Wing Lung Bank Ltd v. Choi Man Kee Garment Factory Ltd and Another

HCA008485/1983

Commercial law - claim for foreign exchange loss of HK$1,368,402.46 arising from undischarged United States currency forward exchange contracts - Letters of Credit in United States currency lodged with plaintiff for amounts adequate to discharge exchange contracts on due dates if applied for that purpose - whether 1st defendant gave plaintiff contrary instructions - whether receipt of Credit Advices and subsequently letters from 1st defendant for extension of time raised estoppel in favour of plaintiff or whether letters were induced by misrepresentation - Held : 1. 1st defendant honestly believed on reasonable grounds that Letters of Credit had been applied to discharge exchange contracts 2. On facts Credit Advices did not give rise to estoppel; 3. Letters requesting extension of time were obtained by plaintiff on its former manager's misrepresentation and in the exceptional circumstances similarly failed to give rise to estoppel; 4. Plaintiff's claim dismissed : judgment for defendants  on counterclaim.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

H.C. Action No. 8485 of 1983

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BETWEEN

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Coram: Deputy High Court Judge Cruden

Date of Hearing: 3, 4, 5 and 6 October 1988

Date of Judgment: 27 October 1988

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JUDGMENT

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1. The plaintiff Wing Lung Bank Ltd. ('the Bank') in this action is suing the defendants for $1,367,232.72 together with interest from 16th June 1983 to judgment. During 1980 the parties entered into a number of forward exchange contracts under which the 1st defendant agreed to deliver to the Bank in United States dollar currency the sums payable under the contracts on the specified delivery dates. The Bank claims that in respect of 5 of the exchange contracts, the 1st defendant failed to make delivery. The Bank pleaded that to mitigate the loss caused by the 1st defendant's default, it was obliged to purchase or settle the exchange contracts, at the prevailing market rate for United States dollars and has thereby suffered loss.

2. In fact there was a sharp increase in the exchange rate between the contractual delivery dates and 16th June 1983 when the Bank acted to mitigate its loss. In the intervening period the exchange rate had risen from a low of 483.2 to a high of 741.50. The resulting loss of $1,367,232.72 was particularised as follows:

3. The Bank further claimed that the 2nd defendant, under three separate guarantees, had guaranteed on demand to satisfy all moneys owing by the 1st defendant to the Bank.

4. The defendants in their defence pleaded that the forward exchange contracts had been entered into in anticipation of the 1st defendant receiving letters of credit in sufficient amounts to discharge the amounts due on the various delivery dates. The defence further pleaded that from 11th March 1980 to 31st March 1981 the 1st defendant had lodged with the Bank for collection 35 letters of credit for collection totalling US$883,251.50. According to the defendants, the application of proceeds of these letters of credit, was more than enough to discharge the 5 exchange contracts with original contract sums totalling only US$700,000. The defendants also counterclaim for the credit balances in 5 other accounts which the Bank has refused to allow them to withdraw and which it later claimed to hold by way of set-off.

5. The 1st defendant manufactures garments for export at its factory in Kwai Chung, New Territories. Payment for the garments its exports is usually made under letters of credit expressed in United States dollars. In 1979 it moved its office from the factory to new premises at 4 Carnarvon Road, Tsimshatsui, Kowloon. The 1st defendant is the managing director of the 1st defendant. He does not speak English and is directly responsible for the factory. The 1st defendant also employed Mr. H.L. Fung, who is a fluent English speaker, as its Sales Manager. Mr. Fung was responsible for sales and managing the office. When the office moved in 1979 to Tsimshatsui, Mr. Choy remained at the Kwai Chung factory and Mr. Fung moved to Tsimshatsui, where he was the senior employee of the 1st defendant and continued to be in charge of the office.

6. Mr. Fung stated that when the 1st defendant costed quotations for overseas customers, it had to consider the affect on profitability, of any change in exchange rates between the date of the contract and the date the buyer's letter of credit could be negotiated. Before the 1st defendant moved its office to Tsimshatsui, one step it from time to time took to reduce exposure to foreign currency fluctations, was to buy forward exchange contracts from its bankers, for sums equivalent to the amounts due under pending letters of credit. During that period the defendant purchased forward exchange contracts for this purpose from the Dao Heng Bank Ltd. and the Overseas Trust Bank Ltd.

