Petek Marketing Ltd v. Magnatek Research Ltd and Others

HCA000164/1981

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Coram: Hon. Fuad, J.

Date of Judgment: 19th March 1981

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ORDER

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1. By a writ issued on the 9th January, 1981 the plaintiff company, Petek Marketing Ltd. ("Petek") which is incorporated in England, claimed US$38,525.60 from a Hong Kong company, Magnatek Research Ltd. ("Magnatek"). The claim arose from a contract under which Petek agreed to buy, and Magnatek agreed to sell, 23,000 audio cassettes and 1,600 video cassettes, to be delivered in England. The sum claimed was the agreed contract price which Magnatek eventually received. Petek alleged that there had been a total failure of consideration or, alternatively, that the money had been paid under a mistake of fact. Further, or in the alternative, Petek claimed damages for breach of contract.

2. On the 12th January, 1981 when Petek and Magnatek were the only parties to the action, on an ex parte application, I granted a Mareva injunction in Petek's favour and made certain orders in aid of that injunction. One of the undertakings given by Petek was that they would apply for leave to add two named directors of Magnatek as the 2nd and 3rd defendants, and the Indian Overseas Bank as the 4th defendant. As regards the Bank, I ordered discovery of the amounts standing in the accounts with them of Magnatek and of the other two defendants who would be added, and of certain documents relevant to these accounts. I also restrained the Bank from making any payment or transfer out of any of the accounts, save as to any amount exceeding US$38,525.60. At the same time I made what was in effect a tracing order in respect of that sum, the proceeds of a letter of credit.

3. On a summons taken out by the Indian Overseas Bank I am asked to set aside the orders I made on the 12th January, 1981 and to discharge all the injunctions granted.

4. It is now necessary briefly to refer to the facts out of which Petek's claim against Magnatek arises. The contract for the sale and purchase of the audio and video cassettes was dated the 8th October, 1980. Petek avers that it was an express term of the contract that all the audio cassettes would be "TDK (made in Japan)" of differing, specified, playing times; and as to the video cassettes, that specified quantities would respectively be "TDK (made in Japan)", "AKAI" and "JVC".

5. On the 10th November, 1980, in accordance with the contract and on Petek's instructions, one of the London branches of Barclays Bank opened an irrevocable letter of credit, with Magnatek as its beneficiary. On the 27th November, 1980 the letter of credit was presented for negotiation to the Indian Overseas Bank (Tsim Sha Tsui Branch), together with the stipulated supporting documents. The letter of credit was stated to be subject to the Uniform Customs and Practice Publication 290. The supporting documents appeared to be the ones called for, and the Bank credited the proceeds of the letter of credit, converted into Hong Kong dollars, to Magnatek's current account with them. This account appears to have been opened in July 1980.

6. All the banking transactions between the Bank and Magnatek which could conceivably be relevant have been fully disclosed by an affirmation made by the Acting Manager of the Tsim Sha Tsui Branch. I need not go into them, except to note that the result of Magnatek receiving the proceeds of the letter of credit was only to reduce their existing overdraft with the Bank.

7. The goods ordered by Petek arrived in London on the 5th January, 1981 and after examining them, a firm of Marine Surveyors and Loss Investigators furnished a report which went into considerable detail and concluded that the goods examined bore no relation to the goods set out in the relevant shipping documentation. Put shortly, it appears that no video cassettes were to be found and none of the audio cassettes were of the brands described in the contract.

8. On behalf of the Indian Overseas Bank, it is submitted that the injunctions and orders of the 12th January 1981 should not have been granted since, in the absence of established fraud, Petek were not entitled to an injunction which would affect the disposition of the proceeds of the letter of credit. Counsel for the Bank relied on Hamzeh Malas and Sons v. British Imex Industries Ltd. [1958] 2 Q.B. 127 and Discount Records Ltd. v. Barclays Bank Ltd and Another [1975] 1 All E.R. 1071. The effect of these decisions was summarised by Lord Denning M.R. in another case cited to me, Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 All E.R. 976 where the Court of Appeal held that a performance guarantee stood on a similar footing to a confirmed letter of credit and that a bank which had given such a guarantee was bound, in the absence of fraud established against one of the parties to the underlying contract, and of which it had notice, to honour its undertaking regardless of the merits of the dispute between the buyer and the seller. Lord Denning had this to say, at page 981 -

"A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was stated in Malas (trading as Hamzeh Malas and Sons) v. British Imex Industries Ltd. Jenkins L.J. giving the judgment of this court said:

'...... it seems to be plain that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes on the banker an absolute obligation to pay, irrespective of any dispute which there may be between the parties on the question whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice.'

