Unharam Rupchand Sons (HK) Ltd t/a Far East Confirmers v. Mercantile Bank Ltd

HCCL000024/1984

C.L. No. 24 of 1984

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon. Rhind, J.

Date of hearing: 29, 30 & 31 January 1985, 1 & 4 February 1985

Date of delivery of Judgment: 15 March 1985

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JUDGMENT

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INTRODUCTION

1. The plaintiff, ("Far East Confirmers"), a company incorporated in Hong Kong, is in business here as a confirming house. Mr. Pitamberdas Udharam Melwani, (Mr. P.U. Melwani",) is the managing director of Far East Confirmers, whilst his son, Mr. Prakash Pitamberdas Melwani, ("Mr. P.P. Melwani") is one of the other directors.

2. In early 1983, Far East Confirmers had a Mr. Richard Chao ("Mr. Chao") as a client. He asked Far East Confirmers to arrange for the purchase of ten different lots of goods from manufacturers in Thailand on his behalf. The agreement between Far East Confirmers and Mr. Chao was to the effect that Far East Confirmers should purchase the goods in its own name and arrange for them to be shipped to Hong Kong. Far East Confirmers were to arrange the financing of this purchase, but, in due course, Mr. Chao was supposed to make reimbursement from the proceeds of letters of credit which he claimed were due to him, and also he agreed to pay Far East Confirmers a commission for arranging these purchases for his benefit.

3. One of the ten lots of goods to be purchased comprised 16,700 sets of leather belts, wallets and key purses. The seller of those goods was Market Holdings Co. Ltd. ("Market Holdings") of Bangkok, the total sale price being US$250,500, C. & F. Hong Kong. Another of the orders was for 15,072 items of assorted ladies clothing for a total price of US$400,092, C. & F. Hong Kong. This time, the seller was a company called Mariyos International Co. Ltd., ("Mariyos International''), also of Bangkok.

4. In April 1983, Far East Confirmers arranged with the defendant "Mercantile Bank"), its bankers in Hong Kong, for the opening of letters of credit in favour of Market Holdings and Mariyos International for the full C. & F. price under the two sale contracts I have described. Those credits were subject to the Uniform Customs and Practice for Documentary Credits (1974 Revision), hereafter referred to as "U.C.P." A condition of each of the letters of credit was to be that one of the documents to be presented under it was an Inspection Certificate, issued and signed by one of the Mr. Melwanis whose signature had to be verified by Mercantile Bank.

5. The terms of the letters of credit were telexed by the Mercantile Bank to the Bangkok Branch of the Hong Kong and Shanghai Banking Corporation Ltd. which, without adding its confirmation, advised each of Market Holdings and Mariyos International of the terms of the letter of credit opened in its favour by order of Far East Confirmers.

6. Unbeknown to Far East Confirmers, Mr. Chao was a rogue. Acting in concert with Mr. Chao, Market Holdings and Mariyos International presented forged Inspection Certificates when they operated the letters of credit with their own banks in Thailand. Market Holdings' bank in Thailand was the Siam Commercial Bank, whilst the bank of Mariyos International was the Thai Farmers Bank.

7. The goods shipped under the letters of credit turned out to be little better than junk. Instead of leather goods, Market Holdings had shipped PVC, and the ladies' clothing despatched by Mariyos International was of inferior quality, in the wrong colours, and short-shipped.

8. Having been tendered documents under the letters of credit, Siam Commercial Bank and Thai Farmers Bank (compendiously referred to hereafter as "the Thai Banks") each paid its respective customer. The Thai Banks presented the documents tendered under the credits to the Mercantile Bank, seeking reimbursement.

9. As soon as Mercantile Bank informed Far East Confirmers of the documents sent from the Thai Banks for payment under the letters of credit, the directors of Far East Confirmers realised that the Inspection Certificates were forged, and immediately made Mercantile Bank aware of this.

10. At first, Mercantile Bank refused to pay the Thai Banks on the basis the Inspection Certificates were forged, later, the Mercantile Bank changed its mind, and while denying any liability to the Thai Banks, nonetheless, proceeded to reimburse them for the full amounts specified by the letters of credit.