7. After the 1st defendant opened it office on the 16th Floor of the Tsimshatsui premises, Mr. Fung was visited by the then Manager of the Bank's Tsimshatsui Branch, whose offices were on the ground floor of the same building. The Branch Manager was accompanied by Mr. K.K. Yiu who was then the Manager of the Bills Department but later was to be promoted to Branch Manager. The Bank's two officers invited Mr. Fung to open an account for the 1st defendant at the Bank's Tsimshatsui Branch. He was told that the Branch was in the process of expanding its Bills Department and that in addition to handling letters of credit, it could provide forward exchange accounts to protect the 1st defendant from exchange fluctuations in respect of unnegotiated letters of credit. Mr. Fung stated that at that time the 1st defendant's accounts with other banks, were at branches no longer so convenient to the new Tsimshatsui office. A new account was opened with the Bank its Tsimshatsui Branch.

8. After the account was opened letters of credit were negotiated and forward exchange contracts purchased. There were clearly substantial export finance transactions handled by the Bank on behalf of the 1st defendant. At that stage cordial relations existed between bank and customer. Indeed, Mr. Fung and Mr.Yiu developed a personal friendship which extended to lunches, dinners and to social functions with their wives, including trips to Macau. According to Mr. Fung, he ensured that sufficient letters of credit were lodged with the Bank to meet delivery dates for the exchange contracts. He recollected being told by Mr. Yiu in about April 1981 that all exchange contracts had been met and thereafter he did not deposit any further letters of credit with the Bank.

9. Mr. Fung stated that during October 1981 he was surprised when Mr. Yiu told him that it had been ascertained, that there were still some exchange contracts undischarged. In reply Mr. Fung alleges he told Mr. Yiu that he must be mistaken as all contracts had been paid. Mr. Fung stated that during October 1981 there were a number of arguments whether any contracts still remained undischarged. Finally, Mr. Yiu appealed to Mr. Fung to supply a letter asking the Bank to extend the undischarged contracts for a longer period. After Mr. Yiu had assured Mr. Fung that the letter would only be used to show to his superiors for internal Bank purposes and would not be detrimental to the 1st defendant, Mr. Fung, on 3rd November 1981, wrote the letter produced as Exhibit P. 1.

10. Mr. Fung stated that in the letter he deliberately did not refer to any specific exchange contracts nor make the request for any particular period of time. At the bottom of the letter, in different typed lettering, there now appears references to Contract's TST-20, 26, 34, 38, 40 and 42. 1 find that these particulars were, without the knowledge of Mr. Fung, added to the letter after it came into the possession of the Bank.In 1983 two similar letters were signed by Mr. Choy on behalf of the 1st defendant. The defendants pleaded that these letters were induced by the Bank's misrepresentation.

11. The Bank called as its principal witness Mr. W.C. Wong, now its Marketing Manager but during 1980 and 1981 the deputy officer in charge of the Bills Department of the Bank's Tsimshatsui Branch. Mr. Wong's superior officer at that time was Mr. Yiu. Mr. Wong was familiar with the 5 exchange contracts most of which were initialled by him. He also was involved in dealing with the letters of credit delivered by the 1st defendant during this period for negotiation.Mr. Wong stated that after the letters of credit were negotiated, it was in most cases his responsibility to deal with the proceeds.The proceeds were applied in accordance with the instructions he received either orally or in writing from Mr. Fung or from his superior Mr. Yiu. In view of the time which had passed since the exchange contracts were signed and letters of credit negotiated, it was not surprising that Mr. Wong was often not sure whether particular instructions had been given to him direct by Mr. Fung or through Mr. Yiu.

12. Mr. Yiu did not give evidence. As the hearing progressed, it emerged that Mr. Yiu had been dismissed by the Bank. Mr. Wong stated that Mr. Yiu was dismissed in about April 1983. Under cross-examination Mr. Wong first agreed that he thought Mr. Yiu had been dismissed for failure to carry out customers instructions but went on to say that he was not very clear about the reasons for dismissal. Shortly before Mr. Yiu was dismissed, he requested Mr. Fung and Mr. Choy to accompany him to the Bank's Head Office where a meeting was held wish the Deputy-General Manager. The Deputy-General Manager pressed for payment of the undischarged exchange contracts. Mr. Fung stated that he replied that no undischarged exchange contracts remained because more than sufficient letters of credit had been lodged with the Bank to discharge by way of set-off all 5 exchange contracts.

