Rudolph Robinson Steel Co v. Nissho Iwai Hong Kong Corporation Ltd and Another
Read the full judgment text of HCA 4232/1996 on BabelCite. This High Court CFI judgment was delivered on 20 April 1998.
1. The Plaintiff is an American company. On 29th May 1995, through the introduction of a company called Nagata Company Limited ("Nagata"), it entered into an agreement ("the Agreement") with Filon World Trade Company Limited ("Filon") for the supply of galvanized coil ("the goods") by the Plaintiff to Filon. The method of payment to the Plaintiff was to be by letter of credit. There were subsequent amendments to the Agreement in respect of the size and quantity of the goods.
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1996, No.A4232 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ---------------
--------------- Coram : Hon Mr Justice Cheung in Court Dates of hearing : 16, 17 and 18 March 1998 Date of handing down judgment : 20 April 1998 ---------------------- J U D G M E N T ---------------------- Facts 1. The Plaintiff is an American company. On 29th May 1995, through the introduction of a company called Nagata Company Limited ("Nagata"), it entered into an agreement ("the Agreement") with Filon World Trade Company Limited ("Filon") for the supply of galvanized coil ("the goods") by the Plaintiff to Filon. The method of payment to the Plaintiff was to be by letter of credit. There were subsequent amendments to the Agreement in respect of the size and quantity of the goods. 2. On 19th July 1995, the 2nd Defendant ("Sanwa Bank") issued a letter of credit to the Plaintiff. The applicant of the letter of credit was the 1st Defendant ("Nissho Iwai"). Filon and Nissho Iwai entered into an agreement in which they agreed, among other things, that Nissho Iwai was to open the letter of credit in favour of the Plaintiff on Filon's behalf. Filon was to pay 1.45% of the purchase price of the Agreement to Nissho Iwai. The terms of the letter of credit provided that it was available with any bank by negotiation and the drafts were drawn at sight with the drawee as Sanwa Bank. The expiry date of the letter of credit was 12th August 1995 and it provided that it was subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No.500 ("UCP"). 3. The Plaintiff shipped the goods under the Agreement. On 17th August 1995, Corestates Bank ("Corestates"), on behalf of the Plaintiff, presented the documents under the letter of credit to Sanwa Bank seeking payment of the sum of US$2,093,649.50. There were discrepancies in the documents and Corestates referred to them and asked Sanwa Bank "If we may honour the beneficiary's draft despite below mention irregularities. If you are unable to authorise negotiation, please hold documents at our disposal". 4. By an advice of refusal dated 23rd August 1995, Sanwa Bank notified Corestates of the discrepant documents and stated that it was "Holding documents at your disposal pending instruction". Thereafter there were negotiations between the Plaintiff, Nagata, Nissho Iwai and Filon on matters regarding the goods and payment under the Agreement. 5. On 6th September 1995, Corestates enquired with Sanwa Bank the payment status of the documents presented under the letter of credit. The reply came on 8th September 1995 from Sanwa Bank stating that it was still waiting the applicant's acceptance of the discrepancy and the documents were held at Corestates' disposal. 6. By a fax dated 8th September 1995, Filon made the following suggestions to the Plaintiff :-
By another fax of the same date, Filon suggested to the Plaintiff that :-
The Plaintiff responded by a letter of the same date, addressed to Nissho Iwai with copy to Filon and Nagata that, inter alia, :-
The letter concluded that :-
By a letter dated 15th September 1995, Nissho Iwai instructed Sanwa Bank to send the following information to the Plaintiff :-
7. On 18th September 1995, Filon faxed to the Plaintiff that :-
8. On the same date, Sanwa Bank notified Corestates by telex that :-
This was followed by another message from Sanwa Bank on the same day instructing Corestates to disregard the earlier message and stating that:-
On 19th September 1995, Corestates informed Sanwa Bank that :-
The Plaintiff duly received US$1,674,919.36. By a letter dated 2nd October 1995, the Plaintiff instructed Corestates to present to Sanwa Bank a commercial invoice in the amount of US$447,999.72 and the SGS-CSTC draft survey report supporting the invoice calculation. The documents were presented by Corestates on 3rd October 1995. 9. By a telex dated 13th October 1995, Sanwa Bank informed Corestates that :-
By a telex dated 17th October 1995, Sanwa Bank informed Corestates that :-
