Carewins v. Bright Fortune (CFA)

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Carewins Development (China) Ltd v Bright Fortune Shipping Ltd
Hong Kong SAR Court of Final Appeal: Bokhary, Chan and Ribeiro PJJ, Litton and Gault NPJJ: FACV No. 13 and 14 of 2008: 12 May 2009 [2009 3 HKLRD 409]

Mr Colin Wright and Mr George Hui (instructed by HH Lau & Co) for the Defendants/Appellant Carriers
Mr Alistair Schaff QC and Mr Benjamin Chain (instructed by Ho, Tse, Wai & Partners) for the Plaintiff/Respondent Shipper

The Hong Kong Court of Final Appeal upheld the judgment of the Court of Appeal to the effect that the presentation rule (that goods must be released to the consignee only against presentation of an original bill of lading) applied to straight bills of lading as well as to "order" bills. It was also affirmed that the word "misdelivery" used in the exemption clause in the bills of lading was ambiguous, and accordingly, the ambiguity had to be resolved against the carriers as the contract breaker. Therefore, the carriers were not relieved from their liability for delivery of goods without the bills of lading.

DMC Category Rating: Developed

This note has been contributed by Ken Lee To-ching, LLB(Hons), PCLL (University of Hong Kong), BCL Student at Oxford University

This decision involved two separate actions brought by Carewins, a Hong Kong exporter, against different carriers claiming for misdelivery of goods shipped from Hong Kong to Los Angeles. As the facts in both cases were similar, the cases were heard together.

In each case, Carewins sold items of footwear to its customer, Artist Fashion, and arranged for shipment from the factory in China to Hong Kong and then from Hong Kong to Los Angeles. The carriers on the Hong Kong/Los Angeles leg of the journey issued "straight" bills of lading, naming Artist Fashion as the consignee. The shipments were made in March/April 2003. On arrival at Los Angeles, the containers were to be delivered to Artist Fashion’s warehouse by Trans-Union Group ("TUG"), acting as the delivery agent for Artist Fashion.

The appeal concerned 23 of the containers, which were delivered to the consignee’s warehouse without Artist Fashion having first presented an original bill of lading. The containers were then seized by US officials acting under a court order in US proceedings brought against Artist Fashion by Burberry Ltd alleging trademark infringements. The dispute with Burberry was settled, and the goods were disposed of on terms which were not revealed at the trial.

Artist Fashion did not pay Carewins for the goods.

The attestation clause in the bills of lading stated "in Witness Whereof, the carrier by its agents have signed three (3) original Bills of Lading all of this tenor and date, one of which being accomplished and the others to stand void". It did not, however, include the usual following sentence "One of the Bills of Lading must be surrendered duly endorsed in exchange for the goods or delivery order".

Clause 2(a) provided that the US Carriage by Goods by Sea Act applied to the liability of the carriers "in respect of the Goods during the period commencing with their being loaded onto any sea going vessel and continuing up to and during discharge from that vessel". Clause 2(b) provided that, subject to clause 2(a), "the [carriers] shall be under no liability in any capacity whatsoever for loss or misdelivery of or damage to the Goods however caused whether through negligence of the Carrier, his servants or agents or subcontractors …". Clause 3 provided that, where US COGSA applied, liability would be limited to US$500 per package, unless the value and nature of the goods had been declared in writing.

Carewins issued proceedings against the carriers because they had delivered the goods without requiring original bills of lading to be presented. The carriers, however, argued that they had duly delivered the goods to the named consignee. The straight bills of lading omitted any express requirement for presentation, and the so-called "presentation rule" should not be implied into straight bills of lading because straight bills (as opposed to "to order" bills) are not by their nature transferable to anyone other than the named consignee, and the carrier must deliver the goods to the named consignee.