13. Mr. Fung alleged that the Deputy-General Manager then reprimanded Mr. Yiu on the conduct of business at the Tsimshatsui Branch. Mr. Yiu was also told that even if a customer did not discharge an exchange contract on delivery date, the Tsimshatsui Branch should forthwith have liquidated the contract. Mr. Fung stated that it always been his experience with other Bank's, that when an exchange contract became overdue, it was immediately liquidated by the bank and the customer's current account debited with the balance owing in Hong Kong currency.

14. The 5 exchange contracts the subject of this action had delivery dates from 12th April 1980 to 9th June 1981. It is undisputed that the contracts were neither paid by the defendants or liquidated by the Bank on or about those delivery dates. It is common ground that the Bank did not liquidate those contracts until more than 2 years later, namely on 16th June 1983 after Mr. Yiu's dismissal. The Bank's explanation for this long delay, is that the 1st defendant by its letter dated 3rd November 1981 requested that the delivery dates be extended and that it wrote other letters on 14th March and 20th April 1983 asking for a further extensions.

15. In relation to these 3 letters Mr.Fung gave a similar explanation. According to Mr. Fung, 6 months after he had understood the exchange contracts had been discharged, Mr. Yiu asked for a letter in order to satisfy the internal requirements of his superiors. The request was made after Mr. Yiu had months earlier confirmed to Mr. Fung that no undischarged exchange contracts remained. At first Mr. Fung refused to supply a letter and only did so after Mr. Yiu assured him that it was merely for explanatory purposes and would have no harmful or detrimental affect on the 1st defendant. The fact that during the subsequent 16 months which passed before Mr. Yiu asked for a second letter, the Bank had taken no action, reinforced Mr. Fung's belief that the letter was a harmless formality.

16. To return to the evidence of Mr. Wong, he stated that the usual practice where a customer purchased an exchange contract, was that the customer would later hand in to the Bank sufficient Letters of Credit, to be negotiated in United States dollars, to discharge the contract. Mr. Fung later stated that this was the sole reason why the 1st defendant purchased the exchange contracts. Mr. Fung was also emphatic that the 1st defendant was never involved in foreign exchange speculation. He asserted that the 1st defendant did not purchase exchange contracts for speculative purposes but solely to safeguard its export contracts from adverse exchange rate fluctuations.

17. At the beginning of his evidence Mr. Wong stated that Letters of Credit were lodged by the defendant to be set-off against exchange contracts TST-15,20, 26,34, 38,40 and42. Later on being shown the defendant's letter dated 3rd November 1981, he stated that while exchange contract TST-15 had been discharged by way of set-off, at the date of that letter balances remained owing under the other exchange contracts. Mr. Wong was taken through the 35 Letters of Credit pleaded in the defence which were lodged with the Bank for negotiation. He agreed that the Bank negotiated all those letters of credit.

18. In relation to each letter of credit, 3 other supplementary documents were usually prepared. When the defendant forwarded a Latter of Credit to the Bank it was accompanied by a Bank form called a Collection Letter signed by the customer. The Bank would then forward its own letter to the Issuing Bank requesting payment and giving instructions on the disposal of the proceeds. After payment had been made,the Bank would send to its customer a Credit Advice setting out how the Bank had applied the proceeds obtained from the Issuing Bank or its correspondent.

19. The Collection Letter included a section headed "Further Instructions." In many of the Collection Letters signed by the 1st defendant this section contained the words "Contract Rate Please!" I find that this instruction was written by Mr. Fung before the Collection Letter was sent to the Bank. I further find that these words were understood by the Bank to be an instruction to set-off the Letter of Credit at the exchange rate stipulated under a then undischarged exchange contract. If there were more than one undischarged exchange contract, I accept Mr. Wong's evidence that the proceeds were progressively applied to the undischarged contracts with earlier delivery dates.

20. One of the evidential difficulties which arose, was that in some of the Collection Letters, the instruction for contract rates had been deleted, while in others no written further instruction was given. Where the further written instruction requested the contract rate and those instructions were not deleted, the number of a particular contract was later written down on the letter by the Bank. In cases where the instruction was deleted, the word "Fixed" and a particular exchange rate were also endorsed on the "Further Instructions" section. In those cases where no written instructions appeared, there were Collection Letters with an exchange contract number endorsed and others where the word "Fixed" followed by an exchange rate was written. In a few the "Further Instruction" section remained blank.

