Lee Ngai Tak t/a Co Trading Co and Another v. Amorn Supplies Ltd and Another

HCA004756/1982

Headnote

Letter of Credit - forgeries of documents under L.C.s - position of Issuing Bank and Paying Bank and liability of other innocent parties.

BETWEEN

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Coram: Hon. Mr. Justice Mayo in Court

Date: 18 June 1982

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DECISION

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1. This is an application by way of inter partes summons for the continuation of an ex parte injunction I granted on the 5th June, 1982 by which it was ordered that the 2nd defendant was restrained from paying to the 1st defendant through its agent the Bangkok Bank Limited any amount under a Letter of Credit dated the 8th April, 1982. The facts are mainly undisputed. On the 30th October, 1981 the 2nd plaintiff entered into an agreement and indemnity with the 2nd defendant Clause 5 of this agreement is important for the purposes of this application as it is of relevance in governing the relationship between the parties. Clause 5 reads as follows :

"We agree that neither you nor your officers nor your agents nor any other person, firm or company who shall make any payment or accept any Bill of Exchange in consequence of any such credit shall incur any liability beyond seeing that the drafts and documents purport to comply with the terms of such credit and in particular but without in any way limiting the foregoing neither you nor any such officer, agent, person, firm or company shall be responsible for :

It is pertinent to observe that there is no direct contractual relationship between the 1st plaintiff and the 2nd defendant at all.

2. The 1st defendant entered into a sales contract with the 1st plaintiff on the 23rd March, 1982. This sales contract was made between the 1st plaintiff as buyers and a Mr. C.F. Kwok as agent for the 1st defendant as sellers of "approximately 0.375 carats or about 225 pieces of blue sapphires for the price of US$500 per carat cost and freight Hong Kong". It was further agreed that shipment should be on or before the 15th May, 1982 by air from Bangkok to Hong Kong after receipt of a letter of credit and upon terms and conditions referred to. On the 1st April, 1982 the 1st plaintiff applied to the 2nd plaintiff to open an irrevocable documentary credit and the 2nd plaintiff agreed to this. In turn the 2nd plaintiff opened an irrevocable letter of credit with the 2nd defendant dated 8th April, 1982 for the account of the 2nd plaintiff in favour of the 1st defendant as beneficiary covering the shipment I have referred to. Various conditions were imposed in the Letter of Credit and it is important that these should be set out in full. They read as follows :

Re. our brief cable dated the 6th April, 1982. Open out irrevocable L.C. No. 18426 amount US$62,500 in favour of Amorn Supplies Limited of 52/3 Poon Road, Silom, Bangkok, Thailand, account of Burfield National Finance (H.K.) Ltd. Yat Fung Building, 34-36 D'Aguila Street, Room 501, Hong Kong. Expiry for negotiation 15th May, 1982. Available by beneficiary draft at sight on accountee account Camery Trading Co. (Hong Kong) for 100% of invoice value together with following documents. Signed invoice in quadruplicate. Packing list showing item by item with weight in quadruplicate, Clean air waybills consigned to our order notify accountee marked 'freight prepaid' and mentioning this L/C No. dated not later than 10th May, 1982. Beneficiary to telex accountee advising flight number, carrier, quantity of goods and shipment date three days before shipment for prior approval. A certificate to this effect is required in duplicates. This L/C is valid for negotiation only when accompanied by an inspection certificate issued and signed by Camery Trading Co., Hong Kong and countersigned by B.N. Finance Corporation (Hong Kong) whose specimen signatures are to be followed by airmail and form an integral part of this credit satisfying that quality and quantity of goods have been inspected in good order and perfect condition and packages had been duly seen by Camery Trading Co. covering shipment of 125 carats (75 pieces) of blue sapphire at US$500 per carat C & F Hong Kong shipment from Bangkok Thailand to Hong Kong. Partial shipments allowed transhipment prohibited, special instruction quantity and value 5% more or less are acceptable. Insurance is to be covered by buyer. Documents must strictly comply with the terms of this credit and guarantee against any discrepancy is not acceptable. In reimbursement we will remit the net proceeds to the negotiating bank upon receipt of documents in compliance with terms of this credit. This credit is subject to ICC PUB 290."