The Plaintiff's claim 10. The Plaintiff has not received payment of the balance of the purchase price in the sum of US$447,999.72 and it seeks to recover the amount from Sanwa Bank on the basis that the draft survey report ("the report") was presented in compliance with the letter of credit and Sanwa Bank had accepted and took up the report under the letter of credit but had, in breach of Article 9(a)(1) of UCP500, refused to pay the drafts drawn by the Plaintiff under the letter of credit. The Plaintiff had included but decided not to pursue against Sanwa Bank an alternative cause of action that it had breached its duty as an collecting agent. 11. The Plaintiff also made an alternative claim against Nissho Iwai on the basis that it had, through Sanwa Bank, made an offer to the Plaintiff on 18th September 1995 that, subject to the Plaintiff agreeing to the immediate release of the documents under the letter of credit, it would pay 80% of its value immediately and the remaining 20% of its value would be paid to the Plaintiff on negotiation of the report. The Plaintiff had accepted this offer and presented the report. Nissho Iwai had, in breach of this agreement, refused to pay the balance of the contract sum to the Plaintiff. Case against Sanwa Bank 12. The Plaintiff's case against Sanwa Bank is on the basis that it is liable under the letter of credit. The issue is whether the words "the balance amount in accordance with the above calculation will be paid on collection basis upon receipt of the above mentioned Draft Survey Report" in Sanwa Bank's telex of 18th September 1995 would take Sanwa Bank's liability outside the letter of credit so that it assumed no responsibility for the payment of this amount. Collection basis 13. The terms "documents presented on a collection basis", or "for collection" are ambiguous. In Jack on Documentary Credits (2nd Ed.) Para.5.60, it is stated that :-
14. In Encyclopaedia of Banking Law (1997 Ed.) Para.309.1, it is stated that:-
15. Both commentaries referred to Harlow & Jones v. American Express Bank Ltd. [1990] 2 Lloyd's LR 343 in which discrepant documents under a letter of credit were presented by the beneficiary's bank to the Poole branch of the issuing bank. The Poole branch asked its Calcutta Office whether it might negotiate despite the discrepancies. The Calcutta Office stated that, "... please note that the opener has not repeat has not accepted the discrepancies stop However they have requested us to intimate you to send the documents strictly on collection basis only." 16. The Poole branch informed the beneficiary's bank that "... opener has not accepted discrepancies and have requested documents be forwarded on collection basis to our Calcutta ...". The beneficiary's bank replied on 17th February 1987, stating "We hereby authorise you to send documents presented ... on a collection basis to your Calcutta Office". On the same day, the Poole branch wrote to the Calcutta Office stating that :-
The Calcutta Office later obtained the customer's consent to accept the documents and handed over the shipping documents to the customer. When the bills matured, they were dishonoured by the customer. 17. The issue in that case turns on the meaning of the instruction to send the documents "on a collection basis". Experts were called on the meaning of the term. Gatehouse J. at p.348 stated that :-
18. Gatehouse, J. came to the conclusion that the letter of 17th February from the Poole branch must be taken to have meant what it said : that the documents were tendered under a letter of credit; notwithstanding its expiry, and the Defendants were obliged either to reject the documents or to accept them in accordance with its terms, they acted contrary to the instructions and were liable. The judge held that he had to interpret the scope of the Defendants' authority on an objective basis : namely what interpretation would be placed on the contractual documents by reasonable bankers in the position of the parties at the time, having regard to the factual background known to both of them, of which must be taken to have been known to them. Among the factors considered by the judge were :
Expert opinion 19. Both parties called experts to give evidence on the meaning of the words "on collection basis". The Plaintiff's expert is Professor E.P. Ellinger. He is currently a Professor of Law at the National University of Singapore. He is the author of many books on banking including the author of four chapters on the Financing of International Trade in Benjamins on Sales of Goods and of the chapter on Bills of Exchange and Banking in Chitty on Contract. He also gives advice to banks in Singapore and conducted workshops for bankers. 