Fm Global Logistics (M) Sdn Bhd v Prestige Sports Sdn Bhd (BA-22NCvC-481-11/2019)

The Plaintiff’s claim is for breach for contract on the part of the Defendant in failing to pay for the warehousing and logistic services the Plaintiff provided. As a consequence of the Defendant’s failure to pay the outstanding amount, the Plaintiff has exercised its right of lien over the Defendant’s goods kept at its premises.

Apart from defending the Plaintiff’s claim, the Defendant in turn has mounted a counterclaim for the loss of its goods arising from the Plaintiff’s negligence, as well as conversion for the wrongful exercise of lien. 05/08/2022 15:07:03 BA-22NCvC-481-11/2019 Kand. 88 The Plaintiff’s claim

The Plaintiff is in the business of providing warehouse and logistic services. The Defendant is a company in the business of amongst others, an authorised distributor of branded sports shoes, sportswear and other sports goods.

The Defendant engaged the Plaintiff to store its goods and to deliver its goods to its retailers pursuant to Delivery Orders issued by the Defendant to the Plaintiff.

Prior to dealing with the Defendant, the Plaintiff was in a business relationship with Italia Sportivo Sdn. Bhd. (“Italia Sportivo”). The representative from Italia Sportivo with whom it dealt with, was one Frankie Ng. The Defendant and Italia Sportivo were part of the Al-Ikhsan Sdn. Bhd. group of companies.

The business relationship between the Plaintiff and Italia Sportivo was governed by a written contract. This written contract was adduced as BA [1-4] at the trial. BA [1-4] stipulated inter alia, the rates charged by the Plaintiff for its warehousing and distribution services.

Through an email on 23.11.2016, Frankie Ng informed the Plaintiff that the Defendant would be taking over all the business and stocks of Italia Sportivo. The email sent by Frankie Ng in respect of the matter was copied to the employees of both the Plaintiff and the Defendant.

In view of the conduct of the parties, and supported by the email of Frankie Ng, the Plaintiff contends that the terms of BA [1-4] also governed the business relationship between the Plaintiff and the Defendant. In other words, the terms contained therein applied equally to the Defendant as it did to Italia Sportivo.

The Defendant was regularly billed for the warehouse services provided by the Plaintiff. A monthly statement of accounts/invoice was sent to the Defendant. The charges were according to the floor area occupied by goods of the Defendant stored in the Plaintiff’s warehouse.

The contract terms in BA [1-4] provide that the Defendant was obliged to pay the amount billed within 30 days. In the event of late payment, interest at the rate of 24% per annum will be imposed.

The Defendant was billed an amount of RM 1,701,719.86 vide the Plaintiff’s invoice dated 31.5.2019. The Defendant admitted to this amount by its letter of 21.6.2019 wherein the Defendant proposed to settle the entire amount outstanding by way of 11 monthly instalments of RM 140,000 each instalment and RM 161,719.86 for the 12th month. This admission was confirmed by the issuance of a debit note dated 1.8.2019 in favour of the Plaintiff for the amount of RM 1,842,026.65. This amount was the principal sum owing as at 7.8.2019. Notwithstanding the issuance of the debit note, no payment was made by the Defendant.

On 12.9.2019, the Plaintiff issued a Notice of Termination informing the Defendant that its services will be terminated. The Defendant was also informed that the remaining goods in the Plaintiff’s warehouse will be held on a lien for all sums due and owing to it.

As at 4.10.2019, the amount due and owing was RM 1,978,195.79 comprising of the principal sum of RM 1,842,026.65, late payment interest of RM 59,286.63 and warehousing charges for August and September amounting to RM 76,882.51.

This amount forms the essence of the Plaintiff’s claim in this suit. The Defendant’s defence

The Defendant denies the applicability of written contract identified as BA [1-4]. Instead the parties’ relationship was merely based on the invoices issued by the Plaintiff, wherein the rates charged were as stated in the invoices. The Defendant disputes the imposition of the late payment interest stipulated in BA [1-4] as these terms did not govern the parties’ relationship.

Further, the Defendant is not liable to pay the claim of the Plaintiff as latter was negligent in causing the loss of its goods whilst in the warehouse of the Plaintiff. The Plaintiff had failed to fulfil its obligations under the warehousing and delivery arrangements. The Defendant’s counterclaim

The Defendant’s counterclaim comprises of 2 causes of action, one in negligence and the other in conversion. Its counterclaim arose from the following facts.

