Zhoushan Xinhong Aquatic Co Ltd and Another v. Sinotrans Ltd and Another

DCCJ 540/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 540 OF 2006

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BETWEEN

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Coram: Deputy District Judge W.C. Li in Chambers

Date of Hearing: 15^th November 2006

Date of Handing Down Decision: 21^st November 2006

DECISION

1.The 1^st Defendant (“D1”) applied by Summons dated 18 August 2006 to set aside the Interlocutory Judgment dated 15 August 2006 obtained by the Plaintiffs (“Ps”) against D1 in consequence of D1’s failure to file and serve a Defence within the time as extended by a Consent Order dated 30 March 2006. The time extended for D1 to file its Defence was 10 April 2006. D1 applied to set aside the Default Judgment on the grounds that the Default Judgment was entered irregularly, or alternatively, that D1 had a good defence on the merits. The Ps opposed this application.

2.D1 applied for a stay of proceedings after filing an Acknowledgment of Service on receipt of the Ps’ Writ of Summons, and before that D1 had twice applied for extension of time to file its defence. They applied for a stay of proceedings relying on an exclusive jurisdiction clause in their bill of lading and intended to stop the Ps’s action in Hong Kong and argued that the case should be heard in a Maritime Court in Mainland China. The Application for a stay of proceedings was made under RDC Order 12 Rule 8. It was common ground between the Ps and D1 that this application was not an application under RDC Order 12 Rule 8, albeit D1’s Summons cited Order 12 Rule 8 on the right hand side of the Summons application. The application did not ask for any of the reliefs stated in Order 12 Rule 8 and the Summons did not state the grounds relied on. The application was in fact made under the inherent jurisdiction of this court, and this was conceded by D1’ s counsel when the summons was heard before Her Honour Judge H.C. Wong. H.H. Judge H.C. Wong dismissed D1’s application on 4 August 2006. There was no appeal. D1 did not file a Defence after the dismissal of the said application. It did not seek Ps’ consent or apply to the court for further extension of time to file its defence. The time extended for D1 to file its defence on 10 April 2006 had long expired. Judgment in default of Defence was entered against D1 on 15 August 2006.

3.The application by D1 to stay proceedings for a foreign forum must be made under the inherent jurisdiction of the court. RDC Order 12 Rule 8 had no relevance to the application. It was clear that this was a mistake. D1 now argued that since they had taken out the Summons under RDC Order 12 Rule 8, albeit wrongly, then on their own mistake, RDC Order 18 Rule 2(3) should apply and that gives D1 14 days after the determination of H.H. Judge Wong’s decision to dismiss the application, to file its defence. Clearly this argument is also wrong. Not only does common sense dictates that it is not sustainable, there are authorities to show that this line of argument could not succeed.

The “Messiniak Tolmi”  1982  ILR 266 (CA) United Phosphorus Ltd  v  China Mercahnts (HCCL 81/97 – unreported)

Royal Skandia Life Insurance Ltd  v  Sparkle Consultants (Hong Kong) & Others (HCMP 1453/2006 – unreported) (CA)

Accordingly, the default judgment dated 15 August 2006 was a regular judgment.

4.To set aside a default judgment regularly entered, the burden on D1 was substantial and D1 had to show not just an arguable defence but that it had a real prospect of success. D1 must satisfy the court that its case and the evidence which it adduced in support thereof was potentially credible and carries some degree of conviction. The court must, therefore, form a provisional view of the probable outcome of the action. However, where the outcome will depend upon whose evidence is likely to be accepted, the court may not be able to form a provisional view. D1 had not filed an affidavit of merits in support of this application. D1 therefore relied on the papers already before the court to show that it had a defence on the merit.

5.The Ps were the shipper (the 1^st Plaintiff (“P1”)) and the receiver (the 2^nd Plaintiff (“P2)) of a cargo of frozen squids carried by sea from Ningbo in China to Nagoya in Japan on board the vessel “Xiang Xing” pursuant to a contract of carriage contained or evidenced by a bill of lading numbered 8NGBN03A5975 dated 27 August 2005 which was issued by D1 as carrier. Upon delivery to P2 in Japan, the said cargo was found to be damaged in that it had defrosted during the course of carriage from Ningbo to Nagoya. A full surveyor’s report was commissioned by the Ps’ insurers. This was the only surveyor’s report available. D1 had not attended or joined in this survey.