11. Next, Mercantile Bank proceeded to debit the account of Far East Confirmers and Far East Confirmers' other related accounts for the full amounts that it had paid to the Thai Banks.

12. By the present proceedings, Far East Confirmers challenge the right of Mercantile Bank to have made those debits, the contention of Far East Confirmers being that any payment the Mercantile Bank made to the Thai Banks was of a voluntary nature, for which Far East Confirmers have no responsibility. Although the action has been lodged by Far East Confirmers as plaintiff, it is, nonetheless, up to the Mercantile Bank, despite being a defendant, to justify debiting those accounts.

13. Four broad grounds were advanced by Far East Confirmers as to why Mercantile Bank lacked Far East Confirmers' authority to pay the Thai Banks, and hence to debit Far East Confirmers' accounts. Those four grounds are (1) the letters of credit never authorized negotiation by the Thai Banks as they were "Straight Credits" rather than "Negotiation Credits"; (2) the letters of credit were not in fact negotiated by the Thai Banks; (3) there has not been strict tender of documents under the letters of credit; and (4) the Thai Banks did not act in good faith and did not examine the documents with reasonable care.

14. That is the barest summary of what the case is about. I will now seek to outline events in more detail.

OUTLINE OF EVENTS

The applications for the letters of credit

15. There exists what is known as a "General Security Agreement Relating To Goods", made on the 30th June 1981 between Mercantile Bank and its customer, Far East Confirmers, on Mercantile Bank's standard form. Against the background of that General Security Agreement, Far East Confirmers applied for the letters of credit which have given rise to the present case. Only two out of the twelve topics dealt with by that Agreement had any relevance to the case before me, and even they were only of marginal relevance. I now set out the text of those two headings;

16. It was on the 7th April 1983 that Far.East Confirmers, using Mercantile Bank's standard form, made an application to the Mercantile Bank for an irrevocable documentary credit to be issued in favour of Market Holdings for the sum of US$250,500. I set out the text of that application in full:-

"To: Mercantile Bank Limited

Attached to that form of application were printed conditions, the only relevant parts of which were the following:-

"Except so far as otherwise expressly stated, this documentary credit is subject to Uniform Customs and Practice for Documentary Credits (1974 Revision), International Chamber of Commerce Publication No.290.

This documentary credit and the drawings thereunder are to be subject to the terms of the General Security Agreement Relating to Goods given to you."

17. That application resulted in the Mercantile Bank sending the Bangkok Branch of the Hong Kong and Shanghai Banking Corporation Limited, Bangkok a telex in the following terms, on the 7th April 1983

"Mercantile Bank Limited

Incorporated in England

Mercantile Bank Limited

Incorporated in England

18. On the 8th April 1983, the Bangkok Branch Hong Kong and Shanghai Banking Corporation wrote to Market Holdings, advising it of the receipt of Mercantile Bank's telex of the previous day, and setting out the text of that telex.

19. A similar procedure was followed when Far East Confirmers applied to Mercantile Bank on or about the 26th April 1983 for an irrevocable documentary credit for US$400,092 to issue in favour of Mariyos International. I do not need to set out the terms of this application as they are all correctly reflected in the terms of the letter of credit which Mercantile Bank issued'. There was one slight alteration in the conditions of this application, compared with the application made in favour of Market Holdings on the 7th April 1983. Whereas in the Market Holdings' application, Condition 4 was to the effect "Letter of guarantee is not acceptable", the application on behalf of Mariyos International provided in its Condition 4 "Negotiation under beneficiaries letter of guarantee for any irregularities not acceptable". I do not think anything turns on this.

20. Another difference is that whereas the inspection certificate in the earlier application was to be signed by Mr. P.U. Melwani, the later application made provision for his son, Mr. P.P. Melwani, to perform that roles.

21. I now set out the text of that letter of credit in favour of Mariyos International which was telexed to the Bangkok Branch of the Hong Kong and Shanghai Banking Corporation on the 26th April 1983.

"Mercantile Bank Limited

Incorporated in England

Mercantile Bank Limited

Incorporated in England

22. The Bangkok Branch of the Hong Kong and Shanghai Banking Corporation wrote to Mariyos International on the 27th April 1983, advising the text of the telex.

