FROM PASSING OF RISK TO LIMITATION PERIOD – good defence?

In a HKSAR High Court’s judgment, Starlight Exports Limited & anor v CTO (HK) Ltd, HCCL 55/2004 (handed down on 19 July 2006), the court rejected the argument that the Defendant carrier was entitled to deliver the cargo without production of the original bills of lading under a “FOB” sale. The carrier was held liable to the damages representing the value of the goods at the time of misdelivery.

Three “To Order of Shipper” freight collect bills of lading were issued to the Plaintiffs, who were the sellers of FOB sale. In order to help the buyer to obtain finance, post dated new bills of lading similar to the old ones, with the term “To Order of Shipper”, were issued and inserted with later “Shipped on Board” dates.

The buyer did not pay for the purchase price of the goods. The Plaintiffs requested the Defendant to return the goods back to Hong Kong in December 2003. Eventually, the Plaintiffs discovered that the Defendant’s agent had released the goods without production of either old or new bills of lading.

The Defendant argued, inter alia, that the property in the goods passed to the buyer when the goods passed upon shipment from Hong Kong. It follows that even without presentation of the bills of lading, the Defendant was bound to release the goods. Further, the claim has been time barred as it was brought outside the contractual 9-month limitation period. Clause 17 of the Defendant’s Standard Conditions stated to the effect that the Defendant shall be discharged all liabilities under the Standard Conditions unless suit is brought with 9 months after the delivery of the goods, or the date when the goods should have been delivered.

Reyes J. of the Hong Kong High Court held that based on the evidence including the holding of the “To Order of the Shipper” bills of lading by the Plaintiffs under “D/P at sight” terms, the Plaintiffs reserved their right to the disposal of the property in the goods. The “FOB” terms in the circumstances only transferred the risk but not the title of the goods to the buyer.

It appears that the Defendant has misunderstood the Incoterms 2000. Even if it was a CIF or CNF sale, the Incoterms 2000 do not state exactly at what point of time when the property in the goods should pass to the buyer. The time of passing the title to the goods from buyer to seller depends on the intention of the parties in the sale arrangement. Further, Section 21 (2) of the Sale of Goods Ordinance has provided that “where the goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie deemed to reserve the right of disposal”. The presumption created by the said section, together with the D/P arrangement, would make the property in the goods not pass on shipment but on payment. The English Sale of Goods Act 1979 also has similar provision, which was applied in the English Court of Appeal case Mitsui & Co Ltd and another v Flota Mercante Grancolombiana SA The Ciudad de Pasto, The Ciudad de Neiva [1989] 1 All ER 951.

The Court has properly pointed out that had the carrier’s defence been succeeded, it would have rendered the D/P term pointless as a commercial arrangement. It also follows that in such case, no seller would have relied on L/C and/or D/P arrangements in the international sale of goods.

It is indeed sensible for the Court to separate the sale contract from the contract of carriage. A person who has obtained the title to the goods may not be the one who is entitled to obtain immediate possession of the goods from a carrier. A freight forwarder holding the original ocean bill of lading, who has not obtained property in the goods, is the proper person to obtain delivery of the goods. A carrier is in breach of the contract of carriage if it delivers the goods to the cargo owners by passing the freight forwarder, who might be deprived of the rights to obtain freight and/or charges from the consignee under its own bill of lading.

Reyes J also held that delivery in Clause 17 meant “delivery in accordance with the terms of the relevant bill of lading”. The Plaintiffs never instructed the carrier to deliver the goods to the buyer. The contractual 9-months therefore could not run from the date of wrongful release of the good to the buyer. The goods were consigned to the Plaintiffs’ order. The words “should have been delivered” were construed in the sense that the time for the limitation period would not run until the Plaintiff gave specific instruction to release the goods or asked for the return of the goods. It follows that the Plaintiffs’ action has not been time-barred. The above have yet to take into account that the action was brought within the one-year limitation period stipulated in the Hague Visby Rules applicable to the case.

The construction of Clause 17 by Reyes J. makes it difficult for Owners to rely on the one-year limitation period stipulated in the bill of lading or Hague Visby Rules in the cases of misdelivery. His Lordship did not rule that the time bar provision was inapplicable due to fundamental breach by the Defendant of its obligations. This is understandable as fundamental breach is no longer a rule of law in Hong Kong. Instead, he tried to construe the words “delivery” and “should have been delivered” against the carrier. The reasoning that the time did not run from wrongful delivery appears to be sound since the goods were not delivered to the Plaintiff’s order. Applying the same reasoning to the words “should have been delivered” to the Plaintiff’s order is logically correct as the Plaintiff never gave instruction for delivery but would create the undesirable circumstances to the carrier that its liability would depend on when the holder of the bill of lading asked for the goods.

The case is conflicting with the findings of The “Zhi Jiang Kou” [1991] 1 Lloyd’s Rep. 493. In the said case, the Australia Court of Appeal ruled that the plaintiff’s claim for misdelivery under a “To Order” bill of lading was time barred pursuant to the Hague Rules incorporated into the bill of lading and the contractual time bar clause. The plaintiff’s submission that the time limitation in the bill of lading did not apply because the goods were not delivered under it to the plaintiff was rejected by the Court. The Court went on to hold that “the date when they should have been delivered” envisaged the fixing of a time with a fair degree of precession after the clock would run. Otherwise, the carrier would remain liable for an extended indefinite period. It is however not sure how the undisputed facts concerning the date when the goods should have been delivered in exchange for the bill of lading came from. Possibly, it was the date shortly after the buyer should have obtained the bill of lading from the bank if it had duly honoured its obligations under the sale or finance arrangements. If so, why the present case could not have adopted the same reasoning?

As Reyes J’s decision was only at the High Court level, it will create uncertainty on when the carrier’s liability will extinguish in the cases of misdelivery. Reyes J also indicated that in any event, the Plaintiff’s claim was still not time barred pursuant to the Hague Visby Rules applicable the contract of carriage. That may be a reason for the Plaintiffs not appealing this finding of His Lordship. However, it appears that the parties did not make any submissions whether Hague Visby Rules were applicable to the post discharge events including the misdelivery.

Tsui & Co

June 2007