Societe Generale v. Hanil Bank

HCCL000012/1992

1992, No. CL-11

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

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1992, No. CL-12

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1992, No. CL-15

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Coram: The Hon. Mr. Justice Stone in Chambers

Dates of Hearing: 10 March, 20 May 1997

Date of Delivery of Judgment: 6 June 1997

Date of Handing Down of Decision on Costs: 20 June 1997

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J U D G M E N T

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1. I have before me three discovery summonses, each drawn in like terms, in the three titled actions. For present purposes, however, and by agreement, argument has proceeded upon the basis of the papers in C.L. No. 11 of 1992.

2. The hearing of these summonses has in fact taken place in two parts. When argument commenced, I expressed the view that the various matters in issue could usefully be accorded greater focus, and in the event the applications were stood down part heard upon the Plaintiff's application. In the interim I am pleased to note that the solicitors for both sides have acted most constructively; I am told that a meeting has taken place between the legal representatives of the parties, and that the original discovery requests, as widely drawn, have been the subject of agreement in part on the one hand, and greater refinement in terms of what is outstanding for debate on the other. Accordingly, when Mr. Bharwaney, who appears for the Plaintiffs in these three actions, re-opened the application at the adjourned hearing, he did so with the benefit of an Amended Schedule to that which was originally attached to the summonses, with the result that the areas in dispute have been thrown into sharper relief.

3. Before turning to the particular matters for decision, it would assist, I think, to provide some indication of the nature and subject matter of these three actions which, together with one further action not the subject to the present applications (that is C.L. No. 11 of 1997) have now been ordered to be heard together.

4. These cases revolve around an elaborate letter of credit fraud. The Plaintiff in each of these actions is Societe Generale, which carries on the business of banking in Hong Kong as a full branch of Societe Generale S.A., a public corporation incorporated in France with limited liability. The Defendants in each action are banks incorporated in Korea which carry on the business of banking in Korea and elsewhere. The actions all arise from similar facts, and are founded on similar causes of action.

5. In broad outline what happened was this. At the request of Shinhan International Limited, a publicly listed Korean company, the Defendant Korean banks (respectively Koram Bank, Hanil Bank and Bank of Seoul) opened master letters of credit in favour of one Newroots Limited, a Hong Kong company and a subsidiary of Shinhan, with Societe Generale Hong Kong as advising bank. These master letters of credit were available against, inter alia, invoices issued by Newroots and airway bills showing that the goods in question were consigned to Seoul with one of the Korean banks as consignee. Against the security of these master letters of credit, Societe Generale Hong Kong agreed, on the application of Newroots, to open back-to-back letters of credit in favour of one Charles International Limited, a subsidiary of Shinhan incorporated in Delaware, U.S.A. These "baby" letters of credit were available against, inter alia, invoices issued by Charles and airway bills as requested under the master letters of credit.

6. Documents complying with the requirements of the "baby" letters of credit were presented by Charles and payment effected under these letters of credit by Societe Generale Hong Kong. At the same time, Societe Generale Hong Kong agreed to make advances to Newroots to enable it to settle its indebtedness under these "baby" letters of credit. Each advance was made upon the security of the master letter of credit and of the documents, submitted by Newroots, conforming to the requirements of these master letters of credit, and such advance was discharged when Societe Generale Hong Kong negotiated the master letter of credit. It is the Plaintiff's case that this was a common arrangement made by Korean companies to permit the enjoyment of lower rates of interest in Hong Kong for the period of the advance against documents, and which was made possible by the terms of the master letters of credit which permitted, in effect, the presentation of stale documents.

7. The Defendant Korean banks have alleged fraud on the part of Shinhan, Newroots, and Charles and have refused reimbursement under these master letters of credit. In particular, it is contended that the documents presented by Charles for payment under the "baby" letters of credit and the documents presented by Newroots were fraudulent, that the airway bills were forgeries, that the goods allegedly covered by them were non-existent, and that Societe Generale Hong Kong knew or ought to have known of the same. I pause to note that it is this latter allegation which is used by the Plaintiff to fundamentally underpin the present applications.