The sellers present documents to the Thai Banks

23. It was on the 24th June 1983 that Market Holdings presented documents to its bankers, Siam Commercial Bank, which purported to be pursuant to the requirements of the letter of credit. The documents presented were as follows:-

(1) A sight draft drawn on Mercantile Bank by Market Holdings for the

full amount of the credit, namely US$250,500.

24. Far East Confirmers has no complaint about that document as such.

(2) Invoice in six copies

25. That invoice has a printed address for Market Holdings crossed out, without any authentication, and the address "140 Wireless Road Kian Guan Building, Bangkok, Thailand", which is the address stipulated in the credit, has been "chopped" onto the invoice. Far East Confirmers contends that unauthenticated alteration makes the invoice discrepant.

(3) A full set of original bills of lading

26. They met the letter of credit specification that they should be "Clean on board bills of lading made out to shipper's order and endorsed in blank and marked freight prepaid and notify credit opener", but, nonetheless, failed to conform with the terms of the credit, according to Far East Confirmers, because the letter of credit forbade transhipment, whereas these bills of lading were headed "Combined Transport Bill Of Lading" which allowed transhipment.

27. As events turned out, too, the goods in fact were transhipped. Instead of being sent direct from Bangkok to Hong Kong, they were transhipped in Singapore.

(4) An Inspection Certificate which purported to be signed by Mr. P.U. Melwani.

28. That Inspection Certificate purported to be signed on behalf of Mercantile Bank, Hong Kong by one J.K. Fang, the verification taking the following form "Without responsibility on the part of the bank or the signing officer we confirm that this signature agrees with the specimen held in our files." That in fact is the standard form of verification used by the Mercantile Bank, but it is common ground that, in this instance, J.K. Fang's signature was a forgery, as was the signature of Mr. P.U. Melwani.

29. I will deal with the significance of this Inspection Certificate more fully in due course. Far East Confirmers have many complaints about it. In particular, they contend that a purported verification with the qualifying words "Without responsibility on the part of the bank or the signing officer" is no verification at all, and hence discrepant.

30. Siam Commercial Bank credited Market Holdings' current account with the Thai currency equivalent of US$250,500 on the 24th June 1983.

31. On the 23rd June 1983, Mariyos International had made a similar presentation of documents to its bankers, Thai Farmers Bank.

32. Regarding that presentation, Far East Confirmers make the same complaints as they have in relation to the documents presented by Market Holdings, and in addition, they have another complaint about the invoice, namely, that there is an unauthenticated alteration of the description of part of the goods. On the face of the invoice there is evidence that a typist has applied some white typist's paint where the words "C-01" for "Lady Scarves" appears, and typed over the top of it.

33. Thai Farmers Bank credited the current, account of Mariyos International with the equivalent in Thai currency of US$400,092 on the 27th June 1983.

The Thai Barks send the documents to Mercantile Bank

34. Accompanied by a document described as an "Export Negotiation Advice", the Siam Commercial Bank duly cent the documents to the Mercantile Bank on the 27th June 1983, by airmail. Those documents were received by Mercantile Bank on 29th June 1983. As I understood the position, Far East Confirmers had no complaint about the manner of the despatch of those documents by the Siam Commercial Bank, nor did it have any complaints about the endorsements on the draft which the Siam Commercial Bank presented.

35. By contrast, Far East Confirmers contend that the manner in which Thai Farmers Bank sent their documents to Mercantile Bank did not conform with the terms of the credit. The credit had provided "All documents are to be despatched in two sets by consecutive airmails to the issuing bank". Instead of sending the documents direct to Mercantile Bank, Thai Farmers Bank sent them through its Hong Kong agent, Philadelphia International Finance Co. - Hong Kong Limited.

36. Far East Confirmers further complains that one of the invoices has gone missing.

37. Moreover, Far East Confirmers seek to take a point about the endorsement on the draft. It was endorsed to the order of "Philadelphia International Finance Co, H.K." by Thai Farmers Bank, whereas the subsequent endorsement in favour of Mercantile Bank is by "Philadelphia International Finance Co. - Hong Kong Limited. According to Far East Confirmers, the difference between the two names makes the endorsement irregular. Mercantile Bank informs Far East Confirmers of the tender of the documents

38. By a letter dated 30th June 1983, and headed "Payment Request For Documentary Credit Bill'', Mercantile Bank informed Far East Confirmers that it had received the documents under the credit in favour of Market Holdings, and invited Far East Confirmers to examine the documents at the Mercantile Bank with a view to seeing whether they ought to be rejected in the event of any discrepancy. That letter also contained the sentence 'This bill is drawn under our DC HKM831044 and has been sent to us by the negotiating bank for payment".