20. The Defendant's expert is Mr Wheatley, Q.C. He practises at the UK Bar. Between 1974 and 1990, he was the Chief Legal Advisor to the Lloyds Bank Group. He was a General Manger of the Lloyds Bank and its representative on the British Bankers Association Legal Committee. After leaving the bank, he acted as a banking consultant to a building society and to a city firm of solicitors. He had written many articles on banking for The Times, The Financial Times and for various legal journals. In 1996, he returned to his practice at the Bar. Since 1990, he acted as a self-employed expert in banking law and practice. 21. Mr Shieh, Counsel for Sanwa Bank, reminded me that an expert may give evidence as to the term of art but the construction of a document is a matter for the Court. To this principle, there is no dispute. Professor Ellinger 22. Professor Ellinger's opinion contained a summary of the systems of collection of commercial paper and documentary credits. There is no dispute on these systems and I will set out the nature of these two systems :-
23. Professor Ellinger was of the view that the systems of collection of commercial paper and documentary credits are not mutually exclusive. In the context of commercial credit transactions the words "on a collection basis" do not indicate that the documents are being handled outside the framework of the letter of credit. In other words, "on collection basis" does not suggest that the documentary credit, under which the documents are to be tendered, is being short-circuited. Usually, the words signify that the documents, though tendered under the letter of credit, are handled on a collection basis due to special circumstances. As between the seller and his bank, the words indicated that the documents are not being negotiated within the meaning of article 10(b)(ii) of UCP-500. When used by the confirming bank or by the issuing bank, they imply that the documents are discrepant and, in consequence, are being handled on a special basis. When the confirming bank agreed to handle the documents on a collection basis, it would not be paying on the discrepant documents but would be trying to get a waiver for the discrepancies from the issuing bank. When the issuing bank used such words after the customer had rejected the documents, it was offering to act on the instruction of the confirming bank or negotiating bank or the beneficiary, for example, to store the goods at the warehouse or to auction the goods. 24. He also said that the banking practice in Harlow & Jones confirmed with his experience, namely, the use of the words "on collection basis" is not inconsistent with the presentation of documents under the letter of credit. Mr Wheatley Q.C. 25. According to Mr Wheatley Q.C., the phrase "on a collection basis" means that the bank would collect the amount from the applicant if it could but without responsibility if it could not and on payment of its usual charges as a collecting bank. He said that he had discussions with his former colleagues in the Lloyds Bank and they confirmed that his understanding of the meaning of "on a collection basis" accorded with theirs as practical bankers. He also accepted that the meaning of the words "on a collection basis" have to be ascertained from the context of the document. 26. Although Mr Wheatley said that his former colleagues confirmed his understanding of the phrase "on a collection basis", it appeared that they were not aware of the decision of Gatehouse J. nor the views of the experts in that case which agreed that the words "on a collection basis" were ambiguous and must take their meaning from their context. My interpretation 27. This is not an easy case. However, after reviewing the evidence and the arguments of the parties, I have come to the conclusion that Sanwa Bank is not liable to the Plaintiff. Notice of Refusal 28. The agreement between the Plaintiff and Sanwa Bank is to be found in their telexes of 18th and 19th September 1995. The distinguishing feature in this case is that Sanwa Bank had issued a Notice of Refusal in respect of the discrepant documents. Article 14d(ii) of UCP states that :-
Such a Notice of Refusal is irreversible (Jack on Documentary Credits 2nd Ed., para.5.50). The Notice of Refusal expressly stated that the documents were held at the Plaintiff's disposal. After issuing this notice Sanwa Bank no longer had any obligation to pay under the letter of credit. The parties to the sale of goods might negotiate a solution, but as far as Sanwa Bank was concerned, there was nothing left for it to do under the letter of credit. The letter of credit was at an end. To justify the subsequent presentation of the report as a renegotiation of the letter of credit, the intention of the parties must be clear from the agreement reached and the surrounding circumstances. I am not satisfied that was the intention. 