Failure to Pay for Warehousing and Logistics Services Provided, and a Counter Claim for Loss of Goods in FM Global Logistics (M) Sdn Bhd v Prestige Sports Sdn Bhd [2022] MLJU 1767 (High Court, Shah Alam) per Alice Loke Yee Ching JC

This case provides an insight into what happens at the tail end of a supply chain. After goods are purchased and carried by sea to the discharge port, the goods are warehoused and distributed. Therefore, after performance of the carriage of goods by sea, there is usually a contract for warehousing and distribution of those goods from the warehouse. Goods may be carried on big fancy ships, but the tail end of the maritime supply chain involves vast storage issues and the challenge of the last mile delivery during distribution. Now on to the FM Global Logistics case.

The Plaintiff, FM Global Logistics (FM) provided warehouse and logistics services to the Defendant, Prestige Sports Sdn Bhd (PS). PS is the authorised distributor of branded sports shoes, sports wear and other sports goods. FM was contracted to deliver goods to customers of PS. FM contended that PS failed to pay for the services it rendered, and exercised a lien over goods belonging to PS stored at its warehouse. PS counter claimed by asserting that FM’s negligence caused loss of its goods, and that FM’s wrongful exercise of the lien was a conversion of the goods at that warehouse.

In order to appreciate this case better, it is pertinent to examine the history of previous dealings. Before dealing with PS, FM was in business with Italia Sportivo Sdn Bhd (IS). FM used to deal with a representative of IS called Frankie Ng. Both IS as well as PS were part of the Al-Ikhsan Sdn Bhd group of companies. On 23 November 2016, Frankie Ng emailed FM that PS would be taking over all the business and stocks of IS. This email was copied to employees of both FM and PS.

In the light of the email, FM contended that the written contract between FM and IS (adduced in court as BA[1-4]), in particular the rates for warehousing and distribution services contained in it, were also applicable to PS. FM regularly billed PS monthly based on the charges contained in contract BA[1-4], calculated on floor area occupied by the goods in storage. Payment under contract BA[1-4] was supposed to be made within 30 days after billing. Interest at a rate of 24 percent per annum was payable for any late payment.

On 21 June 2019, PS admitted and/or acknowledged via a letter, that it owed FM RM1,701,719.86 from an invoice dated 31 May 2019. PS suggested that the amount be settled by 11 monthly instalments of RM140,000 each, with RM161,719.86 for the 12th month. On 7 August 2019, PS admitted that it owed a slight larger sum of RM1,842,026.65 by a debit note. The additional sum was RM59,286.63, warehousing charges for August and September. Subsequently, PS reneged on this arrangement and did not make any payment of the sums owed to FM. Judicial Commissioner Alice Loke Yee Ching held that there was an admission of indebtedness, thus providing clear and uncontroverted evidence of the indebtedness of PS.

The counter claim put forward by PS was premised on the duty of FM as a bailee to look after the goods belonging to the bailor PS in the warehouse. This statutory codification of the doctrine of a bailment for reward is found in Section 101 of the Contracts Act 1950 Under Section 104, FM as the bailee, is bound to exercise due care in looking after the goods. PS also filed an alternative claim based on the tort of negligence, a non-statutory action that is based on exercising due care. The counter claim by PS is based on the finding of the auditor that there was a discrepancy between the inventory in the Warehouse Management System, and the actual physical stock in the warehouse.

Judicial Commissioner Alice Loke Yee Ching held that the findings of the auditor does not necessarily mean that goods belonging to PS were lost whilst in the possession of FM. There are several reasons for this position. First, the WMS is an interdependent system that draws data from both FM and PS. Data from FM comes from scanning the barcode upon arrival of the good in the warehouse. The data contributed by PS comes from Invoices, Packing Lists, Master Data List, Delivery Orders and Collection Advice. The warehousing process starts with the Master Data List from PS, and any mistake will therefore be entered into the WMS. There is no way for FM to know of any errors at this stage.

Second, the learned Judicial Commissioner also found that returned goods by customers of PS are not physically verified. The scanned barcode of a bundle of goods, may not reflect the actual amount of goods in that bundle. Note that only the barcodes are scanned for returned goods.