39. When that letter was received by Mr. P.P. Melwani on the 1st July 1983, he immediately realised that something very odd was happening in the transaction with Market Holdings. One of the essentials for the operation of the credit in favour of Market Holdings was an Inspection Certificate, signed by Mr. P.U. Melwani, and Mr. P.P. Melwani knew that Mr. P.U. Melwani had not in fact signed any such certificate.

40. On attending at the premises of the Mercantile Bank on the 1st July 1983, immediately after receiving Mercantile Bank's letter, Mr. P.P. Melwani detected that his father's signature on. the Inspection Certificate was a forgery. Moreover, various other features of the Inspection Certificate, such as the wrong post office box and phone number in the address of Far East Confirmers, revealed that it was a bogus document.

41. On the 1st July 1983, Mr. P.P. Melwani alerted the staff of the Mercantile Bank to the fact that the Inspection Certificate was a forgery. As the Inspection Certificate also purported to bear the signature of J.K. Fang, one of Mercantile Bank's officers, Mercantile Bank immediately set about ascertaining whether his signature was forged too. The signature "J. K. Fang" on the Inspection Certificate was in purported confirmation of the signature of Mr. P.U. Melwani agreeing with the specimen held, in the files of the Mercantile Bank.

42. What transpired between Mr. P.P. Melwani and the staff of the Mercantile Bank in relation to the credit in favour of Mariyos International on the occasion of his visit to the Mercantile Bank on the 1st July 1983 is an area of factual controversy in the present case. According to the oral testimony of some of the Mercantile Bank's witnesses, Mr. P.P. Melwani enquired about the credit in favour of Mariyos International, the upshot of that being that he was handed one of the six original invoices from Mariyos Intrnational Mr P P Melwani denies that version. According to Mr. P.P. Melwani, there was no discussion about Mariyos International on that occasion, and he was certainly not handed one of the original invoices relating to that transaction.

43. The question whether Mr. P.P. Melwani was handed one of the original Mariyos International invoices on the 1st July assumed considerable significance on the issue of whether Mercantile Bank made a perfect tender to Far East Confirmers of all the documents under the Mariyos International credit. Far East Confirmers contend that they have only ever received five of the six invoices necessary for a perfect tender, whereas Mercantile Bank claims that Far East Confirmers has in fact been given the full set of six invoices. Much evidence was adduced as to whether there was a missing invoice, as Far East Confirmers contend and this is an issue with which I will deal more fully when I come to consider the topic of "discrepancies" later on in this judgment

44. It is only on this issue of the missing invoice that any findings of primary fact are called for in the present judgment. All the other controversies have to be resolved on the documents in evidence before the court.

45. Irrespective of whether the staff of Mercantile Bank actually gave Mr. P.P. Melwani one of the original invoices under the Mariyos International credit on the 1st July 1983, there can be no doubt that on 1st July 1983, Mercantile Bank sent Far East Confirmers one of its standard letters of "Payment Request For Documentary Credit Bill" in relation to the Mariyos International transaction. That letter reached Far East Confirmers on 2nd July 1983.

46. In respect of the Mariyos International credit, Mr. P.P. Melwani was the person required to sign the Inspection Certificate. As Mr. P.P. Melwani knew that he had never signed the requisite Inspection Certificate, he realised that Mariyos International must have been engaging in fraud as soon as he learned that Mariyos International had sought to operate the credit.

Far East Confirmers formally complain to Mercantile Bank of forgery

47. On 2nd July 1983, Far East Confirmers formally wrote to Mercantile Bank, complaining that the Inspection Certificate under t he Market Holdings' credit was forged, and directing Mercantile Bank to reject the payment request which had come from the Siam Commercial Bank.