In the course of the parties’ business relationship, the Defendant raised the issue of discrepancy between the amount of stocks recorded in the Plaintiff’s Warehouse Management System (“WMS”) and the physical stock in its warehouse. There were occasions when the stock that was to be sent out for delivery from the Plaintiff’s warehouse was not available.

It is the Plaintiff’s practice to conduct a physical stock take every year. This exercise is undertaken with the Defendant and their jointly appointed auditor. Discrepancies between the stock recorded in the WMS and the physical stock in the Plaintiff’s warehouse were discovered every year from 2016 to 2019.

During the stock take exercise, to ensure accuracy of the exercise, movement of the goods will be frozen, both physically and in the WMS of the Plaintiff. Therefore, during the stock take exercise no transaction of goods received or delivered will be recorded in the WMS. Similarly, no goods will be moved into and out of the warehouse.

Any discrepancies between the number of goods in the WMS and physical count upon stock taking, were previously resolved by the Defendant consenting to the Plaintiff adjusting its WMS to reflect the physical goods in the warehouse.

In 2018, a stock take was undertaken in May 2018. Again, as was the customary practice, adjustments were allowed to be made in the WMS to reflect the physical stock.

Sometime in August 2018, the Plaintiff transferred the Defendant’s goods from its warehouse in Port Klang to its new warehouse in Puchong. Although it was only three months after the May 2018 stock take exercise, the Defendant discovered that the closing stock of goods held in the Port Klang warehouse did not tally with the opening stock in the Puchong warehouse.

The Defendant requested for the appointment of an external party to conduct a complete stock take exercise. The Plaintiff agreed to the request and asked the Defendant to propose the name of an auditor.

Parties then agreed to jointly appoint Adam & Co., a firm of auditors to do an inventory count of the four brands held in the Plaintiff’s warehouse in Puchong, namely Teva, Canterbury, Lotto and Asics.

The appointment was confirmed in writing vide a letter from the Plaintiff to the Defendant dated 14.12.2018, and responded to by the Defendant on the same day. The appointment of Adam & Co. was on the Terms of Reference (“TOR”) which provided for the agreed upon procedures for the stock take exercise. Essentially, the objective of the stock take exercise was to compare the quantity stock in the Plaintiff’s WMS as at close of the stock take exercise with the physical stock in the warehouse of the Plaintiff and to arrive at a finding on the variance.

The stock take exercise was conducted from 15.12.2018 to 22.12.2018. Parties agreed that the opening balance stock in the WMS was to be as at 28.5.2018. The closing balance of the stock would be arrived at by tabulating the movement of the stock in the WMS from 28.5.2018 until the end of the stock take exercise. This was done based on the following documents provided by the parties:-

Inbound process – Prestige (the Defendant) to provide the invoices/packinglist/master data list and FMGL (the Plaintiff) to provide the goods receipt advice;

(ii) Outbound process – Prestige to provide delivery orders and FMGL to provide the shipment orders, pick slips and delivery note;

(iii) Return inventory – Prestige to provide the collection advices and FMGL to provide the goods receipt advices.

The physical stock count was done by segregating all of the Defendant’s goods in the Plaintiff’s warehouse and then scanning the items, one by one. Prior to scanning, the Plaintiff provided Adam & Co. with a list containing all the product’s Stock Keeping Unit (“SKU”) numbers/details and quantity. Each SKU refers to a stock keeping unit, for example, a packet of socks, a box of shoes, or a piece of apparel. The Plaintiff’s representatives will then scan the Unit Product Code (“UPC”) on each SKU. Upon scanning, a report of the scanned items will be printed. This report will then be compared with the closing stock in the WMS to determine the discrepancies.

Upon the conclusion of the stock take exercise, Adam & Co. made the following findings based on the 4 brands of sportswear in the Plaintiff’s warehouse. The gross quantity of surplus and shortage for these brands were as follows:- BRAND SURPLUS SHORTAGE TEVA 380 220 ASICS 8822 6581 ASICS PS 17 21 CANTERBURY 789 579 LOTTO 4863 4837 TOTAL 14871 12,238

Shortage meant that there were less goods in the Plaintiff’s warehouse compared with the WMS. Surplus on the other hand, meant that there were more items in the warehouse than that in the

The presentation of the final tally by Adam & Co. was stated in the following format:-

Gross quantity meant that the variances were presented on the shortage of goods on the whole, regardless of the brand. Net quantity meant that the variances were presented specific to each SKU. The SKU is specific to each item’s model, colour, size, etc.

As nothing turns on the distinction between the gross and net quantity, suffice to state that the gross surplus for all brands was 14,871 and the gross shortage was 12,238.

