Lord Russel of Killowen:-

The appellants are a limited company incorporated under the Indian Companies Act. They carry on the business of bankers in Burma through the head office at Pyapon and various branches, one of which was at Bogale. They may be conveniently referred to as the Bank. The respondents to the appeal are a trading company incorporated in Japan. They carry on business in Burma, and in the course thereof they purchase rice from paddy traders. They may be conveniently referred to as the Japanese company, or as the plaintiffs. In the neighbourhood of Bogale are to be found rice mills to which the traders bring their paddy for the purpose of having it milled. One of these mills, the Natchaungwa Mill, had been mortgaged by its owner to the Bank, and at all times relevant to this appeal the Bank were mortgagees in possession of this mill and were milling paddy there for various paddy traders. For brevity's sake this mill will be referred to as the N mill. It was managed by one Ba Maw, under the general supervision of the Bank's branch manager at Bogale, one Pya Cho.

Paddy traders are, not unnaturally, desirous of anticipating to some extent the realization of the value of the produce which they bring to be milled; and in order to do so they obtain advances from the Bank on the security of the produce, the advances being repaid when the produce is sold as rice. The procedure was as follows: When a trader desired an advance on the security of his produce, the mill owner or his manager would fill in a printed form (called warrant of goods) showing the amount of paddy held on behalf of the trader and its value. The warrant of goods recites (anticipatively) that the Bank has granted to the trader an advance, and contains undertakings to hold the produce, with the consent of the trader (who had to sign the document), on behalf of the Bank as security for the advance; not to deliver up possession of the produce except under the written directions of the Bank; and to affix labels on or near the produce so as to identify it as the Bank's security. On receipt of this warrant the Bank manager would visit the mill and verify the quantity of produce. If satisfied the Bank would then make an advance to the trader, the trader signing in favour of the Bank: (1) a letter of hypothecation which, after acknowledging the warrant of goods as constituting a security for the advance, authorized the Bank in default of payment to sell, and (2) a promissory note for the amount of the advance. Before the mill-owner or his representative (in this case Ba Maw) parted with any rice to a purchaser he would require authority from the Bank manager so to do, which would only be given after the security had been cleared.

The facts which gave rise to the present litigation may now be stated. One of the traders who brought his paddy to be milled at the N mill was one Saw Kai. On 18th April 1930, a contract in writing was entered into between Saw Kai and the Japanese company by which the former sold to the latter 1,200 bags of Ngasein big mill special rice at a price therein mentioned, to be delivered on 15th May 1930, and to be milled at the N mill. This contract was witnessed by Ba Maw, describing himself as manager of the N mill. It is not in dispute that Saw Kai's produce at the N mill was in fact subject to securities (of the nature hereinbefore described) in favour of the Bank for advances made to him, though it is denied that that fact was known to the Japanese company. All Saw Kai's produce at the N mill was noted in the paddy register kept at the mill as being under security to the Bank.

By 30th April 1930 the milling of Saw Kai's produce had proceeded so far as to have produced 700 bags of the contract rice, which lay at the N mill subject to the Bank's security. On that day two documents were signed by Saw Kai. One was a delivery order addressed to "the Godown Master" at the N mill requesting him to deliver to the Japanese company or order "700 ba