Linna Textiles Manufacturing Ltd. v. The Hongkong and Shanghai Banking Corp.
Read the full judgment text of HCCL 133/1997 on BabelCite. This HCCL judgment.
1. This case concerns an enjoined Letter of Credit. It is also a curious case in terms of the sequence of events which has unfolded. But let me start at the beginning.
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HCCL000133/1997 HCCL133/97 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL LIST NO.133 OF 1997 ---------------
--------------- Coram : The Hon Mr Justice Stone in Chambers Date of Hearing : 10 May 1999 Date of Delivery of Judgment (adjourned into open Court) : 12 May 1999 ____________________ J U D G M E N T ____________________ 1. This case concerns an enjoined Letter of Credit. It is also a curious case in terms of the sequence of events which has unfolded. But let me start at the beginning. 2. There is before the Court for decision the Plaintiff's application, which technically it is agreed is pursuant to its summons dated 21st July 1997, to continue an injunction which was initially granted by this Court on 22nd July 1997. On that date the Court ordered :-
3. At the hearing which took place on 22nd July a short extemporary judgment was delivered simply to serve as a record of that which transpired and which, I hope, speaks for itself. The injunctive relief was granted against the Defendant Bank upon a "neither consent nor oppose" basis, the result of such Order being that an interim injunction would remain in place pending argument, which at the hearing on 22nd July was ordered to take place on 30th July 1997 at 11.00 a.m. As the Court noted in its judgment at the time, it was thought that the course adopted would accord the Defendant protection in relation to demands for payment by the Agricultural Bank of China, which was said to have negotiated the documents under the Letter of Credit in question, and to whom the Defendant felt otherwise it would have to make payment, and at the same time accord to the Plaintiff the measure of interim protection it sought for itself pending full argument upon the application. It is worth recalling that in its brief judgment the Court noted that :-
referring in this connection to Mr Fung's assertion that this was an instance of clear fraud by the beneficiary to the knowledge of the Defendant Bank, and to his citation of the well-known dictum of Ackner LJ in United Trading Corporation S.A. and Murray Clayton Ltd. v. Allied Arab Bank Ltd. and Others [1985] 2 Lloyd's LR 554 at 561. 4. The Court's judgment of 22nd July 1997 concluded with the reminder to the Plaintiff that the burden was on the Plaintiff to establish notice of fraud on the part of the Bank, and that "whether the Plaintiff will be able to discharge that burden is a matter which no doubt will be canvassed next week", by which time, of course, it was anticipated that the Defendant would have filed evidence upon its own behalf and that the substantive argument then would take place. 5. However, things did not go according to plan. By a Consent Summons dated 29th July 1997 taken out by the Defendant, the hearing of the Plaintiff's inter partes summons scheduled for 30th July 1997 was adjourned for argument to a date to be fixed, and the interim order originally granted on 22nd July 1997 was continued until the determination of the inter partes summons or until further order. At the end of July 1997 it could not, I suspect, reasonably have been anticipated that argument as to the events which gave rise to the interim injunction would not take place in fact until a further 21 months had elapsed. 6. In broad terms, what has happened is this. Subsequent to the Consent Order of 29th July 1997 the Bank appears to have engaged in an extensive dialogue with the Agricultural Bank of China as to whether Agricultural Bank of China had indeed negotiated the documents under the Letter of Credit and/or whether payment had been effected to the beneficiary thereunder, one Huaiyin Foreign Trade Corporation, which was the seller of ladies garments in the underlying sale contract with the Plaintiff buyer, and pursuant to which the Plaintiff, as a customer of the Defendant, had utilised credit lines afforded by the Bank to underpin the issuance by the Bank of the relevant Letter of Credit. 7. Such inter-bank dialogue concluded, I am bound to say somewhat inconclusively, in or about February 1998, after which in April 1998 the Defendant apparently became embroiled in litigation before the Peoples' Court in Shanghai in proceedings commenced by the said Huaiyin Foreign Trade Corporation against (somewhat oddly) both the Defendant and its Shanghai branch (albeit the latter entity was subsequently dropped from such proceedings), wherein Huaiyin as the beneficiary was seeking to enforce payment under the Letter of Credit issued by the Defendant at the behest of its customer, the Plaintiff. 8. This occurred, as I have said, in or about mid-1998, and towards the end of that year the solicitors for the Defendant, Messrs Johnson, Stokes & Master began to correspond with the Plaintiff's solicitors, Messrs M.K. Lam & Co. about the injunction proceedings remaining outstanding in Hong Kong, which of course had last seen the light of day a year or so earlier. Accordingly, by letter dated 14th September the Defendant's solicitors wrote as follows :-