The Defendant claims that the quantity of the shortage meant that the goods stored in the warehouse of the Plaintiff had gone missing. This represents a loss to the Defendant as the lost goods cannot be sold.

As for surplus quantity, it also represents a loss as the goods kept in the warehouse of the Plaintiff was not delivered. When the Defendant receives orders from its customers, it issues delivery orders to the Plaintiff. The Plaintiff then delivers the goods to the dealers. The stock delivered will then be deducted from the Plaintiff’s WMS to reflect the balance stock after delivery.

Therefore, to the Defendant, both shortage and surplus figures represent a loss.

Upon the request of the Defendant, the findings of Adam & Co. included a presentation as to the monetary value of the shortage and surplus.

The total value of the loss in respect of the various brands, comprising of Teva, Canterbury, Lotto and Asics is computed as RM 5,862,966.50. This amount is made up of RM 2,128.881.90 for the shortage of goods and RM 3,734,083.60 for the surplus of goods. The total value of the loss amounting to RM 5,862,966.50 forms the essence of the Defendant’s claim in negligence.

The Defendant alleges that the loss was occasioned as a result of the Plaintiff’s failure to manage and store its goods in a safe and reliable manner and to deliver its goods pursuant to delivery orders.

Apart from the cause of action in negligence, the Defendant also claims damages for conversion. The Defendant alleges that the Plaintiff has unlawfully detained its goods by refusing to permit the Defendant to retrieve its stock. Had the Plaintiff permitted the Defendant to do so, it would have mitigated its losses by selling the stock at a discounted price. Plaintiff’s defence to the counterclaim

In response to the Defendant’s counterclaim of negligence, the Plaintiff submits that the ‘but for’ test has not been satisfied. The Defendant must establish that the loss alleged was due to the negligence of the Plaintiff.

The Plaintiff denies that the findings of Adam & Co. is proof of its negligence. Notwithstanding the fact that it had agreed to accept the report of Adam & Co. arising from the stock count as final and conclusive, at the time of its appointment, it was nevertheless entitled to challenge the basis of its findings. Whilst it does not dispute that the findings showed surplus and shortage of stock in the WMS system of the Plaintiff, these discrepancies can arise for various reasons which are not attributable to the negligence of the Plaintiff. I will allude to the reasons in the later part of this judgment.

The difference between the surplus and shortage had been previously resolved by the parties by adopting by a nett-off or contra approach. Adopting the same approach here, the difference between the surplus of 14,871 and the shortage of 12,238 would give a surplus figure of 2,633 which vindicates the Plaintiff.

Further, the variance figure is within the acceptable range of variances. As variances are not uncommon in the warehouse and logistics industry considering the huge quantity of items dealt with, the industry recognises a concept called ullage. This concept takes into account unexplainable surplus and shortage in stocks and makes allowances for the difference in the stock quantity.

Ullage applies in the warehouse industry, particularly when the items stored in the Plaintiff’s warehouse are of considerable quantity. In this case, the number of the Defendant’s items in its warehouse at the time of stock count, was approximately 850,000. Therefore the variance figure of 2633 is not significant. In any event, it showed a surplus stock in the Plaintiff’s warehouse.

As for the Defendant’s claim in conversion, the Plaintiff contends that its right to a lien over the goods arises from the application of the Standard Trading Conditions to the parties, which provide for the right of the Plaintiff to impose a general lien over the goods to the amount of any outstanding debt. The trial

In support of the claims of the respective parties, 4 witnesses testified for the Plaintiff and 3 witnesses for the Defendant. The evidence taking spanned a total of 12 days in all. Issues for determination

The position taken by the parties calls for the determination of this court on the three claims brought the parties; the Plaintiff’s claim for breach of contract and the Defendant’s claim for negligence and conversion. The issues arising from the claims can be broadly stated as follows:-

whether the Plaintiff is entitled to its claim for the warehouse and logistics services amounting to RM 1,978,195.79 as at 4.10.2019, by reference to the terms of the contract governing the parties;

(ii) whether the right of lien was lawfully exercised by the Plaintiff and if so, the claim for conversion must consequently fail; and

(iii) whether the Defendant is entitled to its counter claim for the sum of RM 5,862,966.50 arising from the Plaintiff’s negligence, based on the findings in Adam & Co.’s report. Analysis and findings of this court

I shall now proceed to deal with the main issues as well as the ancillary issues arising therefrom to determine the merits of the respective claims. The terms governing the contractual relationship between the parties

Upon a consideration of the evidence at the trial, I find BA [1-4] applied to the business relationship between the Defendant and the Plaintiff.