6.D1’s proposed or draft defence appeared to rely mainly on the terms and conditions set out on the reverse side of the bill of lading. The exemption clauses relied on were Clauses 9(4)(d), 12(a) & 12(c), and 19(1) & 18(2). D1 also contended that it “may well be possible, therefore, that the cargo was damaged even prior to loading onto the ship”, and D1 also argued that the Ps had not provided any evidence to show that D1 had done anything wrong which caused damage to the cargo.

7.The Ps’ cargo underwriter appointed a surveyor to look into the pre-shipment process and to find out if pre-shipment damage to the said cargo could occur at this stage. This was the “Huada Investigation report”. Again this was the only surveyor’s report for the pre-shipment stage. The process of the cold storage of the said cargo of frozen squids involved the freezing of the squids to a temperature of minus 20 degrees Celsius and the said cargo was required to be maintained at a temperature of minus 18 degrees Celsius. Prior to the said cargo been delivered to D1 to be stuffed into containers, there were two areas that deserved our closer scrutiny, and these were the areas D1 raised in their contention. The first was that the No. 2 cold storage where the frozen squids were kept was maintained at a temperature between minus 18 degrees to minus 28 degrees Celsius. This was seen in the temperature record between 4 August 2005 to 25 August 2005 (25 August was the day of transportation). There was a typhoon which caused power shortage for 6 hours on 6 August 2005 and the temperature in the No. 2 cold storage was found to be below minus 12.3 degree Celsius. However the shipper also had other finished products stowed in the same storage and had remained in sound condition despite the power stoppage, and the temperature of the products was measured at minus 19.6 degrees Celsius. The second area of concern was the “vanning” stage of the pre-shipment where the frozen cargo was delivered by van and by ferry to the port where the cargo was stuffed into frozen containers. The whole process took some 3.5 hours and was done at night hours. The surveyor found that the chances of any damage occurring at this stage was minimal because (1) although the van and container was not powered up for refrigeration, the short time of the journey, due the low temperature in which the cargo was stored, would not affect the quality of the product (in other words, the temperature would not rise to such an extent to affect the quality) which had also been agreed by the shipper in their previous transportation; and (2) the shipper further indicated that they had never experienced a similar damage to the cargo before. The shipper had produced 600-700 tons of cuttlefish products every year since 1999 and all the products were delivered in similar fashion by van before being shipped by containers to Japan and they had never experienced any damage like this before. In other words, the shipper had used a tried and tested method and no damage had ever occurred over the years. The surveyor found that the chance of damage to the said cargo at this pre-shipment stage was minimal.

8.The Ps and D1 argued on who had the burden of proof. At common law, the party seeking to rely on an exemption clause would bear the burden of proof. D1 would have to show that the circumstances on which they relied on the exemption clauses had arisen. D1 must not put forward submission that amounted to mere supposition to establish their defence and it must not rely on that to show a real prospect of success in their defence.

9.To rely on Clause 9.4 (d), D1 must show that the damage to the cargo was caused by P1’s fault in handling, loading, stowing or the unloading. Nothing in the evidence suggested that Ps were at fault. To rely on Clauses 12(a) and 12(c), D1 must adduce evidence to show that the damage to the cargo arose as a result of the negligence of P1 filling, packing, or stowing the container, or as a result of a defect in the container which would have been discovered upon reasonable inspection by P1. There were 4 drain plugs in the container and one drain plug was found missing by the surveyors when the container arrived in Nagoya. No conclusion could be made as to why and when did this missing drain plug came about. In any event, this missing drain plug did not appear to be relevant in this case as the only possible damage that could be caused by this single missing drain plug applied to a small, localized area. So, only a few cartoons of frozen squids that was at the drain hole might be affected and would not cause the whole container load of frozen squids to be defrosted and refrozen at some stage of the sea voyage. It might have accelerated the rise in temperature in the container when there had been a power stoppage. Indeed the surveyor in Japan concluded that  “From what we had surveyed, we are of the opinion that : (1) the deterioration damage to the cargo was caused by insufficient freezing due to rise of temperature throughout the ocean voyage; (2) the rise of temperature was caused by the derangement or stoppage of refrigeration machinery; (3) absence of the drain plug accelerated the rise of temperature due to the outer air entering through the drain hole……” The surveyor opined that the damage was caused by stoppage/insufficiency of refrigeration in the course of the voyage. This was based on evidence that they had found in their survey. When they inspected the condition of the cargo, they found that “most of the cartoons were stuck slightly to each other, showing that they had once been unfrozen and the frozen again, and some of them were found to be wet excessively”.  And “the pieces of sliced meat contained were found to be stuck to each other in a block state, showing the same process as stated above”.