On the 24th April the terms of the letter of credit were with the agreement of all parties amended and the latest shipment and expiry dates were extended to the 25th May, 1982 and the 30th May, 1982 respectively and the amount of the credit was increased by US$125,000 covering the additional shipment of 250 carats (150 pieces) of blue sapphires at the same price per carat.

3. For the time being, nothing further was done by the 1st and 2nd plaintiffs. On the 18th May the 2nd plaintiff was advised by the 2nd defendant that Cathay Pacific Airways were shipping the goods to Hong Kong. Obviously this came as a great surprise to the 1st and 2nd plaintiffs on account of the terms and conditions I have quoted from the Letter of Credit. No inspection letter had been issued or signed by either of them. On the 20th May the 2nd defendant supplied to the 2nd plaintiff photocopies of the following documents which the Bank of Bangkok on behalf of the 1st defendant had transmitted to the 2nd defendant:

I have taken this description of the documents from the statement of claim. What is clear is that the document described as the "Certificate of approval for shipment" and the "Inspection Certificate" were forgeries. The contents of the other two documents were deliberately false and misleading. The 1st and 2nd plaintiffs promptly made a report to the police. Police enquiries are proceeding.

4. On the 28th May, 1982 the 1st plaintiff wrote to the 2nd defendant instructing them to refuse acceptance of the document sent to them by the Bank of Bangkok and to refrain from making any payment of the amount of any part of US$195,000 and to advise the Bank of Bangkok to this effect. The 2nd plaintiff wrote a similar letter to the 2nd defendant on the same day.

5. The 2nd defendants have consistently refused to comply with the requests made by the 1st and 2nd plaintiffs. Hence the necessity for the injunction.

6. Exhibited to a recent affirmation filed by a representative of the 2nd defendant is a copy of a communication they received from the Bank of Bangkok dated 12th May which refers to the transaction and which certifies that all terms and conditions of the credit have been complied with and that they have endorsed the amount of the drawing on the original credit. There was a further endorsement to the effect that there is a request for the proceeds to be remitted to the Chase Manhattan Bank in New York for credit of an account. Unfortunately as one would expect in a situation of this nature it would appear that the Bank of Bangkok have applied the proceeds to the 1st defendant or his order and accordingly it is virtually inevitable that the Bank of Bangkok will make application to the 2nd defendant for reimbursement.

7. At this stage it is necessary to have regard to the position the Bank of Bangkok finds itself in. It was the Banker for the 1st defendant. After negotiating the draft it became a Holder in due course. It is clear from Article 9 of the Uniform Customs & Practice which I will be referring to that all Banks only deal with documents at their face value. The commentary on paragraph (f) on page 17 of Bankers Documentary Credits by F.M. Ventris, Lloyds of London Press Ltd. 1980 is of some assistance. It reads :

"The paying Bank, other than when it is also the issuing Bank, does not, according to the Rules, have to ensure that the payment is made in accordance with the terms and conditions of the 'credit' but only that payment is made only against documents which on their face appear to be in conformity with the terms and conditions of the 'credit'"

8. There seems to be little doubt that the Bank of Bangkok would succeed in any claim it made against the 2nd defendant.

9. In deciding whether to grant this application the plaintiffs will have to establish that they have an arguable case at law. It is only if they establish this that a court then goes on to consider the balance of convenience. Mr. Ip who represented the 1st and 2nd plaintiffs argued at some length that as two of the documents which he referred to were forgeries the terms of the letter of credit had not been complied with. He argued that the Uniform Custom and Practice for Documentary Credits (1974 revision) was applicable. He did however accept that Article 9 did restrict the liability of Banks. Article 9 reads as follows :

"Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or the general and particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented thereby, or for the good faith or act and or omissions, solvency, performance or standing of the consignor, the carriers or the insures for goods or any other person whomsoever."

He did though refer to page 132 of the Law of Bankers Commercial Credits by H.C. Gutteridge and M. Megrah, 5th Edition under the heading 'Forged or False Documents'. The passage he referred to reads as follows:

"It may happen that the documents, or some of them which are tendered to the banker under a commercial credit are forged or false in the sense that they wrongly describe the goods. The questions which arises in such cases cannot be solved by the application of any general rule, but must be determined in accordance with the circumstances in which such tender is made; but in all probability whether the documents are forged or false would, per see, make no difference unless the issuing bank was aware of the fact at the time it was called upon to pay (Uniform Customs Article 9). If to the knowledge of the bank the beneficiary was responsible for the forgery or falseness the bank could refuse to pay. The intervention of a bona fide third party such as an negotiating banker without such knowledge could, however, render the issuing banker liable to him."