Court of First Instance Judgment
At first instance, that argument failed, the Court following the rulings of the Court of Appeal in Singapore in Voss v APL Co PTE Ltd [2002] 2 Lloyd’s Rep 707 and of the House of Lords in the later case of MacWilliam Co Inc v The Mediterranean Shipping Co SA (The "Rafaela S") [2005] 1 Lloyd’s Rep 347. In both these cases, the respective courts had held that a straight bill, though not transferable in the same way as a bill of lading made "to order", was nevertheless a bill of lading, and its production was a prerequisite to delivery, even in cases where there was no express provision to that effect in the bill of lading.

However, the first instance court went on to relieve the carriers from responsibility for misdelivery, on the basis that the exemption in clause 2(b) of the bills of lading applied. The judge found that the misdelivery had taken place after discharge was complete and the Hague Rules regime had accordingly come to an end. In those circumstances, the wording of clause 2(b) – which referred to misdelivery "however caused" - was wide enough to exempt the carriers from liability.

Cargo interests appealed.

Court of Appeal Judgment
The leading judgment was given by Reyes J, with whom other judges agreed.

On the first issue of whether the defendant carriers had breached their contractual obligations to Carewins by delivering the relevant goods to Artist Fashion without production of the bills of lading, the Court examined at length the decision of the House of Lords in The "Rafaela S" case and drew the following conclusions from it, with which it agreed:

"(1) From at least 1873 (if not earlier) mercantile practice treated straight bills as bills of lading having the
       characteristics of documents of title.
(2) In the 1920s, the drafters of the Hague Rules must have been aware of this practice and would have intended
      the expression "bill of lading or any similar document of title" in Art.I(b) to reflect such established
      commercial usage.
(3) It followed that the expression "bill of lading or any similar document of title" in Art.I(b) included straight
      bills of lading."

The Court went on to say that as a straight bill is a bill of lading, it must be that a straight bill is a document of title in the same way that an order bill is a document of title, and has to be produced before the named consignee can obtain delivery of the goods. This function of serving as a document of title or "key" to the goods distinguishes a straight bill at common law from a sea waybill.

Similarly, the Court followed the House of Lords in holding that in this case too, the wording of the attestation clause clearly indicated that the bill of lading was a document of title which needed to be produced to obtain the underlying goods. The clause was not to be ignored as being meaningless or inapposite in the case of a straight bill.

The decision of the Hong Kong High Court in The Brij [2001] 1 Lloyd’s Rep 431 was overruled. In this case, Mr Justice Waung had held that "under a straight bill of lading a carrier is entitled and bound to deliver the goods to the originally named consignee without production of the bill."

Accordingly, the appeal on this first point failed.

The second issue was whether the defendants could rely on clause 2 of the bills of lading to exclude their liability to Carewins arising from misdelivery of goods to Artist Fashion.

The Court found at least two ambiguities which had to be resolved against the respondent carriers. The first was that the inclusion in clause 2(b) of the words "whether or not through negligence" after the words "however caused" had the effect of limiting the exclusion to "misdelivery however caused through negligence" or "misdelivery however caused not through negligence". However, misdelivery could be committed in ways which did not involve any consideration of negligence, such as, as here, the carrier’s deliberate or intentional misdelivery of goods to a party, despite the non-production of a bill of lading.

The second ambiguity related to the correlation of clause 2 and the front of the bill of lading. In the bills, the port of discharge, the Place of Delivery and the Final Destination were all described in the same way as "Los Angeles, CA". The Court found the reference to Los Angeles ambiguous; it could mean the port area of the city or the entirety of Los Angeles as a port city. In the latter case, the place of delivery would be the same as the place of discharge. This latter reading seemed to be supported by evidence, and that the parties contractually regarded "discharge" and "delivery" as equivalent operations. On this basis, delivery would have taken place in the Hague Rules period of clause 2(a) and there was no room left for the exculpatory provisions of clause 2(b).

In conclusion, the Court held that clause 2 was not sufficiently clear to exclude the defendant carriers’ liability for misdelivery. The appeal by the carriers was accordingly dismissed.

Carriers further appealed to the Court of Final Appeal on both issues.