To rely on Clause 18.1, D1 would also need to adduce evidence to show that there had been a breach of this clause by the Ps. D1 had adduced previous bills of lading to show that this was not their first business dealing with P1. The requirements of shipping frozen seafood cargo were well within D1’s experience and knowledge. For Clause 18.2 to apply, D1 had to show that the damage was a result of mechanical breakdown or derangement of the container. The surveyor’s report could only say that the temperature had risen at some stage of the voyage at sea causing the cargo to defrost and refreeze but the cause was not explained. D1 would be expected to show that they had exercised due diligence to ensure that the container was maintained in an efficient state. The affirmations of Yang Yuntao had not attempted to show that D1 had discharged its duty to exercise due diligence with regular inspection, testing and maintenance. No maintenance record was shown and nothing was mentioned of its maintenance procedure.

10.This is a case of bailment where the burden of proof is shifted to the bailee when goods are injured or lost while in the possession of the bailee. The bailee must prove either that he took the appropriate care of them or that his failure to do so did not contribute to the loss. The bailee’s burden of  proof is well established, and while, not imposing a duty to provide an exact explanation of the injury, is clearly distinguishable from the burden of proof in an ordinary action for negligence or breach of contract.

11.The damage to the cargo of frozen squids had been shown most unlikely to have been caused before shipment. D1’s contention that it might have, was clearly insufficient, to amount to an arguable defence that had any real prospect of success in a trial. No contention was made that the damage occurred after the shipment arrived in Nagoya. Notice of damage was promptly given when the damage was discovered. The damage was shown to have occurred during the sea voyage and D1 had not adduce any evidence to show that it was not at fault. This was not a case, as D1 argued, that depended on whose evidence the court would accept, or that the court would not able at this stage to form a provisional view of the probable outcome of the case. D1 had  therefore failed to satisfy this court that its case and the limited evidence it had adduced in support was potentially credible and carried some degree of conviction.

12.Counsel for D1 also argued that the reason for D1’s default to file its defence in time was due to the mistake of D1’s solicitors and D1 should not be penalised for that. It was hard to understand why D1 despite having ample time and opportunities to file a defence had not done so. The attempt to stay the proceedings in Hong Kong court was probably ill conceived because when D1 applied for time extension to file its defence, D1 had already submitted itself to the jurisdiction of Hong Kong court. When it became known that the application to stay proceedings failed on 4 August 2006, the defence must be promptly filed and served, and not left to the very last minute. I would agree that ignorance of the law could never be a good excuse. D1 would have known that its application to stay the proceedings had failed on 4 August 2006. There was no appeal against H.H. Judge H.C. Wong’s decision. There was simply no reason why D1 did not file and serve its defence promptly. Nothing was done for 10 days and the Ps entered judgment in default. I take the view that D1 itself would be at fault not to ensure its Defence was filed and served as soon as the stay of proceedings failed. The default judgment entered against D1 appeared justifiable as D1 had not really shown an arguable defence. It would be open to D1 to pursue an indemnity against D2, or to take legal advice on any recourse against its own legal adviser.

13.The default judgment was a regular judgment and D1 had not shown any acceptable reason why it did not file its defence within time or at any time before the Ps sought to enter judgment in default. The Ps in these circumstances were not obliged to warn them that default judgment would be entered. D1 had not shown it had an arguable defence with a real prospect of success at the trial.

14.In the circumstances, D1’s application to set aside the default judgment is dismissed with costs to the Ps.

Representation:

Mr. Christopher R. Kerry of Messrs. Crump & Co. for the 1^st and 2^nd Plaintiffs

Mr. Douglas Lam instructed by Messrs. Richards Butler for the 1^st Defendant