted in their total loss was due to the failure on the part of the defendant's servant to carry out a fundamental term of the contract namely to compare the signature of the endorsement on the back of the Delivery Order with the list of authorised signatures supplied by the plaintiff. The forgery on the back of the Delivery Order was such a bad one that even a casual comparison would have revealed it, The signature was so different from the list of signatures supplied and even on the bankchop there was a misspelling of the word 'Branch'. A forged endorsement is the same as no endorsement. To release the goods without endorsement is a deviation from the performance of contract. Further and in the alternative, as a result of the defendant's breach, of a fundamental term to compare the signatures the goods were completely lost and a further performance of the contract was rendered utterly impossible.

57. Finally, in a similar case of Burwill Trading Ltd. v. The Hongkong and Kowloon Wharf and Godown Co. Ltd. in Action No.1275 of 1974 my brother Zimmern held at page 12 that:

is apposite. Here the defendants undertook to verify the plaintiff's authorised signature on the delivery order before permitting delivery of goods and completely failed to do so."

58. Then at page 13 he said that:

"In respect of the general exempting Clause 29 the loss was not caused by any of the reasons set out in paragraph 4 of the defence but by the failure of the defendants to verify the signature on the delivery order which the defendants had in particular expressly bound itself to do under Clause 49. As for the limiting Clause 5 in all the circumstances of this case loss as a result of misdelivery' is not enough to catch a loss sustained through a breach of undertaking."

59. With due respect I entirely agree with his observations a propos this exemption and limitation clauses in the present case. I find in the present case that the defendants had committed a breach of a fundamental term of the contract by failing to compare the signatures. As a result of this breach there was a total loss. As such, further performance of the contract was utterly impossible. For this reason, none of the limitation clauses 21or 42 of the Conditions of Business can be relied upon by the defendant for its protection.

60. In summary, I find as a fact that the goods were 32 tons of genuine nutmeg oil contain in 160 steel drums. Alternatively, for reasons given, they must be presumed to be genuine nutmeg oil. I also find that the plaintiff never authorised Chan Kung Wo to take delivery of the goods in the circumstances as alleged by the defendant nor can the plaintiff be estopped from claiming against the defendant.

61. Thirdly, I find that there had been a breach on the part of the defendant of a fundamental term of the contract of bailment. As a result of that further performance of the contract is impossible. For this reason the defendant is not entitled to rely on the limitation and exclusion clauses of the contract. Accordingly judgment must be entered in favour of the plaintiff for the amount claimed with costs.

Representation:

H. Litton, Q.C., Mills-Owens (J.S.M.) for plaintiff.

Oswald Cheung, Q.C., A. Dicks (Deacons) for defendant