The Blue Bridge

DMC/SandT/10/7

Hong Kong

The “Blue Bridge” (formerly known as The “Great Power”)

Hong Kong SAR Court of First Instance: Reyes J in Chambers: HCAJ No. 136/1999: 1 February 2010

http://www.hklii.org/hk/jud/eng/hkcfi/2010/HCAJ000136_1999-69593.html

Mr Charles Sussex SC, instructed by Messrs Richards Butler, for the Plaintiff cargo owners

Mr Edward Alder, instructed by Messrs Hammonds, for the Defendant shipowner and the Intended Intervener reinsurer

CARRIAGE OF GOODS BY SEA: SETTING ASIDE DEFAULT JUDGMENT ENTERED INTO AGAINST A SHIPOWNING COMPANY THAT HAD BEEN DISSOLVED: APPLICATION BY RE-INSURER TO INTERVENE: AUTHORITY TO ACT FOR PRINCIPAL IN LITIGATION: DELAY IN APPLICATION TO INTERVENE: REAL PROSPECT OF SUCCESS

Summary

A default judgment was entered for breach of a contract of carriage against a shipowning company that had been dissolved. The Court of First Instance dismissed an application by the vessel’s re-insurer to intervene and to set aside the default judgment. The fact of being a re-insurer did not give it authority to act for the shipowner and it did not have such authority in fact. Further, there was no good reason to explain its delay in applying to intervene, and there was no real prospect of it successfully defending the claim of the cargo owners.

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

Background

Great Power is a Cyprus-registered company. It was the original owner of the vessel The “Great Power” (formerly known as The “Blue Bridge”) (“the vessel”).

The Vessel was insured with the People’s Insurance Company of China (PICC). PICC reinsured the Vessel with the West of England Ship Owners Mutual Insurance Association (Luxemburg) (WOE).

Between July and August 1998, the vessel loaded at Mumbai a cargo of soybean meal in bulk. The vessel then proceeded to Bhavnagar to load further cargo; it then proceeded to Singapore and finally to Kashima in Japan. It made several stops during the journey due to engine problems. An attempt made in Singapore to diagnose the reason for the problems revealed nothing abnormal. The vessel then left for Japan. It experienced further engine trouble and rough seas along the way and finally reached Kashima on 30 October. However, upon discharge, it was discovered that the soybean meal was generally discoloured, heated and cooked.

The cargo owners issued a writ in May 1999. The vessel was arrested in Hong Kong, and the writ was served in rem in April 2002. The vessel was released shortly afterwards on the basis of a Letter of Undertaking (LOU) from WOE in favour of the cargo owners. In the LOU, WOE warranted that it had “irrevocable authority from the owners of the… ship to instruct solicitors as aforesaid and to give this letter of undertaking in these terms” and, in consideration for the vessel’s release, it undertook to pay any sum awarded by the court to the cargo owners up to a certain limit.

WOE then instructed solicitors to file an Acknowledgement of Service in the cargo owner’s action and thereafter a Defence to the Points of Claim. In the proceedings, WOE obtained instructions from PICC, who in turn received instructions from the vessel’s then managers.

However, in 2008, the solicitors then instructed by WOE discovered that Great Power had applied to be struck off the Companies Register in Cyprus in December 2000, and had been dissolved in January 2002. In October 2008, the solicitors applied to the court and were allowed to go off the record as Great Power’s solicitors.

In early 2009, upon an application by the cargo owners under s.327 of the Cyprus Companies Law (Chapter 113), the District Court of Limassol restored Great Power to the Companies Register. Its order stated that Great Power and all other persons “are placed in the same position as nearly as may be as before the Company had been struck off”. The Limassol Court also directed that “the time between the date of striking off and the date of restoration does not run for debts for which at the time of striking off had not been frozen/prescribed”.

S.327 of the Cyprus Companies Law provides that where a company is resurrected: “the company shall be deemed to have continued in existence as if its name had not been struck off; and the Court may by the order give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off.”

In April 2009, the cargo owners applied for the Acknowledgement of Service and the Defence to be struck off on the basis that the solicitors who filed both documents did not have the authority to do so, as Great Power had been dissolved at that time. They also applied for default judgment to be entered in their favour.

In May 2009, Reyes J gave default judgment in favour of the cargo owners and awarded them damages in excess of US$950,000.