Third, there was also evidence there were goods that either did not have any UPC barcodes or had barcodes that were defaced. To make matters worse, some categories of goods on the Master Data List from PS that was given to FM, did not have designated barcodes. Therefore, there was no means of data entry into the WMS via scanning bar codes. The operation of the WMS is based on the assumption that the data concerning the goods can be retrieved from a scanned bar code. Therefore, Judicial Commissioner Alice Loke Yee Ching held that it was very plausible that the so called loss was in reality data entry errors.

Fourth, the learned Judicial Commissioner held PS had opportunity to query any alleged inaccuracy of the stock based on a Daily Stock Summary Report (DSSR) produced by FM. PS failed to scrutinise the DSSR and bring any discrepancy to the attention of FM within 7 days as contractually obligated.

Fifth, both FM and PS had dealt with any discrepancy in 2016, 2017 and 2018 through the practice of nett-off, by resolving the difference in quantity regardless of category, size, model or colour. This process was explained by Judicial Commissioner Alice Loke Yee Ching with the following illustration: ‘Where there is a shortage of 200 shoes which are black in colour and a surplus of 200 shoes which are white in colour, the surplus will be nett-off with the shortage. Where there is a discrepancy after the nett-off, the system quantity will be adjusted to reflect the actual physical stock’. After nett-off, the WMS quantity was then adjusted to reconcile with the actual quantity of physical goods in the warehouse.

Sixth, Judicial Commissioner Alice Loke Yee Ching held that the unexplained surplus and shortage in the stock was a minimal variance and with the ullage practiced in the logistics industry. FM handled in excess of 850,000 goods for PS a year. The variance of 2653 was merely 0.3 percent of the total stock. There is no such thing as 100 percent accuracy and in practice, many companies suffer 0.1 to 2.5 percent loss. So the 0.3 percent range in FM’s warehouse operations was well within this industry accepted range of anticipated ullage.

Seventh, the cases cited by the PS as authorities for breach of the statutory bailment for reward under Sections 101, 104 and 105 of the Contracts Act 1950, were very different from the allegations on the facts of this case in dispute. The learned Judicial Commissioner pointed out that in Tai Seng Glass Sdn. Bhd v Jasa Kita Warehousing Service Sdn. Bhd. [2011] 1 MLJ 70 there was a failure of due care towards the goods because: (a) The Bailee (Warehouser) did not notify the Bailor (Customer and owner of the goods) that it relocated to new premises; (b) 37 remaining crates stored at the new premises were damaged by water seepage. In Port Swettenham Authority v TW Wu and Company (M) Sdn. Bhd. [1978] 2 MLJ 137, there was a failure to exercise due care for pharmaceutical goods because only 29 cases (out of 93) were collected by the warehouser from the Port Authority. The rest were recovered in shops in Kuala Lumpur. Note that bailment was not pleaded by PS but the learned Judicial Commissioner allowed FM to make a legal submission in response and provide the necessary evidence. As the claim by PS based on an alleged failure of due care based in bailment failed, an analogous claim based on a failure of due care in the tort of negligence also inevitably failed.

Eighth, FM was contractually authorised by a general lien’s clause in the standard terms and conditions for any dispute concerning any outstanding claim for the warehousing services rendered, to retain the goods up to the value of the indebtedness. PS tried to argue that the lien could only be used in specific circumstance of a dispute relating to the control of the goods which hinders delivery. In essence, what PS tried to argue is that the lien only applied to freight forwarding services rather than warehousing services. Judicial Commissioner Alice Loke Yee Ching held that even though contract BA[1-4] are subject to the standard terms and conditions (STC) of the Federation of Malaysian Freight Forwarders (of which FM is a member), the STC clearly states that FM has a ‘general lien’ to confiscate, forfeit and dispose goods ‘in any manner deemed fit’ to recover costs and expenses incurred. The more specific interpretation put forward by PS was clearly unsupported by the drafting. The freight forwarding STC can be read to apply equally to warehousing as the parties agreed for the incorporation of the freight forwarding STC. Therefore, FM was expressly contractually authorised by the lien to hold on to goods belonging to PS, and claims for conversion (ie unauthorised holding on to the goods) against FM could not stand.

Thank you for reading IMSML Website Article 11/2022.

Stay tuned for the next IMSML Website Article 12/2022:

A Dispute Concerning Importation of Face Masks into Port Klang in Carpet Prima Sdn Bhd v Top Logistics Solution Sdn Bhd [2022] MLJU 1605 (High Court, Klang) per Azmi Abdullah J

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

19 October 2022

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my