1 The sale and purchase contracts

2 This case concerns a serial sale of waste paper of Japanese origin. The ultimate consumer was an Indian company, Emami Paper Mills Ltd of Calcutta (`the Indian buyers`), who entered into an agreement with a Singapore company, the plaintiffs, for the purchase of pure white waste paper cuttings.

3 In November 1984 the plaintiffs entered into an agreement (`the Horng agreement`) with the first defendants, Horng Chang Enterprise Pte Ltd, to purchase 220mt of waste paper at the price of US$88,000. The waste paper was to be delivered at the port of Calcutta, India where it would be collected by the Indian buyers who were involved in the business of repulping waste paper and recycling it into pure white writing paper. The shipment of the paper was to be effected in containers at any Japanese port. The Horng agreement provided for inspection of the paper by an inspection agency of international repute or Nippon Kaiji Kentai Kyokai, the second defendants, who are independent cargo surveyors. The Horng agreement described the commodity as `pure white cutting`. There was no other specification in the agreement.

4 In December 1984 the first defendants said that they were only able to supply 120.33mt of waste paper. The Indian buyers agreed to accept that quantity. The plaintiffs accordingly agreed to receive the same quantity.

5 To fulfil their agreement with the plaintiffs, the first defendants entered into an agreement with Khoei Timber Products Co, the third defendants. Payment by the plaintiffs to the first defendants was to be effected by a letter of credit in favour of the latter. The letter of credit was eventually established by the Singapore branch of the State Bank of India. One of the documents stipulated in the credit was a `surveyor`s certificate from any Japanese government department certifying the quality of material is as per NARI specifications and does not have any printed, typed, written or computer printed material and have only pure white in colour`. The credit described the commodity as `waste paper - pure white paper cuttings`.

6 The first defendants in their turn established a letter of credit in favour of the third defendants. It was issued by Chartered Bank, Singapore. The credit described the commodity as `waste paper - pure white paper cutting of Japan origin`.

7 The second defendants of Kobe, Japan were appointed to inspect the cargo. On 20 December 1984 the second defendants received a telex from the first defendants in the following terms:

8 The inspection certificates

9 The second defendants issued four certificates all dated 12 January 1985 for the total quantity of 120.33mt. The certificate mentioned the Chartered Bank letter of credit. Each certificate included the following statement:

10 This dispute

11 The shipment of the total quantity of 120.33mt of waste paper was effected at Kobe, Japan on board the vessel mv `Lanka Srimathi` on 12 January 1985. The ship arrived at Calcutta in or about the third week of February 1985. On arrival it was found that the goods were very poorly wrapped and it was further discovered that part of the consignment was not in the form of cuttings but consisted of rolls and/or sheets. The Indian customs at that time believed that 70% of the goods was in the form of rolls and/or sheets when in fact only 4mt were in rolls or sheets. Indian customs did not at first permit the Indian buyers to collect the waste paper on the ground that the goods being rolls and sheets, the Indian buyers required a licence or written permission from the Indian Government to import such rolls and sheets. Later the Indian buyers were permitted to collect the waste paper on production by them of a banker`s guarantee that any customs duties or penalties payable by the Indian buyers would be paid.

12 Further, in or about April 1985, the Indian buyers discovered that the waste paper was coated with a chemical substance which substance rendered it impossible to repulp the waste paper into pure white paper. The chemical coating caused light brown, brown, blue and black specks to appear when it was subjected to the repulping process. It was discovered that 90% of the waste paper was affected and defective in this way. As a result the consignment was unsuitable for the purpose for which the Indian buyers purchased the same - that is to say, to make pure white stationery by the recycling process.

13 Following the arrival of the consignment at Calcutta there was a period of accusations. The plaintiffs on 17 April 1985 remonstrated with the first defendants on the basis of the problem encountered by the Indian buyers. Then on 4 May 1985 the plaintiffs sent a telex to the second defendants referring to the certificates. The telex went on as follows:

14 The response of the second defendants to the plaintiffs was as follows:

15 Throughout entire period of inspection, consignees` representative, Mr Kuo Jen Shui, managing director witnessed spot where commodity was stocked.

16 Because of no mention about applicable Nari specifications item number in L/C, after consensus as to the `pure white` was obtained between supplier and him, we checked/inspected commodity together with him based upon the consensus and he accepted commodity as being in conformity to terms of L/C.

17 Thence it was vanned in containers in his full attendance but no markings were made on bales identifying certification of our inspection.

18 From circumstances, it is our understanding that commodity was delivered to consignee to their satisfaction without any trouble. Also, we would add the fact that we received agreement letter on commodity with Mr Sui`s signature.

19 Since matter you are complaining is considered due to divergence of view on quality of commodity between you and Horng Chang Enterprise, you are advised to get in touch with this company (Mr Shui) for solving problem.

20 On 17 May 1985 the plaintiffs telexed the second defendants that their losses were over one million United States dollars.

21 On 20 May 1985 the first defendants stated to the plaintiffs that the `Japan suppliers have the cargo according to the sample that we have given to you and moreover they have surveyed the cargo before shipment`. The plaintiffs thus were told that they were given a sample by the first defendants. It will be recalled that on 20 December 1984 the first defendants had confirmed that they placed the order with the third defendants through samples they had sent.