The Plaintiff adduced the following evidence to establish that BA [1-4] applied not only to Italia Sportivo, but to the Defendant as well. The evidence is as follows:-

the email of 23.11.2016 sent by Frankie Ng, the representative of Italia Sportivo Sdn. Bhd., with whom the Plaintiff had been dealing with, which said, “Yes. But from January we will change from Italia Sportivo Sdn. Bhd. to Prestige Sports Sdn. Bhd. We now on the legal side with Lotto Sport Italia for the changes….”

(ii) the company search of both companies showed both companies to have the same registered address, same Chairman, directors, shareholders, and company secretary. The nature of the business as stated in the corporate information lodged with the Companies Commission is also the same;

(iii) the emails sent by the Plaintiff in the course of the parties’ business relationship were addressed to Frankie Ng at the Defendant’s email address;

(iv) PW1, the Sales and Marketing Manager of the Plaintiff, testified that Frankie Ng represented not only Italia Sportivo, but the Defendant as well;

the bills issued by the Plaintiff were in accordance with the rates in BA [1-4]. The Defendant made periodical payments towards these bills without any objection raised;

(vi) PW2, the financial controller of the Plaintiff, testified that it would not conduct any business with any entity unless parties have an agreement on the charges for general storage, handling and other related charges.

Premised on the oral evidence and contemporaneous documents, it is irrefutable that the parties intended their business relationship to be conducted on the same terms as previously applied to Italia Sportivo.

Even if BA [1-4] was initially issued to Italia Sportivo, by virtue of the Plaintiff dealing with the Defendant upon the instructions of Frankie Ng, I find the terms therein had been subsequently incorporated into the contract between the parties. Parties had obviously, by their conduct incorporated the terms of BA [1-4] into their business relationship.

I find support for the principle that terms of a contract can be incorporated by the conduct of the parties in the Court of Appeal case of Bauer (M) Sdn Bhd v Daewoo Corp [1999] 4 MLJ 545 which held, But that a term may be incorporated not only by words but also by conduct is illustrated by British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd [1975] QB 303, where it was proved that the hirer of a crane expected that the hire would be subject to certain conditions imposed by the supplier. There had been no course of dealings between the parties. Neither had the terms actually specified by the supplier been drawn to the attention of the hirer before the contract was concluded. Yet, it was held, upon the basis of a common understanding derived from the conduct of the parties, that the suppliers’ terms had been incorporated into the contract of hire by reference.

The claim of the Defendant that it had been paying the Plaintiff based only on the invoices issued is incredible. I therefore reject its contention that BA [1-4] did not apply to the Defendant.

In BA [1-4] sets out the rates for the storage charges and distribution services provided by the Plaintiff. The last page of this document contains the heading Terms and Conditions, of which item 8 states, “Other Terms and Conditions are subject to the Standard Trading Conditions as issued by the Federation of Malaysia Freight Forwarders. A Copy is Available Upon Request.”

The Standard Trading Conditions (“STC”) were exhibited as part of the agreed bundle of documents at the trial. The Plaintiff’s claim for RM 1,978,195.79

The applicability of the terms and conditions in BA [1-4] becomes significant in relation to the computation of the Plaintiff’s claim. The claim of the Plaintiff for the amount of RM 1,978,195.79 includes late payment interest amounting to RM 59,286.63 and warehousing charges for August and September 2019 amounting to RM 76,882.65. The imposition of the late payment interest is contested.

The Plaintiff contends it is entitled to charge late payment interest pursuant to the STC which applies to the parties. Clause 6.5 of the STC provides for interest to be charged as follows, Where the customer is in arrears of any payments for freight and services rendered by the company and the outstanding exceeds the agreed credit period, the company shall be entitled to impose a late penalty charge of such percentage as advised and/or imposed by the associations.

PW3 testified that based on the STC of 2003 issued by the Federation of Malaysian Freight Forwarders, an interest of 2% per month is imposed. However, being mindful of the interest rate imposed on judgment debt, the Plaintiff computes the late payment interest at 5% instead.

The challenge by the Defendant as to the late payment interest on account of the inapplicability of the STC is without merit. It makes no commercial sense for parties to conduct business without any imposition of interest for outstanding amounts.

Having considered the contention of the parties, I find the imposition of late payment interest is allowed by the contract terms governing the parties.

The amount due and owing by the Defendant had been informed by the Plaintiff through the statement of accounts in its monthly billing.