21. Mr. Wong explained what these endorsements meant and how they came to be made. Where the words "Contract Rate Please!" were not deleted the proceeds were applied to a particular exchange contract and the contract number was endorsed on the Collection Letter by a bank officer. Where no further instructions appeared but an exchange contract number was similarly endorsed, that meant the proceeds of the relevant Letter of Credit were also applied to discharge that exchange contract. Where the words "Fixed" were endorsed, that indicated that the proceeds were not applied to an exchange contract but were negotiated by the Bank at a rate fixed by reference to the then current market rate, less an in-Bank deduction. The figures following the word "Fixed" recorded that net market rate.

22. Mr. Wong explained how in practice these different alternatives arose. He stated that on receipt of a Letter of Credit and Collection Letter, he would check if the 1st defendant had any undischarged exchange contracts. If so, he would telephone the 1st defendant and inform it that there was an undischarged contract and enquire whether the proceeds of the Letter of Credit were to be applied by way of set-off. A customer might be given the choice whether to use the Letter of Credit proceeds to discharge the exchange contract at the contract rate or have the proceeds credited to its account at the current rate fixed by the Bank. If the customer nominated the contract rate that was applied but if he preferred the fixed rate, Mr. Wong then had to obtain authority to use that rate from his superior, who at the material time was Mr. Yiu.If a fixed rate were used the proceeds were not applied to discharge an exchange contract but credited direct to the customer's account.

23. The document appearing at page 25 of the Agreed Bundle is an example of a Collection Letter being received with no written further instructions and Mr. Wong endorsing it with the reference to Exchange Contract TST-40 @516.6 which indicates that the proceeds were to be applied at that contract rate towards discharging that contract. The Collection Letter at page 34 contains a similar endorsement. The majority of the endorsements which fall into this category are preceded by a Chinese character which means "Set-off". The Collection Letter at page 37 of the Agreed Bundle is an example of those where the customer's instruction that the contract rate be used, was deleted and the letter endorsed that the fixed rate of 493 was to be applied. Page 40 of the Agreed Bundle is an example where no further written instructions were given and the Bank endorsed the letter with the words "Fixed @5021". Page 52 is an example of where the Further Instructions section remained blank.

24. According to Mr. Wong, where there were no written further instructions he would also telephone Mr. Fung and enquire how the 1st defendant wished the proceeds to be applied. In the case of the Letter of Collection at page 34, Mr. Wong stated the only reason why Contract TST-40 was written by him on that letter, would have been because Mr. Fung requested that action when he enquired on the telephone. Mr. Wong further stated that on the day a Letter of Credit arrived, Mr. Fung might earlier that day have discussed current exchange rates on the telephone and indicated that he preferred a fixed rate. If that were approved then when the Collection Letter later arrived, Mr. Wong would endorse the word "fixed" on the letter and the current rate, without further reference to the 1st defendant.

25. Mr. Wong had no difficulty in explaining the Bank's usual practice in handling Letters of Credit in relation to exchange contracts and the meaning of the various endorsements on the Collection Letters. However, as his evidence proceeded he explained that while this was the usual practice, he was relying on that practice and the documents shown to him, to reconstruct what had occurred. For example, he was unable to recall in relation to specific Letters of Credit and their accompanying documents, whether he personally spoke to Mr. Fung or whether Mr. Yiu after discussing the options with Mr. Fung, then gave him the instructions. On other occasions, Mr. Wong stated Mr. Fung would personally call at the Bank and would speak either to him or Mr. Yiu. When Mr. Fung called and spoke to Mr. Yiu the latter would instruct Mr. Wong how to apply the proceeds. Again Mr. Wong was unable to recollect, in relation to particular Collection Letters, whether he received instructions direct from Mr. Fung or through Mr. Yiu.

26. There were other Collection Letters where no exchange rate instructions were given and where, according to Mr. Wong, Letters of Credit were negotiated with the Issuing Bank without any reference being made to the 1st defendant. The evidence of Mr. Wong on what occurred on these occasions was contradictory. Mr. Wong referred to the Collection Letter at page 43 of the Agreed Bundle as an example of this category. In evidence-in-chief he explained that as the Letter of Credit was to be negotiated by another Bank, that Bank would convert the proceeds from United States dollars into Hong Kong currency at its own rate. The Bank had no control over the rate in such cases and therefore did not first confer with the defendant. The proceeds were always received in Hong Kong dollars. But in cross-examination he agreed that where a Letter of Credit was in United States dollars, it was open to the Bank, when forwarding the Letter of Credit to the Issuing Bank for payment, to ask that the proceeds be paid in United States Dollars. On many occasions the Bank asked the Issuing Bank to convert the proceeds of Letters of Credit expressed in United States dollars into Hong Kong currency. However, there were also occasions where the Bank asked for the proceeds to be sent in United States dollars and payment was received in that currency.