The Court of Final Appeal Judgment
All five judges agreed that the appeal should be dismissed. Riberio PJ (with whom all other judges agreed) gave the leading judgment, and additional comments were given by Bokhary PJ and Litton NPJ.

The two issues before the Court of Final Appeal were the same as those before the Court of Appeal, namely:

1.    Where goods are shipped for carriage by sea under a straight bill of lading for delivery to a named 
       consignee, does the carrier attract liability for delivering the cargo to that consignee without production and
       surrender of the bill of lading?
2.    If the answer is prima facie "yes", are the carriers in the present case exempted from liability by the relevant
       exclusion clause in clause 2 of the bills of lading?

The Court held that for both "order" bills and "straight" bills, delivery only upon presentation of the original bill of lading is, by the nature of the contract between shipper and carrier contained in a bill of lading, an incident of such contract and therefore an implied term thereof.

Although this "presentation rule" is a main object (if not the main object) of the contract contained in both kinds of bills of lading, liability for delivery without presentation of an original bill of lading may be excluded by a specific rather than general form of words. It is not necessarily achieved simply by excluding liability for "misdelivery whether or not negligent" as in this case. This is because what "misdelivery" means depends very much on the context. While the concept of "misdelivery whether or not negligent" can, as a matter of language, extend to delivery without presentation of an original bill of lading, it can also be understood to mean something less radical. Therefore, the exclusion clause was not free from ambiguity, and the carriers could not rely on it.

Ribeiro PJ
Riberio PJ first noted the main characteristics of a bill of lading as summarised by Lord Steyn in The "Rafaela S" case:

"It operates as:
(a) a receipt by the carrier acknowledging the shipment of the goods on a particular vessel for
      carriage to a particular destination;
(b) a memorandum of the terms of the contract of carriage, which will usually have been
      concluded before the signing of the document;
(c) a document of title to the goods which enables the consignee to take delivery of the goods
      at their destination or to dispose of them by the endorsement and delivery of the bill of

He also noted that the legal characteristics of bills of lading operate to meet the needs of export trade. The seller can ensure that the overseas buyer will pay for the goods before they are released to him. By transfer of the bill of lading to him, the buyer can ensure that the goods have been shipped and that he will be entitled to delivery from the carrier on arrival. The bill of lading also protects the carrier in that he is delivering goods to the person entitled to possession of goods and will obtain a good discharge. Given the crucial importance of the bill of lading in such transactions, the presentation rule is strictly enforced, e.g. that where a carrier delivered the goods without negligence against forged bills of lading, this afforded it no defence against a claim in contract or conversion.

Ribeiro PJ said that "there is no valid reason why the essential characteristics of a bill of lading as a document of title should depend on whether it is negotiable", and it was wrong to suggest that the absence of negotiability rendered the requirement of production of the original bill an "empty formality". Quoting the judgment of Lord Bingham in The "Rafaela S", he was of the view that the presentation rule does not lack a commercial rationale in relation to straight bills. If the named consignee in the straight bill cannot produce the bill of lading, it may very well be because he has not paid for the goods and is not entitled to possession. He therefore rejected the carriers’ arguments that the presentation rule is necessary as a matter of business efficacy only for order bills, but not straight bills, as straight bills are not negotiable.

Secondly, he said that the terms of the bills of lading issued in this case demonstrated a contractual intention that delivery should only be made against presentation of the original bills. If the parties had intended otherwise, they could have used a sea waybill which permits delivery merely on proof of the recipient’s identity. The bills in this case had all the features of a bill of lading intended to function as a document of title: each document called itself a "bill of lading", with a bill of lading number; the word "ORIGINAL" was printed on the form; it set out the details of the goods covered, etc., and detailed terms regarding conditions of carriage usually found in bills of lading. Most significantly, it contained an attestation clause, with the reference therein to "accomplishing" the bill, which meant completing performance of the contract of carriage by delivery against surrender of one original bill of lading. Therefore, the attestation clause would only make sense if the parties intended the bills to be presented to the carrier as the justification for release of the cargo to the holder of the bill.