8. To the contrary, the Plaintiff's case is that it had properly relied upon the security of the master letters of credit to open the back-to-back letters of credit upon the application of Newroots, that it had properly relied upon the security of the master letters of credit and the documents presented thereunder by Newroots, which conformed to the master letters of credit, to make advances to Newroots to discharge the latter's indebtedness under the "baby" letters of credit, that it did not know nor indeed had any reason to suspect that fraudulent activities were being carried out by Shinhan, Newroots and Charles, and that at all material times it was a negotiating bank which had negotiated the master letters of credit and the documents presented thereunder in good faith and without notice of any alleged fraud. In a nutshell, therefore, the Plaintiff in each action, Societe Generale Hong Kong, claims to be reimbursed by the Defendant Korean banks in terms of the moneys which it has paid out during the negotiation of the master letters of credit.

9. So much for the factual matrix. Mr. Bharwaney submitted that the Plaintiff had made substantial discovery in these actions, but maintained that the discovery made by the Defendant Korean banks is inadequate and deficient. His application, pursuant to Order 24 rules 3 and 7, identified documents in the Amended Schedule relating to the dealings of the Defendant banks with Shinhan and its affiliates; as such, Mr. Bharwaney says they are all documents which the Defendant banks ought to have in their possession, custody or power given their role as the banks issuing the master letters of credit, which issuance took place upon the application and instruction of Shinhan.

10. So far so good. Having established that the documents itemised in the broad categories in the Amended Schedule relate to dealings between the Defendant banks and Shinhan, Mr. Bharwaney demonstrated relevance as follows, and this is perhaps the key to the present case. He submitted that a major defence raised by the Defendant banks against the claims of the Plaintiff is that Societe Generale Hong Kong knew or ought to have known of the fraud allegedly perpetrated by Shinhan and its affiliates at or before the time the Plaintiffs negotiated the master letters of credit; to this end the Defendant Korean banks have obtained substantial discovery on the grounds that such documents are relevant to the issue of knowledge. But, Mr. Bharwaney continued, what is sauce for the goose is sauce for the gander. Ergo, the documents now to be discovered would tend to show the extent of the knowledge possessed by the Defendant Korean banks arising from their dealings with Shinhan and its affiliates, in particular with regard to the goods purportedly imported by Shinhan under the master letters of credit. And to the extent that such documents demonstrate that the Defendant Korean banks in Seoul (the final destination of the goods covered by the master letters of credit) had no knowledge or reason to suspect that fraudulent activities were being carried out by Shinhan, they are highly relevant as tending to support the Plaintiff's case that the Plaintiff, as a negotiating banker in Hong Kong dealing solely with documents, also possessed no knowledge of or reason to suspect such a fraud. To adopt Mr. Bharwaney's turn of phrase, we want discovery against the Defendant banks to establish that we knew as little about what was going on as we did; if the Defendant banks did not know of the fraud, a fortiori the Plaintiff would not have known.

11. I confess to finding this a somewhat unusual approach, involving, as it seems to me, argument by means of negative inference. Mr. Bharwaney frankly conceded to the Court, upon being pressed on the point, that he had absolutely no basis to suggest knowledge of the fraud on the part of the Defendant banks, nor could he suggest how the Defendant banks would have entered into the relevant transactions if indeed they had had any such knowledge; moreover, not only is there on the pleadings no allegation whatever of knowledge on the part of the Defendant banks, nor is there any allegation of recklessness or of negligence on their part. In my view this fact constitutes a distinction with a very real difference. Whilst the state of knowledge of the Plaintiff has been placed squarely within the pleadings as an issue to be decided upon the evidence by the trial Judge, the knowledge of the Defendant banks is nothing to the point, and until an issue in this regard appears in the pleadings (a matter Mr. Bharwaney has said that he will reflect upon) it is unclear to me why there should be widespread discovery of much of the itemised documentation which is currently sought, when to-date at least it has been suggested by nobody that the Defendant banks had any idea or knowledge of what was taking place. In short, therefore, a negative does not prove a positive.

12. Mr. Bharwaney further argued that the pleaded case does not preclude the discovery of any document which, in terms of the well-known authority of Compagnie Financière du Pacifique v. Peruvian Guano Co. [1882] 11 QBD 55, it is reasonable to suppose contains information in order either to enable a party applying to advance its case or to damage the case of its adversary. This well-known rubric on occasion appears to have almost unlimited capacity to extend the limits of discovery; nevertheless I am unable to understand how the fact, currently accepted by all parties, that the Defendant banks knew nothing about what was going on can serve to assist the Plaintiff to advance its case or how it has, or can have, probative relevance in terms of what is probably the primary issue for decision, namely the state of knowledge on the part of the Plaintiff negotiating bank. Accordingly, whilst recognising the undoubted range of Peruvian Guano, I am disinclined in the circumstances of this case to look favourably upon a wide-ranging quest for documents which in my judgment have little or no probative significance in terms of the case in its present form, a view which I was constrained to express to Mr. Bharwaney during the course of the hearing.