48. A similar letter was sent by Far East Confirmers to Mercantile Bank on the 4th July, this time directing Mercantile Bank to reject the payment request by Thai Farmers Bank under the credit in favour of Mariyos International.

Mercantile Bank rejects the documents tendered by the Thai Banks

49. At the trial before me, it was common ground that the signatures of J.K. Fang and Mr. P.U. Melwani or Mr. P.P. Melwani, as the case may be, on the Inspection Certificates were forged. Mercantile Bank had obviously reached that conclusion by the 5th July 1983 when it sent telexes to the Thai Banks, refusing to honour their reimbursement requests on the ground that there was compelling evidence of forgery.

Far East Confirmers discover the goods were transhipped

50. Meanwhile, on the 4th July 1983, Far East Confirmers had received Arrival Notices from the shipping company, showing that the goods shipped under both credits had been transhipped in Singapore, despite the prohibition on transhipment in the letters of credit. That such tranship-ment could have occurred set the Melwanis thinking along the lines that the Combined Transport Bills of Lading tendered under the credits might not be conforming documents.

The Thai Banks continue to demand reimbursement

The Thai Banks were in no way daunted by Mercantile Bank's claim that the certificates of inspection were forgeries. Relying on the provisions of the U.C.P., the Thai Banks contended that they had negotiated the credits in good faith, having examined the documents with reasonable care to ascertain that they appeared on their face to be in accordance with the terms and conditions of the credit. I now set out the articles of the U.C.P. which may be relevant in this context:-

"Article 7

51. Besides relying on the forgery point, Mercantile Bank, at first, led Far East Confirmers to believe that there were other grounds for resisting the Thai Banks' demands for reimbursement. Based on what it had learnt from the Bangkok Branch of the Hong Kong and Shanghai Banking Corporation, Mercantile Bank informed Far East Confirmers that instead of having unconditionally negotiated the credits, the Thai Banks were merely seeking payment on behalf of the beneficiaries on a collection basis. If that were correct, the result would be that the Thai Banks were merely agents for the beneficiaries and because of the fraud of those beneficiaries, the Mercantile Bank would be justified in refusing payment. At first, too, Mercantile Bank passed on to Far East Confirmers what it had heard from the Bangkok Branch of the Hong Kong and Shanghai Banking Corporation to the effect that Siam Commercial Bank had negotiated against a guarantee from Market Holdings, a circumstance which, if true, meant that Siam Commercial Bank would have been in breach of the provision in the letter of credit: "Negotiation under beneficiaries' letter of guarantee for any irregularities not acceptable".

52. However, in subsequent telexes, the Thai Banks have asserted that they unconditionally negotiated the credits, and Siam Commercial Bank has denied that it negotiated against a guarantee.

The parent steps in

53. Mercantile Bank is a wholly-owned subsidiary of the Hong Kong and Shanghai Banking Corporation.

54. At about the end of July 1983, the Hong Kong and Shanghai Banking Corporation intervened in the dispute that Mercantile Bank was having with the Thai Banks over whether there should be payment under these credits.

55. By this stage, it had come to light that the goods shipped were either not up to contract quality or were short shipped.

56. On 5th August 1983 Hong Kong and Shanghai Banking Corporation sent a telex to the Siam Commercial Bank in the following terms: -

57. An identical telex, mutatis mutandis, was sent to the Thai Farmers Bank on the same day. Those telexes were followed up by further telexes from the Hong Kong and Shanghai Bank to the Thai Banks on the 12th August 1983. The text of the telex to the Siam Commercial Bank was as follows: -

The Mercantile Bank pays the Thai Banks

58. On 17th August 1983, Mercantile Bank paid Thai Farmers Bank the US$400,092 which it claimed under the credit in favour of Mariyos International, whilst on the 25th August 1983 it paid Siam Commercial Bank the US$250,500 under the credit of which Market Holdings was the beneficiary.

59. News of what had happened reached Far East Confirmers when they received the following letter from Mercantile Bank on the 6th September 1983: -

Mercantile Bank debits Far East Confirmers

60. As foreshadowed by Mercantile Bank's letter of 6th September 1983, Far East Confirmers' account was duly debited. That action triggered off claims by the Mercantile Bank under guarantees on behalf of Far East Confirmers and resulted in Mercantile Bank availing itself of the assets in various of Mr. P.U. Melwani's accounts.