27. Under cross-examination Mr. Wong was also unable to explain why if his evidence was correct, the 1st defendant on several occasions on the face of the Bank's records, adopted an adverse current rate rather than a better contract rate then available under existing undischarged exchange contracts. In elaboration of Letters of Credit expressed in United States dollars being converted at contract rates into Hong Kong dollars, before being credited to the defendant, Mr. Wong stated that it was the Bank's policy to pay in Hong Kong currency unless the customer specified that he wished the proceeds to remain unconverted and applied in United States currency.

28. As to some cases where the defendant adopted an adverse current rate, Mr. Wong said that it was too long ago to recollect whether he would have expressly told Mr. Fung of the difference between the current rate and the comparable contract rate. To a number of other material questions, Mr. Wong was only able to reply that he did not know the answer. In particular he was unable to state with any confidence how the 1st defendant's written instructions, requesting contract rates, came to be crossed out and fixed rates inserted.He agreed some of the alterations were made in his handwriting and could only infer that he must have received instructions from either Mr. Fung or Mr. Yiu.

29. When Mr. Fung gave evidence he informed the Court that he was no longer the 1st defendant's Sales Manager but was now carrying on his own trading business. Mr. Fung gave his evidence in English. He gave answers quickly and clearly to all the questions put to him in evidence-in-chief and cross-examination. Mr. Fung stated that when initially the 1st defendant lodged Letters of Credit with the Bank it had no forward exchange contracts. Later, on Mr. Yiu's advice, forward currency contracts were pruchased. Letters of Credit were later negotiated without any queries on rates because they were lodged against exchange contracts with their own predetermined contract rates. Mr. Fung stated that in his officehe kept lists of the amounts of the exchange contracts and the letters of credit lodged, to ensure that sufficient letters of credit were available to meet the exchange contracts by their delivery dates.

30. Mr. Fung stated that his discussions with Mr. Wong mainly related to the documents necessary to support the negotiation of the Letters of Credit. From August to November 1979 Mr. Wong also telephoned to ask whether forward contracts were to be set-off against newly lodged Letters of Credit. But Mr. Fung denied he discussed with Mr.Wong whether the proceeds were to be applied at contract or fixed current rates. Mr. Fung agreed that subsequently there were time when Mr. Wong telephoned asking how the proceeds of letters of credit were to be applied. Mr. Fung stated that his invariable reply was to ask Mr. Wong not to bother him on those matters as Mr. Yiu already knew that they were to be set-off against the exchange contracts.

31. As time went on Mr. Fung stated a close relationship with Mr. Yiu developed. By 1980 they were having lunch together 3 or 4 times each week. Mr. Fung stated that during the early period he gave instructions to the Bank on the application of Letters of Credit proceeds by endorsing them on the Collection Letters. Later as the number of contracts increased, he would often take the documents down to Mr.Yiu and instead of giving written instructions, ask Mr. Yiu to have the proceeds set-off against the exchange contracts. Mr. Fung stated that he never nominated which exchange contracts were to be discharged but relied on Mr. Yiu applying the proceeds to the earlier relevant contracts.

32. When Mr. Yiu was asked to attend to these matters he was alleged to have replied on occasions. "Oh! yes certainly, of course". Later Mr. Yiu more sharply told Mr. Fung that he did not have to be reminded what to do in detail. Mr. Yiu also at times criticised Mr. Fung for being so long winded in giving instructions, when Mr. Yiu already knew what had to be done.

33. Mr. Fung confirmed that the requests on many of the Collection Letters "Contract Rate - Please!" were in his handwriting. He stated that he continued to endorse Collection Letters with those words, when he did not deliver them personally to Mr. Yiu but had them taken to the Bank by his staff.

34. Where the words "Contract Rate - Please!" were deleted, Mr. Fung stated that was not done by the Bank in accordance with his instructions.He did not know why the Bank had later deleted his instructions. Mr. Fung could only speculate that possibly Mr. Yiu changed the instructions to give the 1st defendant more time but he was never told of that action being taken. Mr. Fung further stated that in addition to keeping his own records, he always told Mr. Choy when an exchange contract was purchased and the amount of Letters of Credit lodged against those contracts.