29. If one examines the common practice referred to by the experts in Harlow & Jones, one can see that the practice is rather narrow in scope. It refers to discrepant documents, including documents presented after the expiry day of a letter of credit, sent to the issuing bank for collection or on a collection basis under the letter of credit which would be expressly or impliedly extended if, after inspection, the opener and its bank decided to accept the documents and thus waived the discrepancies. Although Gatehouse J. analysed the situation as a renegotiation of the credit in which the opener may require allowances, he was not dealing with a situation where notice of refusal had expressly been given by the issuing bank as in this case. 30. In Harlow & Jones, from the facts recited by the judge neither the Poole branch or the Calcutta Office of the issuing bank had issued a notice of refusal. The letter from the Poole branch to the seller's bank was that "... opener has not accepted discrepancies and have requested documents be forwarded on collection basis to our Calcutta (Office) ...". Gatehouse J. did not base his decision on the absence of a notice of refusal. It was not necessary to do so in that case because on the facts he held that the documents were forwarded under the letter of credit. New document 31. The examples gave by Professor Ellinger of documents presented under a letter of credit on collection basis by a confirming bank and an issuing bank were documents that were already presented under a letter of credit and found to be discrepant. In Harlow & Jones the documents that were presented on collection basis were documents which were already in the hands of the beneficiary's bank. In the present case, the document which was required to be presented on a collection basis was the report. This was not a document which was covered by the letter of credit. The presentation of this document could not be regarded as the presentation of a discrepant document or a document under the letter of credit because its existence was simply not required under the terms of the letter of credit. It is difficult to rationalise the situation as a renegotiation of the letter of credit. 32. Professor Ellinger accepted that it was very rare that the parties will make an arrangement for presentation of future documents on collection basis. This being the case, such presentation should not be envisaged as being under the letter of credit unless the intention is clear. 33. In order to bring the case within the context of a renegotiation of credit, the Plaintiff must show that the letter of credit itself was amended by the telex of 18th September 1995 so that the report became a required document under the letter of credit. I agree with Mr Shieh's submission that it is a strange construction to say that the letter of credit had been amended in this way because the telex does not stipulate a deadline for the presentation of this document. Mr Smith, Counsel for the Plaintiff, argued that in the absence of a specific time, the report must be presented within a reasonable time and that it was to the interest of the Plaintiff to present this report as soon as possible. In my view, it would create havoc in letter of credit transactions if this argument is accepted. Article 5a of UCP provides, among other things, that the credit must be complete and precise. Negotiation 34. The Plaintiff argued that it is significant that the payment of the balance of the amount under the letter of credit was to be "upon negotiation of the Draft Survey Reports". It submitted that the use of the words "upon negotiation" can have only one meaning in this context, namely purchase by the bank of the documents. Reliance was made on Article 10b(ii) of UCP which defines negotiation as the giving of value for drafts or documents by the bank authorised to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation. 35. The word 'negotiation' is a word used by Nissho Iwai and not Sanwa Bank. After referring to Nissho Iwai's quoted message, Sanwa Bank stated that "... and the balance amount in accordance with the above calculation will be paid on collection basis upon receipt of the above-mentioned Draft Survey Report issued in accordance to the above requirement ...". I agree with Mr Shieh's submission that the word 'negotiation' was probably used by Nissho Iwai without much detailed thinking and little weight should be attached to it. As far as Sanwa Bank was concerned, its intention is found in the part of the telex I have quoted, namely, "the balance will be paid on collection basis upon receipt of the Draft Report". To rely on Article 10b(ii) is to beg the issue because UCP will only become relevant if the subsequent agreement of the parties involves a presentation of document pursuant to and under the letter of credit. Mechanics of letter of credit 36. The present situation does not fit into the mechanics of a letter of credit transaction. As explained by Article 2 of UCP, documentary credit is an arrangement in which a bank, acting at the request of the applicant, is to make a payment to the