9. In their reply, the Plaintiff's solicitors observed (somewhat curiously under the heading 'without prejudice') as follows :-
10. This correspondence continued in a desultory, and finally inconclusive fashion, until 8th January 1999, at which time Messrs Johnson, Stokes & Master wrote to Messrs M.K. Lam & Co. serving notice that unless the Plaintiff's Statement of Claim in this action was filed and served within seven days, they would apply to dismiss the action with costs. 11. This in turn led to the issuance by the Plaintiff of the second summons presently before the Court at this hearing, namely the Plaintiff's summons dated 9th April 1999 wherein the Plaintiff seeks leave to join Huaiyin Foreign Trade Corporation as the 2nd Defendant in this action, to have leave to file and serve a Statement of Claim pursuant to the draft annexed to the summons, and to obtain leave to serve Huaiyin out of the jurisdiction. A scrutiny of this draft (which is unsigned) emphasises, it seems to me, that the relief which the Plaintiff is really after is that against the Bank, which has now become the proposed 1st Defendant, paragraph 12 and 13 of the draft pleading averring as follows :-
Pursuant to these averments a permanent injunction is sought, seeking to prevent the Bank from effecting payment under the Documentary Credit and also for an Order restricting the 1st Defendant from debiting the Plaintiff's account with the Bank by the amount of US$115,200.00 "and/or any sum relating to the 1st Defendant's Bill with reference : BR AGBC718627WFH and drawn under DC WFH706197", this presumably being reference to a bill drawn by the Plaintiff in favour of the beneficiary under the Letter of Credit and apparently negotiated by the Agricultural Bank of China at the time of the presentation of the documents pursuant to that Credit. 12. It is also evident, albeit Mr Fung for the Plaintiff stoutly disputes this, that the case against the proposed 2nd Defendant is but faintly pleaded, in term solely of damages for breach of contract; there is, for example, no Derry v. Peek claim for fraudulent misrepresentation, and if the damages are for the loss of profit on the sub-sale, as apparently alleged, in this regard there is no condescension to particulars of any kind. Clearly, therefore, even now the Bank remains the principal target in terms of permanent injunctive relief, and from a practical viewpoint it is not hard to see why; until coerced by the Defendant, the Plaintiff has made no attempt to get on with its case, given that the interim injunction of 22nd July 1997 remained in place, thereby providing the protection sought by the Plaintiff whilst the Defendant, somewhat bizarrely, was involved in actively fending off the beneficiary's suit against the Bank in China. 13. I use the term 'bizarrely' because what I am told has happened was that, after losing an application disputing the jurisdiction of the Shanghai Court, the Defendant herein defended the case in China (a procedural approach which did not and does not apparently involve filing a Defence) without the assistance of the Plaintiff (which had never become involved) on the basis that the beneficiary under the Letter of Credit was fraudulent, whilst at the same time the Bank is taking the position in these proceedings before this Court to the effect that it has and had no clear notice of such fraud, and that the Plaintiff in this action has not discharged the heavy burden necessary to justify the injunctive relief (or, more precisely, the continuation of such relief) it is seeking. 14. Such oddities notwithstanding, however, the date appointed further to argue the summons in this Court was eventually obtained by the Defendant in early 1999. Originally the hearing date was fixed for 14th April, but upon being informed at that hearing that the trial of the Shanghai proceedings was imminent and was scheduled for 28th April, this case was then adjourned by the Court and refixed for 10th May. It now appears, however, from evidence recently filed, that the Shanghai litigation between Huaiyin and the Defendant has not achieved any finality, the Shanghai Court having invited the parties to engage in mediation in the hope that the issue could be settled in lieu of the presentation to that Court of the parties' final written submissions. 