35. Mr. Fung stated that by the time the first of the 5 disputed exchange contracts were purchased, he was receiving less frequent telephone calls from Mr. Wong. He had already emphasised to Mr. Wong that it was unnecessary to telephone him over the application of proceeds from Letters of Credit, because Mr. Yiu had received full instructions.Mr.Fung was taken through the Bank's Credit Advice forms which were sent to the 1st defendant, after a letter of credit was negotiated showing how the proceeds had been applied.

36. Each Credit Advice, among other details, showed the exchange rate at which United States dollars payable under a Letter of Credit, had been converted into Hong Kong currency. In 29 of those Credit Advices merely an unexplained bare exchange rate is shown. Only in a few cases are other details supplied. Three Credit Advices indicate that a contract rate was used and refer to the contract number. In two cases the word "Contract" is included but there is no reference to any particular contract. Intwo other Credit Advices the word "Fixed" simply appears. Apart from these latter cases, no indication was given whether the exchange rates shown were contract or fixed rates or whether or not the proceeds were applied to discharge exchange contracts. I accept that a person with knowledge of the actual contract rates could, by comparing the contract rates with the Credit Advice Rates, ascertain whether a contract rate had possibly been used. But on the face of the majority of Credit Advices that question could not be answered with any certainty.

37. The plaintiff submitted that the Credit Advices enabled the 1st defendant to make that comparison and should have put it on enquiry when it appeared that proceeds were being converted at non-contract rates. Mr. Fung's immediate reply was that he never received the Credit Advices. The Bank did not deliver the Credit Advices to the 1st defendant's office but mailed them to the Kwai Chung factory address which was the only postal address on the 1st defendant's stationery. It was only after this action commenced that Mr. Fung discovered that the Credit Advices were received by the 1st defendant at its Kwai Chung factory. Unfortunately, when the Credit Advices arrived at the factory they were not forwarded to the Tsimshatsui office but instead forwarded to the private firm of accountants who then prepared the defendant's annual accounts.

38. Mr. Fung was the only witness called by the defendant. I found him to be an intelligent witness with an impressive command of English who appeared to have an excellent memory for detail. Where Mr. Fung's evidence conflicted with Mr. Wong's evidence I prefer Mr. Fung's evidence. I am satisfied that until Mr. Yiu raised the question of undischarged exchange contracts shortly before the 1st defendant's letter of 3rd November 1981 was written, Mr. Fung honestly believed that all of the 5 exchange contracts had several months earlier been discharged by the application of the series of Letter of Credits lodged with the Bank for collection.

39. On a number of material issues Mr. Fung gave evidence of important discussions he had with Mr. Yiu. As Mr. Yiu was not called this evidence is uncontradicted. I found Mr. Fung's evidence to be credible and convincing. I accept that Mr. Yiu did tell Mr. Fung in April 1981 that all the exchange contracts had been discharged. I also find that when Mr. Fung personally delivered Letters of Credit to Mr. Yiu and reminded him to set them off against the exchange contracts he accepted and relied on Mr. Yiu's assurance that would be done.I further find that when Mr. Fung's written instructions to apply the proceeds at the contract rates were altered by the Bank, those alterations were made without Mr. lung's authority or knowledge.

40. On these issues Mr. Fung's uncontradicted evidence is also reinforced by other evidence. Mr. Wong agreed that the Bank's normal practice when an expired exchange contract had not been discharged, was only to allow I day's grace after which the contract would be discharged by the Bank debiting the customer's account with the then balance owing. This practice corresponded with the experience of Mr. Fung when earlier the 1st defendant had similar exchange contracts with other Bank's. In any event this was the prudent course a Bank could reasonably be expected to follow when dealing with potentially volatile exchange rates.

41. The evidence of what occurred at the meeting with the Deputy-General Manager of the Bank, also reflected this practice for he reprimanded Mr. Yiu for not liquidating exchange contracts where a customer failed to discharge them on delivery date. I also find that no letters of credit were lodged with the Bank for collection after Mr. Yiu's statement that all of the exchange contracts had been discharged. I infer that if at that time the 1st defendant honestly believed there were still outstanding contracts, it would have continued to lodge sufficient letters of credit to set-off those contracts. I accept Mr. Fung's evidence that from the time of Mr. Yiu's assurance in April 1981 six months passed before Mr. Yiu on behalf of the Bank, informed him there were still 5 undischarged contracts.