beneficiary against stipulated documents provided that the terms and conditions of the credit are complied with. Once the documents are accepted by the bank, the shipping documents will be released to the applicant and the bank is contractually bound to pay the beneficiary. This being the framework in which documentary credit operates, it is inherently contrary to the nature of a credit transaction to have "truncated" presentation of documents in which part of the price will be paid upon release of all the title documents and the balance to be paid upon presentation of a future document. There is no evidence that letters of credit operate in this manner. It is the Plaintiff's case that notwithstanding the use of the words "on a collection basis", the presentation of the report is pursuant to or under the terms of the letter of credit. This being the case, the Plaintiff must justify that this arrangement, which is contrary to normal mode of operation of documentary credits, is nonetheless done within the context of the letter of credit. Guarantee of payment 37. The Plaintiff submitted that it is inherently unlikely that the parties would have agreed to an arrangement under which the Plaintiff would release the documents of title without full payment or a binding assurance of full payment from Sanwa Bank. This is also one of the grounds relied upon by Gatehouse J. in Harlow & Jones. However, on a deeper analysis, I do not think that this reason is a sound one. The starting point is that even on the Plaintiff's case, the telex of 18th September 1995 does not connote any commitment or guarantee by Sanwa Bank to pay the Plaintiff. The Plaintiff's case against Sanwa Bank is that it has to decide whether to accept the report or reject it within the time prescribed by UPC Article 14d(i). There is nothing to prevent Sanwa Bank from rejecting the report by giving timely notice. If this is done, the Plaintiff would have no redress against Sanwa Bank at all. This being the case, the so-called guarantee of payment is still conditional upon Sanwa Bank accepting the report. 38. In any event, I would not say that it is inherently improbable that the Plaintiff would only be prepared to release the documents unless a guarantee for the payment of the balance of the purchase price is made by Sanwa Bank. This is not a case where the Plaintiff authorised Sanwa Bank to release the shipping documents for nothing. The shipping documents were released against a payment of 80% of the purchase price. The payment of the balance was dependent upon the presentation of the report. Sanwa Bank was not privy to the commercial discussions between the Plaintiff, Nissho Iwai and Filon. As far as Sanwa Bank was concerned, it is far from obvious that having received 80% of the price, the Plaintiff must be looking at it personally for the balance. Other matters 39. The reference to the number of the letter of credit in the correspondence between the banks is not a factor that one should attach much weight in the interpretation of the agreement between the Plaintiff and Sanwa Bank. One should look for the substance and not the form in ascertaining the true contractual obligation. Further, in interpreting the terms of the agreement between the parties, the Court is not permitted to look at the subjective or internal intention of the parties which had not been communicated to the other side : Harlow & Jones at p.306 or the subsequent conduct of the party : James Miller v. Whitworth Street Estates [1970] AC 572 and Schuler v. Wickman [1974] AC 235. Instructions as to collection 40. The Plaintiff further argued that the agreement should not be construed as involving a tender outside the letter of credit in that there is no detailed or precise instructions as to collection. In my view, the conclusion of the agreement between the parties by the exchange of the two telexes is not the end of the matter because the agreement envisaged that the Plaintiff would present the report subsequent to this agreement. If instructions on collection are required, they can always be furnished at the time of the presentation of the report. The absence of the instructions in the earlier agreement is not fatal to its validity. Further, the draft for the balance of the amount was drawn on Sanwa Bank itself, Sanwa Bank can either pay or refuse to pay, there was no need for instructions to protest. The instructions as to Corestates Bank's account had already been given. Case against Nissho Iwai Liability of Nissho Iwai 41. Nissho Iwai was the applicant of the letter of credit. The Plaintiff's case against Nissho Iwai is that it had made an offer through Sanwa Bank in the telex of 18th September 1995. The offer was accepted by the Plaintiff and Nissho Iwai is accordingly liable. Mr Chong, Counsel for Nissho Iwai, accepted that if I find that the subsequent presentation of the report was outside the letter of credit, Sanwa Bank must be acting as a conduit and therefore the agent for Nissho Iwai in negotiating with Corestates. I have made such a finding and it followed that Nissho Iwai accepts that Sanwa Bank was acting as its agent in making the offer to the Plaintiff. In any event, the authority of Sanwa Bank to act for Nissho Iwai is clearly demonstrated by the telex dated 15th September 1995 from Nissho Iwai to Sanwa Bank which I had referred to earlier. 