15. So it appears, therefore, that this Court now finally must grasp the nettle of this dispute, albeit some two years after it had been anticipated that the injunction issue would be fully debated between the Plaintiff and the Defendant. 16. Mr Alfred Fung, on behalf of the Plaintiff, appeared on this occasion as originally he had when the case first came before the Court on 22nd July 1997. He forcefully submitted that the beneficiary, Huaiyin, was guilty of fraud, that both the issuing bank, that is the Defendant, and the Agricultural Bank of China (which he asserted was not the negotiating bank but was acting merely as the beneficiary's agent for collection purposes) had had full knowledge of such fraud, and that the matter fell squarely within the established fraud exception as per the dictum in United Trading, op.cit. He submitted that the existing 'interim' injunction should continue to trial, and argued that it was important in the circumstances that his client should not have its account further debited if indeed the Bank (which to-date had of course been restrained by the Order of 22nd July) should elect to pay the sum allegedly due (and demanded) under the Letter of Credit. 17. Mr Fung acknowledged that his client, as a customer of the Defendant, was presently significantly in debt in the sum of in or about HK$23.7 million after having fully utilised credit lines and loans from the Bank (but without taking into account the further sum of approximately HK$1 million represented by the Letter of Credit sum of US$115,200), but nevertheless he strongly maintained that it was important that his client should be in the position of proceeding against the Bank at trial for permanent injunctive relief with the interim injunction in hand rather than to be in the position of attempting to recoup the Letter of Credit sum, if and when such was paid, in the form of damages for wrongful payment by the Bank in the face of an obvious fraud. 18. That, at least, amounted to the thrust of his argument, although I am sure that he put it rather more elegantly during a lengthy submission. At the conclusion of the argument, Mr Fung also asked for leave to amend the relief he sought, so that the prohibition against payment extended also to payment to Huaiyin Foreign Trade Corporation and not just to the Agricultural Bank of China, which in his view had rather receded into the background given the existence of the proceedings brought by Huaiyin directly against the Bank in Shanghai. 19. In response, Mr Peter Ng for the Defendant made no bones about his position, and asked the Court to dismiss the injunction in its present or, indeed, in any form. He noted at the outset the conflicts which might arise for his client in terms of the Shanghai litigation if the amendment to the relief now sought were granted in the terms suggested and if the Shanghai Court were ultimately to order payment to be made by the Bank. At bottom, however, his submission proceeded upon two clear and fundamental lines, first, that the Plaintiff had not established fraud to the required standard in order to bring itself within the well-known exception adumbrated in United Trading, op.cit., and second, that it had not established knowledge on the part of the Defendant Bank nor for that matter (and equally important) on the part of the Agricultural Bank of China, about whose role, Mr Ng noted, there had been a clear change of stance by the Plaintiff. The original application made by the Plaintiff - which had spawned the interim injunction of 22nd July 1997 - was made by the Plaintiff on the basis that Agricultural Bank of China was the negotiating bank, and in this regard Mr Ng produced a copy of the Plaintiff's original skeleton argument to make good this point; indeed, I note that in the extemporary judgment which was delivered at the time that the Court made reference to the Agricultural Bank of China "which in turn has negotiated the documents submitted to it by the beneficiary..." However, said Mr Ng, apparently this position was now disavowed, it no doubt being recognised that interference with the right of recourse by a negotiating bank dealing in good faith with a negotiation credit would serve to make the Plaintiff's argument difficult indeed. The crisp point, said Mr Ng, was that the Plaintiff should not be allowed to blow hot and cold on this issue. 