42. On the evidence two difficulties which face the defendant, are the fact that it did receive the Credit Advices and that when it was informed that there remained 5 undischarged exchange contracts it signed the letters of 3rd November 1981, 14th March 1983 and. 20th April 1983 asking for the delivery dates under those contracts to be extended.

43. Dealing first with the Credit Advices, I find that these were sent to the 1st defendant shortly after each Letter of Credit was negotiated and the proceeds applied by the Bank to the credit of the 1st defendant. Clearly it would have been preferable if the Credit Advices had been sent to the 1st defendant's Tsimshatsui office but the 1st defendant's own stationery only contained the Kwai Chung factory address. I accept that Mr. Fung never had actual knowledge of the Credit Advices or their contents. However, I am satisfied that the 1st defendant had such knowledge. The failure of the Kwai Chung factory to forward the Credit Advices on to its Tsimshatsui Office was a failure for which the 1st defendant must bear responsibility.

44. Whether that failure is fatal to the 1st defendant, depends on the information contained in those Credit Advices. The majority simply do not disclose whether they were based on contract or fixed rates.If they had at the time been closely examined they would not necessarily have alerted the 1st defendant to the possibility that proceeds were not being applied to set-off the exchange contracts. In any event, in view of the 1st defendant's oral and written instructions to set-off the proceeds and Mr. Yiu's assurances that had been done, I do not consider that the 1stdefendant was obliged to compare the generally unqualified exchange rates set out in the Credit Advices with the various contract rates to confirm that procedure had been followed. I am satisfied that at the material time the 1st defendant had no knowledge of any factors which could reasonably have required it to embark on that further enquiry.

45. The letters of 3rd November1981, 14th March 1983 and 20th April 1983 constitute a more substantial obstacle. The first letter was signed by Mr. Fung on behalf of the 1st defendant in the circumstances already indicated. At the time, when Mr. Fung was aware that Mr. Yiu had internal problems within the Bank, he accepted the assurance by Mr. Yiu that the letter would not be used against the 1st defendant. Mr. Yiu made that representation in his capacity as a Manager of the Bank. The 1st defendant in reliance on that representation siged the Letter. There is no suggestion of fraud or conspiracy against Mr. Fung or the 1st defendant. The 1st defendant was clearly naive and foolish to sign the letter but the Bank is bound by its Manager's representation on the effect of the letter. I also record that the letter signed by Mr. Fung was in very general terms. It was only after it was delivered to Mr. Yiu that the Bank endorsed on the letter the particulars of the 6 exchange contracts which now appear on the letter.

46. The remaining two letters were not signed by Mr. Fung but by Mr. Choy. Both letters contained references before signature to the 5 exchange contracts in dispute. Mr. Fung stated for the letter of 14th March 1983 these details were supplied by Mr. Yiu and inserted at his request. Mr. Fung stated that Mr. Yiu again informed him that the letter was merely a formality and would not be used against the 1st defendant. Mr. Fung when giving evidence stated that after taking into account that nothing had happened in the 16 months since the first letter was supplied, he believed Mr. Yiu's representation. Mr. Fung was unaware that Mr. Choy had signed the third letter dated 20th April 1983 as Mr. Yiu apparently approached Mr. Choy direct for this letter. Mr. Choy does not speak English and Mr. Yiu would have well known that hitherto he had always dealt with Mr. Fung on behalf of the 1st defendant. The remaining relevant factor concerning the latter two letters, is that shortly afterwards at the end of April 1983, Mr. Yiu was dismissed by the Bank.

47. The Amended defence pleaded that the 3 letters were induced by the plaintiff's misrepresentation and that it would be inequitable for the plaintiff to rely on them. Counsel for the defendants also submitted that on the facts waiver and estoppel had arisen against the plaintiff. This submission was based in the allegation that the 1st defendant discharged its contractual duty, when it tendered to the Bank Letters of Credit sufficient to pay the exchange contracts by their delivery dates. The plaintiff by not applying the Letters of Credit for the purpose of the contracts had, it was submitted, deprived the 1st defendant of the benefit of those contract exchange rates.

48. Counsel for the defendants further submitted that the Bank by assuring the 1st defendant that the contracts were discharged, had deprived the 1st defendant of the opportunity of lodging further letters of credit to pay any remaining unpaid balances. In the meantime there had been a major adverse movement in exchange rates. Counsel for the 1st defendant also submitted that because of the plaintiff's prolonged delay in dealing with exchange contracts, where speed was of the essence, the contract had been held in abeyance and could now properly be treated as rescinded.