To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. The most illuminating case is of Sztejn v. J. Henry Schroder Banking Corporation [1941] 31 NY Supp 2d 631 at 633, which was heard in the New York Supreme Court in 1941. After citing many cases Shientag J. said this:

'It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade.'

He said that in that particular case it was different because:

'..... on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller.'

That case shows that there is this exception to the strict rule; the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment. I would in this regard quote the words of Browne L.J. in an unreported case when he was sitting at first instance. It is Bank Russo-Iran v. Gordon Woodroffe and Co. Ltd. [1972] The Times, 4th October. He said:

'In my judgment, if the documents are presented by the beneficiary himself, and are forged or fraudulent, the bank is entitled to refuse payment if the bank finds out before payment, and is entitled to recover the money as paid under a mistake of fact if it finds out after payment.'

But as Kerr J. said in this present case: '.....in cases of obvious fraud to the knowledge of the banks, the courts may preclude banks from fulfilling their obligation to third parties.' Such is the law as to a confirmed letter of credit."

The Discount Records case is referred to, and approved, by Browne L.J. at page 894 of the report.

9. I have little difficulty in accepting the argument of Counsel for Petek on the applicability of these authorities. It seems to me that once a letter of credit has been negotiated there is nothing sacrosanct about the proceeds; the Court will not then be interfering with the machinery of irrevocable obligations assumed by banks. In my judgment there was thus no impediment of the kind urged upon me in the way of making the ancillary orders in aid of the Mareva injunction. I say "of the kind urged upon me" because I am bound to say that on further consideration I doubt whether I was right in ordering the bank to disclose the state of, and the documents and correspondence relating to, the accounts of Magnatek. It seems to me that it could well be argued that nothing was said in A. and another v. C. and others [1980] 2 All E.R. 347, or in Bankers Trust Co. v. Shapira [1980] 3 All E.R. 353, that justified the orders I made, on the facts before me on the 12th January. It is true that there was ample evidence that goods ordered had not been supplied, and that payment for them had nevertheless been received, but I now question whether there was prima facie evidence of fraud "or other wrongdoing" of the kind Lord Denning had in mind when in the Bankers Trust case, he emphasised how carefully "this new jurisdiction" must be exercised.

10. All this, however, is largely academic, for although Counsel for Petek resisted the application for the discharge of the injunctions as granted, in the light of the facts revealed by the affirmation of the Acting Manager of the Tsim Sha Tsui Branch of the Indian Overseas Bank, he was willing to consent to modifications that would remove all restrictions to their handling of Magnatek's accounts. I therefore dissolve the injunction and set aside the orders made on the 12th January 1981 in so far as they make any reference to the bank. So that there can be no doubt about the matter, I confirm that nothing now remains which would prevent the bank from taking the course of action proposed in paragraph 17 of the Acting Manager's affirmation, assuming that the bank is otherwise justified in so doing.

11. The Indian Overseas Bank also asks for security for costs. Petek intend to continue to pursue their claim against the Bank, and while Counsel for Petek concedes that security will have to be given, he contends that the Bank is being unreasonable in demanding security to cover costs up to and including the trial of the action. He suggests that security up to the close of the pleadings would be sufficient. In exercising my discretion I think I can take into account the prospects, as I see them, of Petek succeeding in their claim against the Bank. I will only say that they do not seem very promising on the material before me. I consider the sum asked for by the Bank to be reasonable, and therefore order that security for the Bank's costs must be provided by Petek in the sum of $50,000. I direct that that sum be paid into Court unless the parties agree to another form of security. It will be furnished within 14 days and proceedings against the Bank are, in the meantime, stayed. The Bank will have liberty to apply for further security if circumstances so warrant.

12. I give leave to Petek to amend the writ of summons in the manner prayed in the summons taken out on the 14th February 1981, but in view of the fact that the amendments are very substantial, I am not persuaded to allow service on Magnatek to be dispensed with. Nor do I think it would be appropriate to reserve costs. I think that the appropriate order to make as regards costs, in all the circumstances is to order that -

Representation:

Mr. R. Faulkner instructed by Deacons for plaintiff

Mr. K. Kwok instructed by Wilkinson & Grist for the 4th defendant