There is evidence of the Defendant’s admission to the amount owing. In a letter dated 21.6.2019, the Defendant presented a proposal to pay the Plaintiff’s claim of RM 1,701,719.86 in accordance to the statement of account dated 31.5.2019. The Defendant even proposed to pay the said amount claimed vide 12 instalment payments. This was followed by the issuance of a debit note for the amount of RM 1,842,026.65. This to me, is clear and uncontroverted evidence of the Defendant’s indebtedness.

By October 2019, the indebtedness of the Defendant had increased to RM 1,978,195.79 as the warehouse charges for the months of August and September 2019 were also included in the claim, together with late payment interest.

Premised on the above findings, I therefore find the Plaintiff’s claim of RM 1,978,195.79 as at 4.10.2018 inclusive of late payment interest of RM 59,286.63 to have been proven. Defendant’s counterclaim for loss of its goods

The Defendant’s case for loss of its goods is premised on a bailor-bailee relationship and negligence.

The common law concept of bailment and the duties of a bailee is statutorily encapsulated in the Contracts Act, 1950. Section 104 provides, Care to be taken by bailee

In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity, and value as the goods bailed. Bailee when not liable for loss, etc, of thing bailed

The bailee in the absence of any special contract, is not responsible for the loss, destruction, or deterioration of the thing bailed, if he has taken the amount of care of it described in section 104.

For the Defendant to succeed in its negligence claim, it is trite law that the Defendant must establish that the Plaintiff had breached its duty of care and that the breach resulted in loss to the Defendant. The existence of a duty of care on the part of the Plaintiff is not disputed here.

Both the claims premised on a bailor-bailee relationship and negligence deals with a common concept, i.e the exercise of a duty of care. The critical question to determine is whether there was in fact, a loss of the Defendant’s goods resulting from the Plaintiff’s want of care.

The Defendant relies heavily on the report of Adam & Co. and claims that the findings in report clearly establishes the Plaintiff’s negligence. Adam & Co.’s report

The findings of Adam & Co.’s report was challenged at the trial by the Plaintiff. The Defendant contends that the Plaintiff is not entitled to do so as the parties had, when the auditor was appointed to conduct a stock count, agreed to accept the auditor’s report arising from the stock count as final and conclusive.

To my mind, the appointment of Adam & Co. then, was to resolve the discrepancies between the physical stock and the WMS stock. However, when the findings are used to file a claim in negligence, I am of the view that the Plaintiff is not precluded from challenging the basis of the findings.

Having considered the evidence adduced at the trial, I am not convinced that Adam & Co.’s report sufficiently proves that the Defendant’s goods were lost whilst in the care of the Plaintiff. My reasons are as follows. WMS is an interdependent system

The WMS of the Plaintiff records the quantity of stocks in the system. The findings of Adam & Co. was based on inter alia, information in the WMS of the Plaintiff. Whilst the information in the WMS is fed by scanning the UPC barcode upon arrival of the goods in the Plaintiff’s warehouse, not all the data in the WMS is solely from the Plaintiff. The WMS also relies on documents generated by the Defendant. The data in the WMS is captured from the Invoice, Packing List, Master Data List, Delivery Orders and Collection Advice.

The inbound process starts with the Defendant’s Master Data List. This was confirmed by the DW1, the manager of supply chain and logistics. In cross, she agreed that when the Master Data List is provided to the Plaintiff, the Plaintiff would not be in a position to know whether the contents are accurate or otherwise. It therefore follows that any inaccuracy in the Master Data List would result in an error in the WMS.

I accept the Plaintiff’s contention that the WMS is therefore an interdependent system and the data therein is not solely under the control of the Plaintiff. Reason for discrepancies/variances in the stock figures

The Defendant proffered several reasons when variances can arise. Firstly, surplus and shortage can happen when goods are received in bundles. PW3 explained that the UPC barcode of the goods which is scanned upon arrival, may not reflect the actual amount in the bundle. For example, the scan may record an amount of 10,000 slippers. However, a physical count may reveal only 9880 slippers, showing a shortage of 20 slippers. His evidence in this regard was confirmed by PW4, the General Manager of the Plaintiff’s warehouse. In view of the huge bundle of some stocks that arrive, the content of the bundles is not physically checked to verify if it tallies with the scanned data.

Secondly, if goods are returned by the Defendant’s customers to the Plaintiff’s warehouse, the quantity of goods are not physically verified. Only the barcode of the goods will be scanned. PW4 explained that during the festive season there will be a higher movement of stock, resulting in a higher quantity of returned stock. The returned stock may have defaced barcode, causing it to be unreadable. Such an occurrence was confirmed by the Defendant’s witness, DW1.