13. Accordingly, in the exercise of my discretion I decline to accede to the present applications in the wide terms in which they are drawn, notwithstanding the refinements achieved by the amendments to the original Schedule. I did, however, invite Mr. Bharwaney to extract from his Amended Schedule such categories of documents as he considered were demonstrably relevant on the pleadings as they stood, after taking into account my rejection of the basis for his primary submission. And it was this secondary "bare bones" exercise, as Mr. Bharwaney termed it, which occupied the latter part of the hearing.

14. Pursuant to this exercise, Mr. Bharwaney formulated, on the hoof so to speak, what I understand to be the following four categories of documents: -

(i) Applications by Shinhan and/or its subsidiaries for extensions of the master letters of credit ;

(ii) Guarantees issued by Shinhan to the Defendants in connection with the issuance of the master letters of credit;

(iii) Guarantees issued by the Defendant banks to enable the release of goods imported into Korea by Shinhan and its subsidiaries under the master letters of credit including letters of release (if any) and correspondence with the carriers of such goods; and

(iv) Import licences issued by the Defendant banks to enable the import of goods into Korea by Shinhan and/or its subsidiaries.

15. So far as the relevant time frame is concerned, Mr. Bharwaney further asked for such categories of documents in respect of all master letters of credit issued between November 1990 to the end of March 1992, whether or not the subject of the particular claims in these actions, the significance of these dates being the period from the commencement of the fraud to the date of the issue of the writs in these actions. After some reflection, and after considering all the material before me, I am inclined to give Mr. Bharwaney an order in terms of the far more limited categories of documents he now seeks, although I decline his request to range over the time period sought and instead confine such discovery only to such documents generated by or in connection with the six letters of credit the subject of these actions. In this connection I note that towards the end of the hearing I suggested to counsel that I could see no reason why all documents coming into being with regard to the six particular letters of credit should not have been discovered (if indeed this has not been the case) although in this judgment of course I am responding solely to the application as made before me.

16. Mr. Robert Whitehead, who appeared on behalf of the Defendants, in the event faced a considerably truncated application, although I think it fair to record that on the face of his skeleton argument and indeed in his oral submission he had expressly opposed the original "negative inference" premise underlying the Plaintiff's application, given the absence of any plea that the Korean banks knew or ought to have known of the fraud. As matters transpired, therefore, Mr. Whitehead's submissions in opposition were brief. The thrust of his able argument was that the secondary submissions, if I can so term them, made by Mr. Bharwaney were ill-founded in that first, the essence of the fraud perpetrated was that no goods were ever actually sent to Korea, and second, that there had been no extensions to the master letters of credit, which he asserted all expired after 7th January 1992. Ergo, Mr. Whitehead submitted, by reason of the very particular circumstances of the case, and given the nature of the fraud as perpetrated, the categories of documents now requested did not exist, and therefore no discovery ought to be ordered in the terms now requested by Mr. Bharwaney.

17. If this be correct, as a matter of fact, I perceive no difficulty in his clients' formally saying so; indeed in part at least Mr. Kemp, solicitor for the Defendants, has already purported to provide some information along these lines in the evidence at paragraph 6 of his 10th affidavit dated 14th May 1997. Nevertheless in the circumstances I do consider that a valid purpose is served by the restricted Order I am now making; and moreover, I also consider that such further discovery by the Defendants should be by list verified by affidavit. I say this not because I suspect anything pernicious, but because in the context of the present applications Mr. Kemp has already had occasion, perfectly properly, to file a corrective affidavit with regard to the initial denial by his clients as to the existence of import licences. As I commented during the course of the hearing, there is a constant danger of inaccuracy in situations such as the present, where instructions are passed from clients in Korea to their Korean lawyers, and thence to the Hong Kong solicitors in charge of the case. Indeed on behalf of his clients Mr. Whitehead has already undertaken to the Court to cause to be filed an affirmation sworn by a responsible officer of his clients to depose to the matters presently contained in paragraphs 4 to 7 of Mr. Kemp's 11th affidavit dated 19th May 1997, and in paragraph 6 of Mr. Kemp's 10th affidavit dated 14th May 1997. I appreciate that such affidavit pursuant to such undertaking may overlap with the further limited discovery I have ordered, but that, it seems to me, is a minor consideration in the circumstances. I further record in this context that by reason of the undertaking offered by Mr. Whitehead, Mr. Bharwaney does not now seek an order in terms of paragraph 6 of his Amended Schedule, the only other matter outstanding in addition to the foregoing categories of documents forming the basis of his secondary submissions.