20. As to the allegation of fraud on the part of the beneficiary, Mr Ng submitted that this was far from clearly established, particularly in light of evidence which had but recently come to light. The original application, he said, had as its central theme the fact that the beneficiary/vendor had sought to draw down on the credit absent delivery of the goods purchased by the Plaintiff, but the materials which had now emerged (ironically as the direct result of the Plaintiff's offer, subsequent to the adjourned hearing on 14th April 1999, to assist the Plaintiff in the defence of the Shanghai proceedings) established that it was at least as feasible - he needed to put it no higher for present purposes - that what had actually happened in this case was that there had been contact between the Plaintiff buyer and the carrier, Sea Trade International, which appeared to indicate that the beneficiary actually had delivered the goods to the wharf for shipment, thereafter presenting conforming documents, but that these goods had not been loaded onto the vessel, and that the Bill of Lading in question had been cancelled (a fact notified to the various banks) because, in the words of the Sea Trade International Certificate dated 30th April 1999, "of the quality and quantity of the goods". 21. Mr Ng observed at this stage that it was not easy to understand, in the context of a FOB contract, why there was any inspection at the wharf by the Plaintiff's inspectors at all, in particular since the packing provision under the Bill of Lading was "Shipper's Load And Seal", and he invited the Court to consider the real possibility that what was actually happening in this case was that the underlying contractual dispute between the buyer and seller was wrongly intruding into the mechanism for payment provided for under the Letter of Credit. These matters, he submitted, were a powerful antidote to the Plaintiff's allegations of fraud. 22. In response, Mr Fung asserted that the Certificate in question assisted his case, because it revealed a request by Huaiyin to obtain the Bill of Lading in advance of actual shipment, albeit the garments the subject of the sale did appear to have been delivered to Sea Trade. He also drew the attention of the Court to the apparent inconsistencies between this version of events and a previous letter from Sea Trade which was earlier exhibited, and he invited the Court to embark upon a detailed examination and correlation between the garment category numbers in the Letter of Credit when compared with those appearing on the Bill of Lading and those apparently inspected by the Plaintiff's inspectors. 23. With respect, this seems to me to represent precisely the type of detailed forensic exercise upon which the Court should not be invited to embark in cases of this sort. The evidence is necessarily imperfect, on both sides, and the Courts, in this and other common law jurisdictions, have said time without number that, subject always to the fraud exception when both the fraud and the notice thereof are as plain as a pikestaff, that interference with the autonomy of Letter of Credit transactions will not be entertained, with the disruptive knock-on effect of such interference upon international commerce. I repeat this principle again today, and for this purpose I have taken the opportunity to adjourn the delivery of this judgment into open Court. 24. Indeed, I venture to suggest that this case has epitomized the nature of such disruption - the Agricultural Bank of China has not had its demands for the payment met, and there have been extended proceedings in Shanghai into which the present Defendant has been drawn. And all as the result of an interim injunction, which I note that the Bank invited the Plaintiff to apply for at the time and to which neither consent nor objection initially was made; thereafter, and further compounding the problem, such interim injunction was not then fully debated at the earliest opportunity one week later as was appointed. 25. Practitioners in Hong Kong dealing with Letters of Credit (and in the present context I refer not only to private practitioners but also to in-house legal representatives) should once again be reminded - if in the quintessential city of international commerce such reminder be necessary - that it will only be in the most exceptional case that the Commercial Court will interfere with one of the key mechanisms of international trade, and that unless the accepted fraud exception can quickly and clearly be made out, any such injunction application is doomed to failure. 26. From the foregoing it will, I think, be clear that I have decided to discharge this injunction, and in the circumstances it remains a matter of surprise (and concern) that the summons was not promptly restored and that the Court has only now had the opportunity to hear the inter partes debate. 