Thirdly, DW1 also agreed in cross-examination that there were occasions when upon arrival at the Plaintiff’s warehouse, the goods did not bear any UPC barcode or was defaced. There were also times when the Master Data List provided to the Plaintiff did not have barcodes for certain goods.

The Plaintiff contended the evidence therefore established that the discrepancies were due to data entry errors rather than actual loss of the Defendant’s stocks in the Plaintiff’s warehouse. Based on the evidence presented, I find the contention plausible.

During the trial, to substantiate its negligence claim, the Defendant attempted to challenge the integrity of the Plaintiff’s WMS. The Defendant referred to its email of 20.9.2018 seeking an explanation as to the adjustment of 74,000 stock in the WMS during the joint stock take in August 2018. According to the Defendant, during the stock take period, no system movement of stock was allowed. The Defendant alleged that this was evidence of tampering of data by the Plaintiff.

The allegation was rebutted by the Plaintiff’s witness, PW4. He explained that notwithstanding the freezing period, the Defendant gave instructions to fulfil delivery orders. He further explained that the “76,850 quantity of stocks were not available in the Plaintiff’s warehouse because the stocks were already shipped out, allocated or on hold.” These goods were not to be represented as available stock in the WMS. Ultimately, all the stocks were accounted for. More importantly, there were no stocks that were lost from the Plaintiff’s warehouse.

I consider the explanation to be reasonable. The alleged discrepancy of 74,000 stocks is an innocuous fact. There is nothing questionable about the adjustment of the stock in the WMS. I therefore do not consider this evidence to substantiate the allegation of negligence by the Plaintiff.

A material document was brought to the attention of the court by the Plaintiff in the course of the trial, namely the Daily Stock Summary Report (“DSSR”). This report was generated daily from the Plaintiff’s system and sent to the Defendant. A sample of the DSSR was tendered in evidence. It contains detailed information pertaining to the quantity of stocks on hand, allocated, on hold and available. I am of the view that if the DSSR was scrutinised daily, any discrepancy in the stock figures could have easily been raised with the Plaintiff.

Further, the disclaimer clause in the DSSR states that “It is recommended that the report be thoroughly checked, as the concluding accuracy of this inventory remains with the owner of this property. Any queries or discrepancies concerning the report should be brought to the attention of FM Global Logistics (M) Sdn Bhd, Warehouse Division, no later than 7 days after receipt of the report.”

Thus, the Defendant had every opportunity to verify the contents of the DSSR and raise any errors noted in the recording of stock quantity as the report was sent on a daily basis. It was incumbent on the Defendant to check the accuracy of the report. Practice of nett-off

Parties have previously dealt with the difference in the surplus and shortage (variances) by the practice of nett off. The shortage and surpluse in the physical stock were resolved by netting off the difference in quantity regardless of category, size, model or colour.

PW2 the Plaintiff’s manager for operation information system and inventory controller, illustrated the practice of nett-off in this manner. He said that 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.

This practice was adopted for the 2016, 2017 and 2018 May stock take. The Defendant’s witnesses confirmed this practice was adopted for the previous stock take, although they contend that the nett-off was allowed only upon the approval of the management.

I accept the Plaintiff’s explanation of the practice of nett-off customarily adopted by the parties to set off the difference in the gross quantity of surplus and shortage. The WMS quantity will then be adjusted to reconcile with the quantity of physical goods in the warehouse.

The auditor was aware of the practice as the report of Adam & Co. reported a variance of 2,633 after the nett-off. This figure was arrived at taking into account the difference between the gross surplus of 14,871 and gross shortage of 12,238. The figure of 2,633 therefore represents a surplus of stocks.

PW2, also stated in his evidence that in view of the quantity of stock handled, which was in excess of 850,000 a year the variance of 2,633 is minimal. This then brings me to the issue of ullage as understood in the logistics industry. Ullage in the logistics industry

Both PW2, PW3 and PW4 testified that the ullage is recognised in the industry to cater for unexplainable surplus and shortage in stocks. The attention of the court was also drawn to the write up in the Australian Logistic Bureau adduced by PW2 which says, Ullage is a term that historically refers to the quantity of liquid within a container that is lost, by leakage, during shipment or storage. The word has now developed a wider logistical meaning and is often used in contracts to define inventory losses in a warehouse facility that are unexplainable. For example, short deliveries that were not picked up, inaccuracies resulting from miscounts, oversupply or undersupply to a customer, pilferage and data entry errors. While clients want perfect inventory management, the reality is that there is no such thing. Most companies suffer inaccuracies in the range of 0.1-2.5% of stock value. Accordingly warehouse providers may insert a ‘no liability’ clause in their contracts that specifically excludes them from ullage responsibility. Customers, however typically have difficulty accepting ullage allowances, believing that their 3PL should be accountable for anything short of 100% accuracy. So the pre-contract debate can be hot on this issue.