22 The second defendants in a subsequent telex dated 20 May 1985 elucidated their position further:

23 First of all, we wish to inform you of the fact that consignee`s order (Horng Chang Ent Pte`s) was placed through the sample submitted by supplier (Khoei Timber Prd Co) under condition of relevant L/C. `The quality of material is as per Nari specification and does not have any printed, typed, written or computer printed material and have only pure white in colour`.

24 Further, we would point out that the sample was of coated material and accepted by consignee`s own examination before his coming to Japan for witness.

25 Since there was no description about Nari specifications grade number in the L/C, nor idea of supplier/consignee`s on it, all we could do at time of inspection for delivery between supplier/consignee was to inspect commodity together with consignee`s representative whether it was of same quality as the sample and after completion of inspection, commodity was confirmed as same as the sample and accepted by consignee.

26 This leads us to believe that your complaint on commodity is due to difference of opinion on quality between you and Horng Chang Ent Pte Ltd.

27 Again, you are kindly advised to contact Mr Kuo Jen Shui, managing director of this company in order that you may hear from him of exact situation in this case.

28 Thereafter further accusations were made against the second defendants and the problem remained unresolved.

29 In consequence the plaintiff brought this action against the first defendants, the second defendants and the third defendants seeking damages.

30 The claim against the second defendants was based on negligence and breach of duty. The plaintiffs, it was alleged, actually and reasonably relied upon the certificates in purchasing the waste paper from the first defendants and that the certificates expressly or implicitly stated, inter alia, that:

31 The plaintiffs went on to allege that the statements by the second defendants were false and/or were made negligently by the second defendants in breach of the duty of care owed by the second defendants to the plaintiffs. The particulars of negligent breach of duty alleged that the second defendants:

32 The pleaded case against the third defendants was that they knew or ought to have known that:

33 The statement of claim against the third defendants went on to say that the third defendants owed to the plaintiffs a duty of care (i) not to sell to the first defendants waste paper containing the chemical coating contained by the waste paper and (ii) not to sell to the first defendants waste paper containing sheets and/or rolls but cuttings only. The plaintiffs further alleged that the third defendants negligently and in breach of their duty of care sold to the first defendants paper containing chemical coating and part of which waste paper was not in the form of cuttings but in the form of sheets and/or rolls.

34 The plaintiffs additionally claimed damages against the second defendants and the third defendants and an indemnity for any sum they were obliged to pay the Indian buyers.

35 As the plaintiffs have no contract with the second and third defendants their claim against them was based on the tort of negligence or breach of duty.

36 The first defendants against whom the claim was based on contract were served with the writ. But they failed to enter an appearance. The action therefore did not proceed to trial as against them. The plaintiffs could have entered judgment against them under O 13 of the Rules of the Supreme Court 1970. They failed to do this.

37 The action against the second and third defendants proceeded to trial. The third defendants, however, made no show at the trial, their solicitors having discharged themselves for want of instructions.

38 The plaintiffs having no contract with the second and third defendants were constrained to seek protection under the law of tort. The case, therefore, involved a consideration of the parameters of liability for negligence causing economic loss in the context of contracts for sale of goods and survey of the goods.

39 The law

40 The question of liability for negligence in a sale of goods was first considered by the House of Lords in Donoghue v Stevenson [1932] AC 562 As summarized by Lord Keith in Yuen Kun Yeu v A-G of Hong Kong [1988] AC 175[1987] 2 All ER 705[1987] 3 WLR 776 at p 192: Donoghue v Stevenson [1932] AC 562 established that the manufacturer of a consumable product who carried on business in such a way that the product reached the consumer in the shape in which it left the manufacturer, without any prospect of intermediate examination, owed the consumer a duty to take reasonable care that the product was free from defect likely to cause injury or health.

41 Lord Keith then quoted the following extract from the speech of Lord Atkin in Donoghue v Stevenson :1

42 I think that this sufficiently states the truth if proximity be not confined to mere physical proximity, but be used, as I think it was intended, to extend to such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act.

43 There will no doubt arise cases where it will be difficult to determine whether the contemplated relationship is so close that the duty arises.

44 Lord Keith went on to comment as follows:

45 The Court of Appeal decided that a claim for pure economic loss, unaccompanied by physical damage to property of which the plaintiff was the owner or to which he could show a possessory title, lay only where he could show a special relationship between himself and the defendant. In so far as the glass units could be said to have been damaged the plaintiffs had failed to show any proprietary interest in them at the time when the damage occurred. Since the plaintiffs had required the sub-contractors to buy the glass units from the defendants only because they had been contractually obliged to do so they could not be said to have relied on the defendants, nor had the defendants assumed a direct responsibility to the plaintiffs for the quality of the units. Accordingly, there was no reason to depart from the normal contractual chain of liability.