Mr. Ip went on to argue that as the 2nd defendant had received notice of the irregularities it was its duty to protect its customer. He also suggested that on the evidence available it was clear that payment had not been made by the issuing bank, that is the 2nd defendant. I accept that this may be true. However it overlooks the fact that undoubtedly the Bank of Bangkok will have a right of action against the 2nd defendant and it is virtually certain that in due course legal proceedings will be taken against the 2nd defendant unless it reimburses the Bank of Bangkok in accordance with the terms of the letter of credit. Mr. Ip cited at some length the case of Grand Power Limited v. Man Sun International Corporation Limited and anor.⁽¹⁾ . This case was heard by Mr. Justice Liu. Mr. Ip placed particular reliance upon a passage appearing on pages 4 and 5 of Mr. Justice Liu's judgment which reads as follows :

"Counsel for the 1st defendant bowed to the general rule that a financial institution such as the 1st defendant was concerned only with documents and not with goods. It was further conceded that when a financial institution such as the 1st defendant was sought to be restrained from making payment under a letter of credit at the instance of a buyer, established or obvious fraud on the part of the seller must be shown to justify the drastic departure from the bank's strict obligation to honour its letter of credit commitment. Counsel laid before the court with great tenacity the different guidelines applicable to the relationship between the banker and the seller in his capacity of a beneficiary in a letter of credit transaction. Dealing with a seller beneficiary, the banker's right to refuse to honour a draft was not limited to the beneficiary's own established or obvious fraud; suffice it for him to raise an arguable case of fraudulently completed documents brought about by a third party alone."

It is though necessary to see Mr. Justice Liu's judgment in its correct context. The observations he makes are mainly pertinent to immediate parties to the letter of credit. It is necessary to take cognisance of the situation in the present case where a bona fide third party, namely the Bank of Bangkok, has intervened and whose interests have been prejudiced.

10. The important point which emerges is whether the irregularities which have been referred to are manifest on the face of the document. Clearly they are not. This being the case the 2nd defendant would have had no reasonable means of ascertaining that a fraud had been perpetrated. Mr. R. Wong who was representing the 2nd defendants referred me to the case of Discount Records v. Barclays Bank⁽²⁾ where a similar situation had prevailed. Mr. Justice Mcgarry expressed the opinion that the claim for an injunction in that case was misconceived. At page 319 of the report on that case he had this to say :

"Somewhere there is a bill of exchange which has already been accepted by the Discount Bank. This bill may well have been negotiated; it may indeed have passed into the hands of a holder in due course. That bill will be presented for payment and the Discount Bank is bound to pay it on the 20th July. The Discount Bank will then debit Barclays Bank S.A. Barclays Bank S.A. will then debit the 2nd defendant and the 2nd defendant will then debit the 1st defendant.

The injunction against the two defendants, if granted, would not achieve Mr. Pain's avowed purpose, which was to prevent Promodisc from being paid. Promodisc indeed may already have obtained payment by discounting a bill. All that the injunction would do would be to prevent the bank's concerned from honouring their obligations."

Further on in the judgment at p. 320 Mr. Justice Megarry had this to say concerning the policy which should be adopted by the courts towards banking transactions.

"I would be slow to interfere with bankers' irrevocable credits, and not least in the sphere of international banking, unless a sufficiently grave course is shown; for interventions by the court that are too ready or too frequent might gravely impair the reliance which quite properly is placed upon such credits."

While I had every sympathy for the predictment in which the 1st and 2nd plaintiffs find themselves I am satisfied that Mr. Ip has not made out either an arguable or a prima facie case that the injunction which was granted should be continued. This being the case this application must fail. I therefore discharge this injunction and order that the 2nd defendants are entitled to their costs.

(1)    Unreported. High Court Action No. 6369 of 1981

(2)    (1975) 1 W.L.R. page 315

Representation:

Mr. Ip (John Ip & Co.) for plaintiff.

Mr. R. Wong (Wat & Co.) for defendant.