Therefore the surplus variance of 2,633 as presented by Adam & Co. must be viewed in the light of the concept of ullage applicable in the logistics industry. The variance of 2633 is but 0.3% of the total stocks handled by the Plaintiff, and well within the allowable range stated by the Australian Logistic Bureau. Proof of loss based on Adam & Co.’s report

I now come to the more critical question of whether Adam & Co. report sufficiently establishes the Defendant’s loss.

Adam & Co’s report was commissioned for a specific purpose. It was to conduct an inventory count. The auditor from Adam & Co. was called to testify. DW2 in his evidence confirmed the objective of his appointment. Upon the conclusion of the stock count exercise, his findings were presented. DW2’s findings included the monetary value of the items stated as shortages and surpluses, to arrive at an aggregate figure of RM 5,862,966.50.

He conceded in cross-examination that the monetary value of the items was in fact supplied by the Defendant. He had no personal knowledge of price of the items. The Plaintiff contends that this part of his findings was clearly outside the scope of his appointment. I find merit in the contention.

DW2 was cross-examined as to his findings at the trial. He made some material concessions which created doubts on the accuracy of Adam & Co.’s final report. He agreed that if quantity of the opening balance of the stock in the WMS on 28.5.2018 was not accurate it would affect the closing figures of the stock in the WMS.

On this matter, the minutes of the meeting held on 12.4.2019 to present the findings of Adam & Co., is relevant. These minutes were taken at the instance of the Defendant. PW2 was recorded to have explained that the opening balance of stock on 28.5.2018 did not include some stocks already allocated for some dealers. Instead, they were only recorded after the actual stock was delivered.

In addition, there is evidence based on the email of the Defendant that adjustments were made to the WMS stocks after the cut-off date of 28.5.2018. These adjustments were made on the instructions of DW1 to allow the Defendant to drop orders.

In cross-examination, the auditor’s attention was drawn to some entries made in his audit working paper. He agreed that there were figures in his working paper and power point presentation to table his final findings which did not tally. In addition, the audit working paper stated the cut-off date for the opening balance of stock in the WMS as 30.6.2018 instead of 28.5.2018.

As a consequence of the above evidence, I find merit in the Plaintiff’s contention that the findings of the Adam & Co. report are unreliable. I find the Plaintiff to have made a credible challenge to the report.

Consequent to all I have mentioned aforesaid, I do not find the Defendant to have proven an actual loss of its stock in the Plaintiff’s possession. The alleged loss arises only by comparison with the quantity stock in the WMS. To my mind, it was merely a case of the quantity of stock in the WMS not reconciling with the physical stock.

In support of its contention that the Plaintiff as the bailee of its goods has to ensure that Defendant’s goods are not lost, the Defendant cited the cases of Tai Seng Glass Sdn. Bhd v Jasa Kita Warehousing Service Sdn. Bhd. [2011] 1 MLJ 70 and Port Swettenham Authority v TW Wu and Company (M) Sdn. Bhd. [1978] 2 MLJ 137 in support. As the facts are relevant to illustrate the duty of the bailee, I propose to set them out.

In Tai Seng Glass Sdn. Bhd. (supra), Tai Seng Glass Sdn. Bhd. entrusted to Jasa Kita Warehousing Service Sdn. Bhd. a consignment of three open top containers containing 48 crates of laminated bronze safety glass to be stored in the defendant's bonded warehouse pursuant to an agreement. 11 crates taken from the warehouse were found in good condition at the time of their removal. However, when a director of the plaintiff went to the defendant's premises to remove further crates of the goods it was discovered that the defendant had relocated to new premises without notifying the plaintiff. Upon checking its goods at the new premises, the plaintiff found the 37 remaining crates that were stored in the defendant's new premises to be damaged as a result of water seepage. The Court of Appeal held that when the goods were delivered to the defendant, a bailor-bailee relationship was created between the parties pursuant to s 101 of the Contracts Act

The defendant as bailee of the remaining goods had not discharged the duty imposed upon it to take as much care of the goods as it should have throughout the period of bailment as a man of ordinary prudence would, and had failed in its duty as a bailee under s 104 of the Act.