27. Upon reviewing the evidence, I think that Mr Ng is correct in his two main submissions, both as to the Plaintiff failing in the discharge of its residual burden as to the fraud itself (notwithstanding Mr Fung's efforts to reverse that burden and to place it on the shoulders of the Defendant), and as to the issue of notice on the part of the Banks, notwithstanding the inconsistent and curious position in which the Bank finds itself in the Hong Kong and China proceedings respectively. 28. I am also of the view, in this particular case, that it is not open to the Plaintiff now to change course and assert that Agricultural Bank of China was not the negotiating bank, when it had approached the case initially on the basis that it was. Nor, with respect, do I understand why the Defendant Bank permitted itself such an extended correspondence on this point with Agricultural Bank of China. In its recourse to the Defendant as issuing bank, Agricultural Bank of China certified its negotiation of the documents under the credit, and if and in so far as Agricultural Bank of China has not clarified whether it has actually effected payment to the beneficiary, Huaiyin, pursuant to such negotiation, that seems to me, in substance, not to be determinative - the process of negotiation produces enforceable obligations, which may or may not have been met in terms of actual payment. Moreover, in terms of the current state of play, Mr Ng has told the Court that the demand from Agricultural Bank of China remains outstanding, his client having issued no notice of rejection of the documents on the basis of non-conformity. 29. It is also abundantly clear, lest the obvious be overlooked, that if at trial it should transpire that the Bank has made wrongful payment - if, indeed, in the present circumstances it actually does so, Mr Ng having told the Court that he has no instructions about the Bank's position if the injunction be now raised, and that presently his only instructions are that payment will be made by the Bank if so ordered by the Court in Shanghai - then damages are themselves an adequate remedy, and that the Bank is good for the money. I appreciate, of course, that the raison d'être of the fraud exception is that instruments of international commerce should not be used as instruments of fraud, but that serves to emphasise the requirement that both the fraud and notice thereof should be abundantly clear, and that, absent such clarity, no injunctive relief should be contemplated, precisely because damages do indeed provide such alternative remedy. 30. However, in the particular abnormal circumstances of this case, the Bank subsequently having become embroiled in the Shanghai litigation, and not apparently having taken active steps to restore this summons until the end of 1998 or the beginning of 1999, Mr Ng's other major point to the effect that the law requires a Plaintiff who has obtained an injunction on an interim basis to proceed with the action with due diligence, failing which the Court is entitled, on that ground alone, to discharge the injunction, perhaps does not figure as large as it might otherwise have done. In this connection, he has drawn my attention the observations of Hoffmann J. (as he then was) in Newsgroup Newspapers Ltd. v. The Mirror Group Newspapers (1986) Ltd. [1991] FSR 487 at 490, wherein the learned judge observed :-
31. Whilst the foregoing is undoubtedly true, in the present case it is fair to say that the Bank has, as Mr Ng puts it, arguably been "overconscientious" in its efforts upon its customer's behalf in both Hong Kong and in Shanghai, with the result that I am disinclined in the present circumstances to treat the Plaintiff's inaction since the obtaining of the initial injunction as attracting the degree of criticism as would otherwise have been the case. Indeed, in the peculiar circumstances prevailing Mr Ng accepts that this is not his best point, and although I have not ignored it, I have not accorded this principle the significance that in more normal circumstances would undoubtedly have been the case. 32. At the end of the day it is clear that the real dispute which should be ventilated is that between the buyer and the seller in terms of their contractual relationship for the sale and purchase of these garments. It is equally clear that up to now the Plaintiff buyer has taken the view that its cause is best served if this underlying transaction can be sidestepped, and it is able to prevent payment under the Letter of Credit. In this regard, Mr Ng has told me that it is the seller's case in Shanghai that it has shipped the goods and properly presented the documents for payment, whilst there is also no evidence before the Court that there has been any inquiry or confrontation made by the Plaintiff with Huaiyin as to the alleged fraud and the non-shipment of the goods in question. 