18. The Plaintiff of course will have carriage of the Order reflected in this judgment, although I appreciate that at present such Order is incomplete without any provision therein as to the costs of and occasioned by this discovery application. As to which issue, I will now hear counsel, and indeed upon any other matters arising.

(Submissions from counsel)

19. Having heard argument from counsel on the question of costs, I am tempted to the view that this particular issue is probably the most difficult in the case, given the history of the applications and their eventual result. And unsurprisingly, the parties are once again at loggerheads.

20. Mr. Bharwaney, in an attractive argument, says that he has succeeded, albeit in part only, and in the circumstances he asks for half of his costs of these applications, and resists any notion that the Plaintiff should bear any of the Defendants' costs. He submits that the first day of this hearing was not totally wasted, and that subsequently some additional discovery was obtained by consent at the meeting which took place between the parties' legal representatives. He further suggests that it would be incorrect in principle to make any order in relation to the eventual cause, and that the Court should look at these applications as a discrete entity, so to speak. He further submits that guidance may usefully be derived from the Court of Appeal decision in In re Elgindata Ltd. (No. 2) [1992] 1 WLR 1207 (CA); in particular I note the statement of general principles therein set out (at p. 1214).

21. Mr. Whitehead, to the contrary, fundamentally disagrees. He makes two broad points. He says that first, if the case had been correctly focused from the outset (which it patently was not) the applications could have been dealt within one day, and not the two that they actually took, so that the costs of the second day were effectively thrown away; in this connection he says that the interim consensual discovery took place only by reason of the better focusing of the application in lieu of that as initially drawn and in any event without acceptance that there was entitlement thereto. And second, that the applications must be looked at in the round, so that the fundamental question to be asked at the end of the day is which party can properly be regarded as the successful party? In this regard he submits unequivocally that this is the Defendants. Although Mr. Bharwaney has ultimately succeeded on a "bare-bones" secondary exercise, Mr. Whitehead submits that the reality is that the underlying analytical premise of what initially presented as a massive and extremely wide-ranging discovery application failed completely, with the result that Mr. Bharwaney was left to pick up the bits and to retrieve what he was able; to extend an already overworked metaphor, no more than "slivers" on a "bare-bones" exercise was ultimately achieved.

22. I am bound to say that my instinctive sympathies in this regard were along the lines of Mr. Whitehead's argument, although I did take the opportunity to reserve and reflect upon the issue, to consider the useful chronology submitted by Mr. Bharwaney for use in this argument, and also to remind myself of the speeches of their Lordships in In re Elgindata, op. cit.

23. At the end of the day, of course, there is always an element of broad brush about costs orders. They cannot, and indeed should not, be measured as if by micrometer, and must depend upon the Court's overall assessment of the case; and clearly, each case must depend upon its own particular configuration. I also think that there is much to be said for a global order which does not turn out to be a Taxing Master's nightmare.

24. Accordingly, after taking into account all the circumstances before me, with particular reference to the history of the applications and to the degree of success ultimately achieved in comparison with the wide-ranging scope of the applications as originally constituted, and of the underlying premise driving them, in my judgment the broad justice of the case is best served by ordering, which I now do, that the Plaintiff is to pay 50% of the Defendants' costs of these applications in any event, such costs to be taxed if not agreed.

25. Finally, may I express my thanks to counsel, and also to the solicitors involved in the case, for their considerable assistance. I hope that at this juncture I may be permitted to express the view that these cases are of some age, and that it is clearly preferable now that they should be pushed vigorously on to trial in order to achieve the resolution of the disputes which unhappily continue to divide the parties.

Representation:

Mr. Mohan Bharwaney, instructed by Messrs. Deacons Graham & James, for the Plaintiff in CL-11, CL-12 & CL-15/92.

Mr. Robert Whitehead, instructed by Messrs. Stephenson Harwood & Lo, for the Defendants in CL-11, CL-12 & CL-15/92.