In the second case of Port Swettenham Authority (supra), 93 cases of pharmaceutical goods had been unloaded at Port Klang and kept in the custody of the Port Authority. Subsequently only 29 cases were collected by the respondents and some of the contents of the missing cases were recovered in shops in Kuala Lumpur. The Privy Council held that at common law the onus is always upon the bailee, to prove that the loss of any goods bailed to him was not caused by any fault of his or of any of his servants or agents to whom he has entrusted the goods for safe keeping.

In both the cases, there was an actual loss of goods which was entrusted with the bailee. In this instance, what was disclosed from Adam & Co.’s report was merely a discrepancy between the system quantity and warehouse quantity. The Defendant’s goods were not physically lost or damaged in the manner illustrated in both the authorities cited. I therefore find the Defendant’s case premised on bailment to be misconceived.

I note that the issue of bailment was not pleaded by the Defendant. It is trite law that the function of pleadings is to give the opposing party an opportunity of responding to a party’s pleaded case by leading the necessary evidence or making a legal submission in response.

Be that as it may, I find the Plaintiff to have adequately responded to the issue of bailment raised, and therefore no prejudice was occasioned.

Premised on my findings, I am compelled to find the Defendant’s claim of negligence fails. I do not find any evidence adduced to suggest any breach of duty of care on the part of the Plaintiff. I also do not find evidence of loss attributable to the alleged breach of duty by the Plaintiff. The Defendant’s claim in conversion

I now come to the Defendant’s claim in conversion. The Plaintiff’s right to lien over the Defendant’s goods to the extent of the amount outstanding was exercised based on the terms of BA [1-4].

Clause 8 of BA [1-4] clearly stipulates that the terms and conditions between the parties are subject to the STC as issued by the Federation of Malaysian Freight Forwarders, of which the Plaintiff is a member. Clause 4.3 of the STC states, “Where the dispute persists and upon the shipper’s inability to resolve the same with the consignee or any other buyer 30 calendar days after arrival of the goods or from the date such dispute arose, the company shall be vested with a General Lien on the goods and may either exercise the rights to confiscate and/or to accordingly forfeit and dispose the goods in any manner deemed fit and proper so as to make good and/or recover any further costs and expenses incurred.”

The Defendant contends that the clause pertaining to lien in the STC applies only to a specific situation. By reference to clause 4.1 of the STC, the Defendant claims that the right to a lien is only exercisable in the event there is a dispute relating to the control of the goods, which hinders the delivery of the goods. The dispute envisaged applies to freight forwarding services rather than warehousing services.

I find no merit in the contention. The parties have, by virtue of BA [1-4], agreed that the STC issued by the Federation of Malaysian Freight Forwarders is to be applicable to them. I am of the view that the terms of the STC has to be read with the necessary modification to apply to warehousing services.

Therefore, where there is a dispute on the outstanding claim for the warehousing services provided, as in this case, by the terms of the STC, the Plaintiff is entitled to retain the goods up to the value of the indebtedness.

In the circumstances, the right to lien was correctly exercised pursuant to the contract terms which binds the parties. Consequently, the claim in conversion fails.

For the foregoing reasons, I conclude as follows. The Plaintiff has proven its case for warehousing services as claimed in its Statement of Claim. The Defendant on the other hand, has failed to prove its counterclaim for negligence causing loss of its goods. Its claim in conversion also fails as the Plaintiff is entitled to impose a lien on its goods up to the value of the Defendant’s indebtedness. The Defendant’s counterclaim is therefore dismissed.

Consequently, I order as follows:-

The Defendant is to pay the Plaintiff the sum of RM 1,918,909.16 as outstanding charges for warehousing services;

(ii) late payment interest of RM 59,286.63;

(iii) interest on the sum of RM 1,918,909.16 at the rate of 5% from date of judgment until realisation;

(iv) the Defendant to pay the Plaintiff costs of RM 75,000. Dated: 31st July 2022 -sgd- ……………………….. Alice Loke Yee Ching Judicial Commissioner High Court of Malaya at Shah Alam Counsel for the Plaintiff : Dato’ Jerald Gomez (Ms. Michelle Wong and Ms. Amanda Ooi with him) Tetuan Jerald Gomez & Associates Counsel for the Defendant : Ms. Shanti Mogan (Ms. Manpreet Kaur with her) Tetuan Shearn Delamore & Co.