In August 2009, WOE applied to set aside the default judgment and to be allowed to defend the action as Great Power’s agents or as interveners.

Three issues arose for the court’s determination:

(1) Had WOE been duly authorised to act in these proceedings on Great Power’s behalf?

(2) Even if WOE had no authority to act on Great Power’s behalf, should it be allowed to intervene in these proceedings?

(3) On the basis that WOE was allowed to take part in these proceedings (whether as agent for Great Power or as Intervener), should the default judgment be set aside as WOE had asked?

Judgment

Reyes J dismissed WOE’s applications.

On the first issue of whether WOE had the authority to act on behalf Great Power, the Court noted the absence of evidence that Great Power had authorised WOE to act on its behalf after it was resurrected in January 2009.

Further, Great Power authorised only PICC to act on its behalf as agent, and WOE was PICC’s sub-agent. That the agent appoints a sub-agent does not mean that there is privity between the principal and the sub-agent; and the fact that PICC and WOE were insurer and re-insurer respectively would not make any difference. In the present case, there was no evidence, for example, that Great Power appointed PICC as agents on terms which expressly or impliedly authorised PICC to create privity of contract between Great Power and WOE as a sub-agent. Therefore, the Court held that WOE was not authorised to act for Great Power, as there was no evidence to infer privity of contract between them.

On the second issue of whether WOE should nevertheless be allowed to intervene despite its lack of authority to act for Great Power, the Court noted that the default judgment would affect WOE as it had undertaken to pay damages to the cargo owners under the LOU. Therefore, on the face of it, WOE should be allowed to intervene.

However, by the end of July 2008, WOE would have known through its solicitors that Great Power had been dissolved in 2002. Therefore, the Court considered it pertinent to ask why WOE had not intervened earlier, in mid-2008, and had instead waited until August 2009.

Further, in August 2008, in rem proceedings against the vessel were subsisting. Solicitors acting for the cargo owners had also invited WOE to proceed as if Great Power were in existence, but WOE had declined to do so.

WOE’s affidavit evidence was unclear as to whether it had been advised by its lawyers that it could not intervene in August 2008 in the in rem proceedings because the owning company did not then exist. The Court held that WOE’s ability to intervene did not depend on Great Power’s existence. Indeed, under the Rules of High Court (Chapter 4A of the Laws of Hong Kong), there was no requirement to investigate whether a defendant owner had ceased to exist.

Therefore, the Court considered that there was no good reason why earlier intervention was not deemed possible. WOE should not be allowed to intervene unless a compelling case could be shown that it would have a “real prospect of success”, if it were allowed to defend the Cargo Owners’ claim.

On the third issue of whether WOE could set aside the default judgment, the test was whether WOE could show “a real prospect of success”: The Saudi Eagle [1986] 2 Lloyd’s Rep 221. The Court felt that it should apply robust practical common sense and consider whether there could be a fair trial, as it would be difficult to gather evidence for events that happened in 1998.

During loading, the moisture level of the soybean meal was monitored and recorded on contemporaneous quality certificates and daily faxes. The Court considered the methodology used in the monitoring to be appropriate and that these results were the best evidence to prove the quality of the soybean meal at that time. They established that, on a balance of probabilities, the cargo was sound in terms of the moisture level before loading. This was below the critical level of 12.5%, at or above which discolouration or deterioration of quality can occur in soybean meal.

As to the condition of the cargo during the voyage, the Court held that even on the evidence of WOE’s expert, the vessel was unseaworthy. Its engine had a clogged air cooler, which was not properly cleaned due to incompetency of the Chief Engineer. As a result, the voyage was prolonged, and this exacerbated the damage that the cargo may have sustained from inherent vice (if any). Further, based on the quality certificates and daily faxes monitoring the moisture level of the soybean meal before loading, there was no realistic prospect for WOE to show how much damage was due to the inherent vice of the cargo. Therefore, applying Ceylon v Chandris [1965] 2 Lloyd’s Rep 204, WOE would be liable for the whole damage to the cargo.

Finally, the Court could only rely on the discharge survey report as evidence of the poor condition of the cargo upon discharge, and that the cargo was subsequently sold at a discount. There would be difficulty in finding the final receivers of the cargo to prove the contrary, let alone to give evidence on the state of the cargo.

Therefore, the Court held that WOE had no real prospect of success in defending the Cargo Owners’ claim. WOE’s application to intervene and set aside the default judgment was thus dismissed.