42. Mr Chong, however, argued that Nissho Iwai was only acting as the financier and agent for Filon in establishing the letter of credit. The Plaintiff should have known that the offer contained in the telex of 18th September 1995 was made by Nissho Iwai as Filon's financier and agent. This being the case, Nissho Iwai had neither the right nor liability for an agreement made on behalf of Filon with the Plaintiff because, as a matter of law, an agent does not attract the right or liability in respect of a contract entered into for his principal. Mr Chong further argued that after the expiration of the letter of credit, the liability of Nissho Iwai as the applicant under the letter of credit towards Sanwa Bank was discharged and there was no question of Sanwa Bank being able to recover any money from the security given by Nissho Iwai for establishing the letter of credit. When the letter of credit expired, whatever security the Plaintiff might have to the purchase price also vanished since Nissho Iwai's liability had been discharged. In respect of the subsequent arrangement, it was merely acting as Filon's agent outside the letter of credit. 43. It is irrelevant that Nissho Iwai was not the buyer under the contract of sale with the Plaintiff. According to the agreement between Filon and Nissho Iwai, the latter would finance the transaction and handle the letter of credit in return for Filon paying it 1.45% of the purchase price. It is difficult to follow Mr Chong's argument as to why Nissho Iwai's liability had been discharged after the expiration of the letter of credit and why it was merely acting as an agent for Filon later on. The fact remained that Nissho Iwai was responsible for financing the transaction. There was no indication that at the time when the offer was made, Nissho Iwai had considered that its obligation had already come to an end. There was no basis for saying that the offer in the telex of 18th September 1995 was made by Nissho Iwai as an agent for Filon. There was no reason why Nissho Iwai would have entered into an agreement with the Plaintiff under which 20% of the purchase price would be paid by Filon, as opposed to being paid by Nissho Iwai. 44. Mr Chong argued that the instruction by Nissho Iwai to Sanwa Bank did not refer to the release of documents : the authorisation to release documents was made by Sanwa Bank only. In my view one must construct a document in order to give it business sense. Would Nissho Iwai be prepared to pay 80% of the purchase price without receiving the documents of title? The release of documents of title must be one of the terms of the offer made by Nissho Iwai. Consideration 45. Mr Chong argued that since there was no contractual relationship between the Plaintiff and Nissho Iwai, its promise to pay the Plaintiff was a bare promise unsupported by any consideration. In my view, the offer was supported by consideration : it was found in the Plaintiff's agreement to release the shipping documents before being paid the whole amount due under the original invoice for US$2,093,649. Obligation to pay 46. Mr Chong further argued that since the report is still being held by Sanwa Bank as an agent for the Plaintiff, the agreement reached between Nissho Iwai and the Plaintiff has not been performed, and there is no obligation on the part of Nissho Iwai to pay the balance of the purchase price. In my view it is clear that the obligation to pay the balance of the purchase price was upon the receipt of the report. The report had been presented by the Plaintiff and received by Sanwa Bank and the obligation of Nissho Iwai was established. Accordingly, the Plaintiff is entitled to judgment against Nissho Iwai. Conclusion 47. The Plaintiff's case against Sanwa Bank is dismissed with costs nisi to Sanwa Bank. There shall be judgment for the Plaintiff against Nissho Iwai in the sum of US$447,999.72. Interest on the judgment sum is at 7% per annum from the date of the service of the writ to judgment and thereafter at judgment rate until payment. The Plaintiff is to have the cost nisi of its action against Nissho Iwai.
Representation: Mr Clifford Smith, inst'd by M/s Stephenson Harwood & Lo., for the Plaintiff Mr K.M. Chong, inst'd by M/s Y.L. Yeung & Co., for the 1st Defendant Mr Paul Shieh, inst'd by M/s Johnson Stokes & Master, for the 2nd Defendant |