However, he added that "perhaps save in exceptional circumstances, the presentation rule would be an incident of the contract evidenced by a straight bill even if it contains no attestation clause".

Therefore, following the Singaporean Court of Appeal decision in Voss v APL Co Pte Ltd [2002] 2 Lloyd’s Rep 707 and the House of Lords decision in The "Rafaela S" [2005] 2 AC 423, the presentation rule was upheld. The decision of the Hong Kong Court of First Instance in The Brij [2001] 1 Lloyd’s Rep 431 was overruled. He concluded on this issue by saying that straight bills shared all the characteristics of order bills, except that straight bills are not "negotiable", in that they are not further transferable by indorsement.

On the second issue of the exemption clause, Ribeiro PJ first noted that, before the Court of Final Appeal, Carewins did not seek to support the Court of Appeal’s conclusion in regard to Los Angeles and conceded that delivery occurred after discharge. As a consequence, the carriers were not prevented by the Carriage of Goods by Sea Ordinance (Chapter 462 of Laws of Hong Kong) from relying on the exemption clause in clause 2 of the bills of lading, and in particular clause 2(b).

On the principles to be applied in construing an exemption clause, he noted that exempting words should be devoid of any ambiguity and construed contra proferentem against the person relying on the exemption clause. The exemption clause should also be construed in the context of the contract as a whole, taking into account its nature and object. The clause should be ascribed "adequate content" consistent with maintaining the basic purpose of the contract. In other words, the exempting words may have to be "read down" so as not to defeat the main object of the contract of carriage.

In the present case, the presentation rule represented one of the main purposes of the bill of lading contract. The word "misdelivery" in clause 2(b) of the bill could, as a matter of language, excuse misdelivery of goods by releasing them without production of the bill. However, clause 2(b) was susceptible to more than one meaning, and it could be given adequate content as an exemption clause which operated without nullifying the cardinal obligation embodied in the presentation rule. The word "misdelivery" was capable of covering a range of situations which all involved the cargo being delivered to the wrong person, but not involving a conscious disregard of the presentation rule by the carrier. Alternatively, the word "misdelivery" contained a linguistic ambiguity, distinguishing between mistaken or inadvertent misdelivery on the one hand and a deliberate misdelivery on the other, as in Alexander v Railway Executive [1951] 2 KB 882.

Therefore, clause 2(b) of the bills of lading did not cover a conscious delivery to a recipient without presentation of an original bill of lading, and it did not exempt the carriers from misdelivery in the present case.

Litton NPJ
In his judgment, Litton NPJ held that, in the hands of a shipper, a straight bill represents the goods and is, in that sense, a document of title.

The bills used in the present case were different from that in Voss (above) in that the words "upon surrender" did not appear on the face of the bills, and there were no express words requiring presentation of the bill against delivery. However, the words on the face of the bills "one of which being accomplished" had the same effect, as explained in the judgment of Ribeiro PJ.

The duty on the shipowner only to release the goods against the production of the bill arises as an incident of the instrument itself, and it would take very strong words to negate this duty. There are also good policy reasons behind the presentation rule. A master would not have to resolve whether the document is a straight bill or an order bill in case of ambiguities (as in Voss, where the attestation clause spoke of "negotiable bill of lading"). He also would not have to be concerned with the authority of the person claiming to be entitled to take possession of the goods when dealing with a limited company.

On the second issue of the exemption clause, he said that it would be very odd if, on the face of the bills and under the presentation rule, the carrier acts at his peril by delivering the goods without production of the bills whereas, if the document were turned over, it says that the carrier acts with impunity in so doing. The parties could not have so intended and the general words used in clause 2(b) were not precise enough to exempt the carriers from liability for delivery without production of the bills of lading.

Comment (from the Editor)
The decision of the Court of Final Appeal in this case brings the law of Hong Kong into line with that of  England and Wales and Singapore. It also emphasises the reluctance of the courts to give effect to any clause in the bill of lading that seeks to exculpate the carrier from liability for misdelivery without production of the bill of lading. 

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