33. Against this factual background, therefore, this Court views with some reservation the Plaintiff's apparent desire - now manifested by its summons to amend dated 9th April 1999 - that the Plaintiff do have leave to join Huaiyin Foreign Trade Corporation to this action; as earlier indicated, at present the case against Huaiyin is but faintly pleaded. However, Mr Ng does not object to the application as such, and if and in so far as the Plaintiff wishes to proceed with the Statement of Claim in its present form (which I suspect was drawn in contemplation that the interim injunction would continue) I grant leave in terms of paragraphs 1, 2 and 3 of the summons. However, given the absence of any proper affidavit, the necessity for which has been overlooked, I am unable to deal with paragraphs 4 and 5, which deal with the obtaining of leave to serve Huaiyin out of the jurisdiction, and the time for acknowledgment of service. Accordingly, I adjourn these particular matters for the Plaintiff's further consideration. 34. Turning now to my Order on the injunction summons, after taking all the evidence into account, together with the extensive and useful skeleton arguments provided by both Counsel, and after considering also the balance of convenience, in the exercise of my discretion and for the reasons given I dismiss the Plaintiff's application for injunctive relief pursuant to its summons dated 21st July 1997. 35. I will hear Counsel on the question of costs upon each summons, and as to any further directions as may be required. [Submissions from Counsel] 36. I have now had the advantage of hearing from Counsel on the matter of costs upon each of the summonses. So far as the Plaintiff's summons for leave to amend is concerned, that is, the summons dated 9th April 1999, I agree with Mr Ng that the Plaintiff is really seeking an indulgence to amend and file out of time, and in my view Mr Ng is right when he says that the Defendant is entitled to its costs of and occasioned by this summons. Such costs are to be paid in any event, and are to be taxed, if not agreed. I so order. 37. This then leaves the issue of costs of the main event before the Court, which was the injunction summons. I note in this context that the costs of the appearance on 22nd July 1997, and also in terms of the consent Order of 29th July 1997, were reserved. Mr Kam, who appeared on behalf of the Plaintiff this afternoon for the purposes of delivery of judgment, points out that the initial interim injunction was obtained in effect by the Plaintiff at the invitation of the Bank, presumably because the Bank, having established that the documents submitted by the Agricultural Bank of China to be conforming, took the view that it had no option but to pay unless restrained by the Court. Mr Kam has asked for costs in the cause; to the contrary Mr Ng wants his costs. He also invites the Court to consider an Order for an immediate taxation and payment. It may be that the form of the costs order will reflect the factual curiosity of this case, and I think that the answer is probably represented by a middle course. In the circumstances of the case I make the following Order : 38. As to the costs of incurred by the hearing on 22nd July 1997, and of the Consent Summons of 29th July 1997, I make no order to costs. However, in terms of all other costs, in particular the costs of the argument before this Court on 10th May 1999 and today's costs, such costs are to be paid by the Plaintiff to the Defendant in any event, to be taxed if not agreed. 39. With regard to consequential directions, Mr Kam tells me that he is anxious to get on with the case. I am pleased to hear it. However, he recognises that he has difficulty because at the moment he has sought to draw in Huaiyin as 2nd Defendant, and presently his tackle is not in order. Mr Ng says that he has no great interest, one way or the other. I do not want the situation to arise whereby in terms of procedural sequence one of the Defendants is likely to be far ahead of the other, and I direct that if and when the application is made to serve Huaiyin out of the jurisdiction, that the Plaintiff's solicitors correspond with those acting for the Defendant with regard to agreeing directions for the future conduct of this case, both in terms of pleadings and discovery; absent such agreement, the Court will of course make the directions necessary. 40. That being all for this afternoon, I thank the parties for their assistance.
Representation: Mr Alfred K.C. Fung, inst'd by M/s M.K. Lam & Co., for the Plaintiff (on 10th May 1999) Mr A. Kam of M/s M.K. Lam & Co., for the Plaintiff (on 12th May 1999) Mr Peter Ng, inst'd by M/s Johnson, Stokes & Master, for the Defendant |