61. The only question I have to concern myself with is whether, in principle, Mercantile Bank was justified in debiting Far East Confirmers' account. If it turns out that Mercantile Bank lacked justification, then the details of how Mercantile Bank should make restitution are to be worked out as a separate exercise, either by consent, or by some form of direction from the court as to the taking of accounts.

Mercantile Bank sends documents under the credit to Far East Confirmers

62. By a letter dated 9th November 1983, Mercantile Bank sent Far East Confirmers what it described as "the documents including the Bills of Lading relative to the two bills for your attention".

63. Far East Confirmers contend that the documents accompanying that letter included only four of the invoices under the credit in favour of Mariyos International. Far East Confirmers further contend that, previously, they had received only one other of the set of six original invoices. Thus, according to Far East Confirmers, Mercantile Bank has made a tender of one original invoice short, with the result that Mercantile Bank is disentitled from claiming reimbursement, having failed to make a perfect tender. As I have already indicated, this issue of fact is the sole one needing to be resolved on the oral evidence.

64. At the end of the Introduction, I indicated the issues that arise. I will now proceed to consider those issues.

ISSUES

1. Did the letters of credit authorize negotiation by the Thai Banks?

65. Letters of credit fall into two broad categories.

66. There are, firstly, what are known as "Straight Credits" Under a Straight Credit, the issuing bank's undertaking to pay is directed solely to the beneficiary of the credit Any bank choosing to negotiate the beneficiary's draft under such a credit will have no claim directly against the issuing bank.

67. By contrast, under a "Negotiation Credit", the issuing bank's engagement is not confined to the beneficiary alone, but extends to any bank which is the bona fide holder of the beneficiary's draft, provided also it is able to tender the documents stipulated by the credit.

68. Whether a particular letter of credit falls under the "straight or the "negotiation" classification is a matter of construction.

69. General provision (d)of the U.C.P. is to the effect that credits must be precise. In a case where a documentary credit does not indicate clearly whether it is of the straight or negotiation variety, the tendency of the courts is to resolve such ambiguity by holding the instrument to be a straight credit. See generally Benjamin's Sale of Goods (2nd Edition), Chapter 23 and in particular para's 2142 and 2149.

70. A more ambiguous form of documentary credit than the one chosen by Mercantile Bank in the present case is difficult to imagine. There are no express words which Mercantile Bank can point to for the purpose of establishing this to be a negotiation credit. The best that Mercantile Bank can do is to point to three instances where the word "negotiation" or "negotiating" is used in the credit.

71. None of those instances of the use of the word "negotiation" or "negotiating" is, in my opinion, inconsistent with the credit here being of the straight type. There is nothing to prevent a straight credit being negotiated, but the third party bank in such circumstances does not obtain any rights directly against the issuing bank. How the presence of the word "negotiation" is not necessarily inconsistent with the existence of a straight credit is illustrated by what Professor Goode has to say in foot-note 34 at p. 652 of his book Commercial Law: -

"34. The term 'negotiation credit' is unfortunately not free from ambiguity, and the U.C.P. to some extent contributes to this, for it does not define a negotiation credit but refers in General Provision (b) to the negotiation of the beneficiary's drafts as the third form of credit, the first two being payment and acceptance. The term 'negotiation credit' is thus sometimes used to denote the nature of Issuing Bank's or Advising Bank's undertaking (i.e. to purchase instead of to pay), an undertaking which may be restricted to the beneficiary, S, whilst on other occasions the term is used to indicate a commitment by Issuing Bank or Advising Bank to those negotiating S's drafts (or producing the documents without a draft) as well as to S himself."

72. On behalf of Mercantile Bank, the question was asked "why would an issuing bank bother to include a provision such as the one to the effect 'Negotiation under beneficiaries' letter of guarantee for any irregularities not acceptable', unless the issuing bank contemplated incurring some sort of liability to the negotiating bank?" According to the submission on behalf of Mercantile Bank, such a provision would be pointless, were this a straight credit. For Far East Confirmers, the answer was given that such a provision is a warning to third party banks who might be operating on a collection basis not to waste the issuing bank's time by trying to collect on the strength of a letter of guarantee. That sounded a reasonable enough explanation to me.