49. On these and related legal submissions I was referred for the defendants to 9 Halsbury's Laws of England (4th Edn.) 394, et. seq.on waiver; 'Chitty On Contracts' (25th Edn.) 817 on recission; Andre et Compagnie SA v. Marine Transocean Ltd. (1981) 1 QB 694; Pearl Mill Co. Ltd .v. Ivy Tannery Co. Ltd. (1919) 1 KB 78; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. (1986) 1 AC 80; and Standard Chartered Bank Ltd. v.Walker (1982) 1 WLR 1410.

50. The plaintiff principally attacked Mr. Fung's evidence and submitted that the only reasonable inference was that Mr. Yiu told Mr. Fung the current exchange rate and when that rate was adopted it was used with the 1st defendant's knowledge and authority. Further, the Credit Advices were sent and received by the 1st defendant and each Credit Advice expressly showed the rate of exchange adopted. It is common ground that the 1st defendant never objected to the contents of any of the Credit Advices. Finally, the 3 letters signed by the 1st defendant constituted an acknowledgment that exchange contracts were unpaid and requested an extension of their delivery dates.

51. On these facts, it was submitted, estopped and waiver arose against the 1st defendant and I was referred to 16 'Halsbury's Laws of England (4th Edn.) 1008 et seq. and 'Chitty On Contracts' (supra) 823 to 825. It was further submitted that in accordance with the principles set out in 'Chitty on Contracts' (supra) 951, 952 there had, in view of the 1st  defendant's written requests for extension, been no failure on the part of the plaintiff to mitigate by liquidating the exchange contracts at an earlier date. On the 2nd defendant's position as guarantor, I was also referred to Bank of India v. Trans Continental Commodity Merchants Ltd. (1982) 1 Llovd's Rep 506.

52. The relevance of the authorities cited depends, of course, on the Court's findings of fact in the unusual circumstances of this particular case. I have already found that Mr. Fung's evidence was not only credible but I have preferred his recollection of events where they conflicted with Mr. Wong's. I confirm that until October 1981when Mr. Yiu for the first time informed Mr. Fung that there remained undischarged exchange contracts, the 1st defendant believed on reasonable grounds that al1 contracts had been discharged. Letters of Credit for adequate amounts had been lodged; Mr. Fung's own records confirmed their adequacy; a relatively lengthy period of 6 months had passed since the delivery dates under most of the contracts had expired.

53. On the evidence of both parties witnesses normal banking practice, where exchange contracts were undischarged on expiration of the delivery dates, was for a Bank to liquidate the contracts without delay. I have already held that in the circumstances of this case, the delivery of Credit Advices, with their limited information on Letter of Credit proceeds, does not affect the position. I have further held that in the unusual circumstances in which the three letters were obtained by the plaintiff, including the pleaded misrepresentation, the plaintiff is also unable to rely on those letters.

54. Why the Bank allowed the contracts to remain for so long undischarged remains an enigma. The very belated action of the Bank's then manager, Mr. Yiu, to attempt to regularise the documentary position by obtaining letters from the 1st defendant in the Bank's favour, contains its own contradictions. Mr. Yiu's dismissal by the Bank as its Tsimshatsui Branch Manager, after 17 months of inactivity by the Bank ended with the final two letters being signed, provides perhaps part of the answer. If so, then the present action is open to the interpretation that it is little more than an attempt by the Bank to recover from a customer, loss caused by the actions of the Bank's own manager. However, as the evidence on the relevant issues I have already considered is clear, this is not an area into which it is necessary for the Court to enter or speculate.

55. On this Court's findings on the relevant material evidence, the plaintiff's claim fails. On the same findings the defendants succeed on their counterclaim. The plaintiff's action is dismissed. On the counterclaim there will be judgment for the defendants for the respective sums of HK$20.30, HK$110.41, US$185.76 and US$16,028.41 together with interest thereon as claimed. There will be an order nisi pursuant to Order 42 Rule 5B(6) RSC that the plaintiff pay the defendants costs to be taxed if not agreed; the order to become absolute if application to the contrary is not made within 14 days. Liberty to apply on any consequential matters is reserved.

Representation:

Miss S. Lau instructed by C.Y. Kwan & Co. for the plaintiff.

Mr. K.M. Chong instructed by Stephen Lo & P.Y. Tse for the defendants.