Oriental Air

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DMC/S&T/30/01
Oriental Air Transport Services Ltd v. Cargocare Hong Kong Ltd
Hong Kong Court of First Instance: Muttrie J.: [2001] HKEC 303: March 2001
Counsel for Oriental Air: Mr. K.M. Chong, instructed by Messrs. K.W. Lai & Co
Counsel for Cargocare: Mr. Thomas Au, instructed by Messrs. Richards Butler
AGENCY CONTRACTS: NO PROVISION FOR INTEREST IN FIRST CONTRACT: SPECIFIC INTEREST PROVISION IN SECOND CONTRACT: FINAL SETTLEMENT: WHETHER INTEREST ALONE CAN BE CLAIMED: HONG KONG LAW INCLUDES ENGLISH COMMON LAW RULE THAT INTEREST CANNOT BE CLAIMED AS GENERA: INTEREST PROVISIONS OF SECOND CONTRACT NOT RETROSPECTIVE TO FIRST CONTRACT: INTEREST UNDER SECOND CONTRACT NOT RECOVERABLE WHERE CLAIMANT FAILED TO IMPLEMENT AGREED ACCOUNTING ARRANGEMENTS: ESTOPPEL:

COUNTERCLAIM FOR UNDISCLOSED PROFITS: ESTOPPEL BY ACCEPTANCE: ACCOUNT SETTLED NOT TO BE RE-OPENED

Summary
In this case, the claimants claimed interest under two agency agreements between them and the defendants. One agreement made no provision for interest, the later agreement did. At the end of the agency relationship, the principal amount due to the claimant was settled. The claim for interest under the first agreement failed under the general rule of English common law, which was also the law in Hong Kong, that a claim for interest alone could not be made.

The claim for interest under the second agreement failed because the claimant had failed to implement the accounting system required. By this conduct it had represented to the defendant that the right to interest would not be exercised and was therefore estopped from claiming interest.

The counterclaim for undisclosed profits depended on whether the words in the agency agreement "freights paid to the airlines" meant what they said or whether they should be interpreted to mean "freights quoted by the airlines". Although the judge upheld the literal interpretation, the claim failed because the counter-claimant had, with full knowledge of the relevant business practice, accepted without question over the whole period of the contract the ‘freights quoted’ figures presented to him by the other party. This conduct amounted to an estoppel. In addition, the judge applied the principle that accounts settled without reserve (as was the case here) could not be re-opened.

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Facts
The claimant and the defendant were freight forwarders, carrying on business in Hong Kong. In June 1991, Cargocare appointed Oriental Air as its handling agent in Hong Kong, under the terms of an Agency Agreement providing for ‘co-operation in the airfreight forwarding traffic between Hong Kong and cities worldwide’. The agreement included a profit-sharing arrangement for shipments to Switzerland (where Cargocare’s parent company was based). It also contained a payment terms clause; this made no provision for the payment of interest. In April 1996, the parties entered into a Supplemental Agency Agreement. The payment terms clause in this agreement it provided that each party should account to the other by monthly statements and that each had ‘the right to charge the other interest at 1.5% per month’ if the amounts due under the statements were not paid within 30 days.

Cargocare gave notice of termination under the Supplemental Agency Agreement and the co-operation arrangements duly came to an end in December 1996. The balance on account due to Oriental Air was settled in March 1997, but without prejudice to a claim that Oriental Air had advanced for interest on amounts paid late under both the original Agency Agreement and the Supplemental Agency Agreement. This interest claim, amounting to HK$184,086 was the subject of these proceedings. Cargocare denied liability for the interest and counterclaimed for ‘undeclared profits’ under the profit-sharing provisions of the 1991 Agency Agreement. Cargocare alleged that Oriental Air had taken a hidden profit by charging the joint venture with air freights higher than those they had actually paid to the airlines. The amount of the counterclaim was HK$121,376.

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Judgment
As regards interest charged on late payments under the 1991 Agency Agreement, the judge rejected Oriental Air’s argument that the interest provisions of the Supplemental Agency Agreement could be applied retrospectively to the 1991 Agreement. He also held that the English common law rule by which interest alone could not be claimed as damages was part of the law of Hong Kong prior to I July 1997 and, by virtue of the Hong Kong Reunification Ordinance, remained so thereafter. He concluded that "the parties cannot have interest unless they contract for it or they can bring it within the second limb of Hadley v. Baxendale" (where a contracting party, by reason of its special knowledge, may be held liable for damages that would not otherwise have been within the contemplation of the parties as the natural consequence of a breach of the contract). Neither was applicable in this case and the claim in this regard failed.

As regards interest charged on late payments under the Supplemental Agency Agreement of April 1996, the judge held that the words ‘right to charge interest’ meant that interest was payable on any amount unpaid within thirty days of the relevant statement. It would not make commercial sense to interpret the clause merely as an option to charge interest. It was not necessary, therefore, for Oriental Air to give Cargocare prior notice of its intention to charge interest under the Supplemental Agency Agreement. On the other hand, the interest provisions of that Agreement required the issue of monthly statements. No such statements had been issued. The judge held that there was a positive duty on Oriental Air to put these accounting arrangements into place and that by not doing so, there was a detriment to Cargocare. Without these statements, Cargocare could not know what its credit period was. By failing to put the new arrangements in place, Oriental Air had made a representation to Cargocare that the right to exercise interest would not be exercised. Oriental Air were therefore estopped from claiming interest. Therefore, this part of their claim also failed.

The counterclaim for undisclosed profits on the airfreight charges depended on the interpretation of the words "airfreight charges paid to the airline" in the profit-sharing provisions of the 1991 Agency Agreement. Cargocare claimed these words meant what they said; Oriental Air said they meant "airfreight charges quoted" (by the airline). It was recognised that there could be a difference between the two. The judge found that there was no custom of the trade to support the Oriental Air interpretation and held that the Cargocare interpretation was the correct one.

But the judge also found that Cargocare, through its involvement in the airfreight industry, was well aware that the charges quoted by the airlines could be subject to further discount. Yet it had throughout the five and a half years of the co-operation arrangements accepted Oriental Air’s charges without question. As a consequence, Cargocare was estopped from raising the issue at this stage. Furthermore, Cargocare had settled without reserve Oriental Air’s account for the principal sums (not the interest) due under the agency contracts and, in the judge’s view, this settled account could not now be re-opened.

Thus both Oriental Air’s claim for interest under the two agency agreements and Cargocare’s counterclaim for undisclosed profits failed.

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Comment provided by William Barber of Richards Butler, Hong Kong

Three important, but not entirely surprising, points arose out of this case.
(1)Non-contractual interest is not claimable at common law unless the claimant >can bring the claim within the second limb of "Hadley v. Baxendale".
(2) A party which has a contractual right to claim interest (or any other contractual right) but fails to exercise this right within a reasonable time or exhibits an intention not to demand interest may be estopped from doing so.
(3) The third point, which relates to the application of common law generally in Hong Kong, was the Judge's rejection of the argument by Oriental Air that if there was no Hong Kong decision affirming an English common law rule prior to the handover on 1st July 1997, then that rule was not part of Hong Kong's Common Law and so could not be carried over into Hong Kong Law post-handover by the Hong Kong Reunification Ordinance. Although not specifically decided by the Judge, it would appear that all English common law which was not rejected by the Hong Kong Courts prior to the handover formed part of the Hong Kong law (unless <>of course it conflicted with local statute).

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