73. The main difficulty for Mercantile Bank was spelling out any engagement to reimburse third party banks. According to Mercantile Bank, this problem could be overcome if the word "you" was construed as, "any bank taking up the credit" in relation to the following provision in a credit: -

"On receipt of documents conforming to the terms of this documentary credit we undertake to reimburse you in the currency of this documentary credit in accordance with your instructions."

74. I regard that as a strained interpretation of the word "you" in that context. The credit was addressed to the beneficiary and I think that the word "you" means the beneficiary, with the inevitable result that this is a straight credit.

75. Both sides sought comfort from the term of the credit that there had to be an Inspection Certificate issued and signed by one of the Mr. Melwanis whose signature had to be verified by Mercantile Bank stating that the goods had been inspected and found correct and in good order. According to Far East Confirmers, that provision meant actual verification of the signature by Mercantile Bank and that in some way was supposed to be one of the indicia of a straight credit.

76. On the other hand, the Mercantile Bank argued that it seemed strange to have this provision for verification of a director's signature if the credit was just to be dealt with between the issuing bank and its customer, and such a provision seemed to presuppose that a third party would deal in the documents.

77. I took the view that this term about verification was neutral from the point of view of determining whether this was a straight credit or a negotiation credit.

78. If this was meant to be a negotiation credit, I can only say that Mercantile Bank has adopted a singularly oblique method of seeking to convey its intention

79. Why any bank should want to express itself in such an obscure way completely baffles me when there are so many well established formulae for constituting a negotiation credit which will be beyond question. The document can be explicitly headed "Negotiation Credit", and then phrases such as "freely negotiable" can be used, or perhaps better still, a clause along the lines of the one set out by Professor Ellinger at page 218 of Current Problems of International Trade Financing can be employed: -

"We hereby agree with the drawers, endorsers and bona fide holders of bills drawn and negotiated in compliance with the terms of this credit that said bills will be duly honoured on presented at our counter...."

80. As a matter of interpretation, I am of the opinion that the letters of credit in issue before me are of the "straight" type, with the result that they conferred no authority on the Thai Banks to seek reimbursement from the Mercantile Bank after negotiation.

81. I do not regard it as necessary to go into detail on an alternative argument put forward on behalf of Far East Confirmers to the effect that the credits might be interpreted as negotiation credits but restricted to negotiation by the Bangkok Branch of the HongKong & Shanghai Banking Corporation, Bangkok. I regarded that argument as bordering on the far-fetched. Clearly, the Bangkok Branch of the Hongkong & Shanghai Banking Corporation played merely the role of an advising bank.

82. By its pleadings, Mercantile Bank indicated that one of its defences would be that, by the custom of bankers, documentary credits in the form presently in issue were to be treated as negotiation credits. After hearing Mr. Boyd's eloquent argument on behalf of Far East Confirmers to the effect that there was no room for further customs in transactions where the U.C.P. applied, Mr. Rattee for Mercantile Bank, rightly, in my view, conceded that he could no longer argue the point.

83. Thus, Mercantile Bark falls at the first hurdle. It lacked authority to reimburse the Thai Banks, and must now malts restitution to Far East Confirmers for having wrongly debited its accounts.

84. In case I am wrong, though, in my conclusion that these were not negotiation credits, I will now go on to consider the other grounds advanced by Far East Confirmers as to why. Mercantile Bank should not have paid these credits.

2. Did the Thai Banks in fact negotiate the drafts under the letters of credits?

85. Unless the Thai Barks credited their customers' accounts unconditionally and without reservation prior to becoming aware of the fraud, they cannot be said to have in fact negotiated the credits, even assuming that the credits authorized negotiation.