46 Dillon LJ in his judgment said the following on the question of duty of care:

47 If, however, foreseeability does not automatically lead to a duty of care, the duty in a Hedley Byrne type of case must depend on the voluntary assumption of responsibility towards a particular party giving rise to a special relationship, as Lord Keith held in Yuen Kun Yeu v A-G of Hong Kong [1988] AC 175, 196 (and see also his statement at p 784 that the Hedley Byrne case [1964] AC 465 was concerned with the assumption of responsibility) and as Robert Goff LJ had earlier held in Muirhead v Industrial Tank Specialities Ltd [1986] QB 507, 528 in a passage which would have been before Lord Keith in the Yuen Kun Yeu case.

48 But in the present case I can see nothing whatever to justify a finding that the defendants had voluntarily assumed a direct responsibility to the plaintiffs for the colour and quality of the glass panels. On the contrary, all the indications are the other way and show that a chain of contractual relationships was deliberately arranged the way it was without any direct relationship between the plaintiffs and the defendants.

49 In Caparo Industries plc v Dickman & Ors [1990] 2 AC 605[1990] 1 All ER 568[1990] 2 WLR 358 the House of Lords stated the principle that the liability for economic loss due to negligent misstatement was confined to cases where the statement or advice is given to a known or direct recipient for a specific purpose which is made known to the author of the statement or advice and upon which the recipient relies upon and acts to his detriment. The House of Lords also approved the following three elements required for a duty of care to exist: (i) reasonable foreseeability; (ii) a close and direct relationship of proximity between the parties; and (iii) it must in such a situation be fair, just and reasonable to impose liability in tort. Caparo [1990] 2 AC 605[1990] 1 All ER 568[1990] 2 WLR 358 decided that auditors owe no duty of care to potential investors who rely on the accounts of a company audited by them. Al Saudi Banque v Clarke Pixley [1990] Ch 313[1989] 3 All ER 361[1990] 2 WLR 344 decided that auditors of a company do not owe a duty of care to banks which lend money to companies in reliance on the companies` accounts and auditors` reports.

50 In Smith v Eric S Bush (a firm) [1990] 1 AC 831[1989] 2 All ER 514[1989] 2 WLR 790 the question for determination was: whether a valuer instructed by a mortgagee to value a house, knowing that his valuation will probably be relied upon by the prospective purchaser and mortgagor of the house, owes to the purchaser in tort a duty to exercise reasonable skill and care in carrying out the valuation. The House of Lords answered the question in the affirmative. The House of Lords treated that case as being `akin to contract`. The valuer knew that the prospective purchaser would probably rely upon the valuation. Next the valuer`s fee, albeit indirectly, was paid by the prospective purchaser. Thus it satisfied the tests stated in the Caparo

51 case.4 It was a clear case where it would be just and reasonable to impose duty on the valuer.

52 Application of the law

53 On the facts of this case the only parties to whom the surveyors would be liable for misstatement are the first defendants and the bank which established the letter of credit in favour of the third defendants, the terms of which were known to the second defendants.

54 It is abundantly clear to me that the second defendants were not made aware of the special terms of the other contracts between the Indian buyers, the plaintiffs and the first defendants. The second defendants did not prepare the reports with the plaintiffs in mind as the plaintiffs were not direct recipients of the reports. And it is not just and reasonable to impose a duty or liability on the second defendants in order to protect the plaintiffs as they could and should have appointed their own surveyors and instructed them of their special requirements. A director of the plaintiffs who gave evidence for the plaintiffs said : `Horng was our first party. If they cannot solve we go for the second defendants or the third defendants`. But their claims against the second and third defendants were launched without sound legal basis. In this case, the knowledge, proximity and fairness which were present in Smith v Eric S Bush (a firm) [1990] 1 AC 831[1989] 2 All ER 514[1989] 2 WLR 790 are not present to hold that the second and third defendants are liable in tort.

55 The reasons which I have given for holding that the plaintiffs could not succeed against the second defendants apply equally to the third defendants. This is not a proper case to impose liability in tort against the supplier in favour of the plaintiffs who had a remedy in contract against the first defendants. They could have easily protected their interest by appointing their own surveyors and giving them instructions of their requirements.

56 The legal aspect of the case set out above sufficiently and effectively disposes of the matter. I shall now consider the factual aspects. First, it was established by evidence that the purpose for which the survey was required was only to ensure that the goods were in accordance with the terms of the Chartered Bank letter of credit and that they conformed to the sample furnished to the second defendants. The reference to NARI specifications had no meaning in the context as no NARI code number was given. And there were no applicable NARI specifications for the waste paper in question. Hence the need to go by the given sample. There was no reason for the second and third defendants to be aware that the paper was required for repulping into pure white writing paper. Admittedly the waste paper cuttings shipped could be put to some commercial use. They could be used for making cardboard. In these respects the second and third defendants performed their contractual obligations. A small part of the consignment, however, consisted of rolls and sheets. There was a misrepresentation in that respect. For reasons I have given the plaintiffs had no cause of action against the second and third defendants. Accordingly the plaintiffs were precluded from proceeding against the second and third defendants.

57 I therefore dismissed the plaintiffs` claims against the second and third defendants and awarded costs in favour of the second defendants.

58 Claims against the second and third defendants dismissed.