86. Doubts arose on the part of Far East Confirmers about whether the Thai Banks had in fact negotiated the credits when Mr. Reypert the Manager of Mercantile Bank, informed Mr. P.U. Melwani and Mr. P.P. Melwani that the Thai Banks had presented the drafts to Mercantile Bank on a collection basis only He gave them the further information, too, that the Siam Commercial Bank was negotiating under a guarantee from its customer, Market Holdings. That part of the evidence of Mr. P.U. Melwani and Mr. P.P. Melwani was in no way challenged by the Mercantile Bank. There is also a telex dated 8th July 1983 from a Mr. Chubb of the Bangkok Branch of Hongkong & Shanghai Banking Corpration to Mr. Reypert to the effect that Siam Commercial Banks had advised the Bangkok Branch of the Hongkong & Shanghai Banking Corporation that the documents were negotiated under a guarantee, whilst Thai Farmers Bank had advised that they had sent the documents on a collection basis without making any advance to the drawers, namely Mariyos International.

87. In subsequent telexes, the Thai Banks assert that they negotiated the drafts unconditionally and in good faith. Siam Commercial Bank denied negotiating under a guarantee.

88. It was submitted on behalf of Far East Confirmers that Mercantile Bank carried the burden of proving that the Thai Banks had in fact negotiated the drafts. As Mercantile Bank did not dispute that, I have treated it as responsible for discharging this burden.

89. A related question is which of the parties carries the burden arising in relation to whether the negotiation was in good faith. To some extent, the issue of good faith was dealt with by the parties in the context of whether the Thai Banks examined the documents with reasonable care to see whether they appeared on their face to conform with the terms of the credit. In my view, the issue of good faith belongs more naturally in the context of the negotiation of the draft.

90. Having been prepared to swallow the camel of proving that the Thai Banks had in fact negotiated the draft, Mercantile Bank, nonetheless, strained at the gnat of having to prove good faith. I regard the issues of whether there was negotiation in fact and whether it was in good faith as virtually inseparable, and if it is correct that Mercantile Bank carries the burden of proving negotiation in fact, I think it should be equally correct that it carries the burden of showing that the Thai banks negotiated in good faith.

91. This is a case where the drawers of the bills were clearly fraudulent from the outset. In such a situation, section 29(1), and section 30 of the Bills of Exchange Ordinance, Cap. 19, come into play. I set out those sections:

"29 (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely -

92. In my view, Mercantile Bank falls within the ambit of section 30(2) as a holder who has to prove that, subsequent to the fraud, value has in good faith been given for the bills. The problem whether value has been given for a bill is, in essence, the same as whether the bill has in fact been negotiated.

93. Such evidence as has been adduced on behalf of Mercantile Bank has failed to satisfy me either that the Thai Banks in fact negotiated these credits or that they did so bona fide. The telexes from the Thai Banks, whether accompanied by Hearsay Notices or not, carried no weight with me. Far from being the type of spontaneous, contemporaneous document which justifies disregarding hearsay considerations, these were nothing better than self-serving documents purporting to describe past events, and with all the appearance of having been drafted by lawyers with an eye to future litigation. If the Thai Banks did in fact negotiate the credits and did act in good faith, then I do not think it is asking too much to expect officers from both banks to come to Hong Kong and stand up in Court to be cross-examined about what happened. Making a journey from Bangkok to Hong Kong is no big problems these days.

94. In particular, the mere assertion from the Thai Banks that they negotiated in good faith could not be unquestioningly accepted. Mercantile Bank itself raised the possibility that some of the Thai Banks' own employees might have been implicated in these frauds, and Far East Confirmers should have had the opportunity of probing that possibility through the production of witnesses from the Thai Banks at the trial.

95. Mercantile Bank itself also first raised the doubts about whether the credits had in fact been negotiated, and whether one of them was under a guarantee. Mercantile Bank has not yet satisfactorily explained how it came by its original information. Merely putting telexed denials hits evidence is simply not good enough.

96. In my view, Mercantile Bank has failed to discharge the onus of proving either that the credits were in fact negotiated or that they were negotiated in good faith. This affords another reason why Mercantile Bank was not justified in debiting Far East Confirmers' accounts for the monies that the Mercantile Bank paid to the Thai Banks.

3. were the letters of credit strictly complied with?

INSPECTION CERTIFICATE

Against Documentary Credit No. DCHKM831044

of Mercantile Bank Ltd., Hong Kong.

J.KFANG

2213

97. The Inspection Certificate tendered by Mariyos international was in identical form and bore the same date, the only difference being the description of the contract goods and the purported signatory was Mr. P.P. Melwani.

98. There is no dispute that both Inspection Certificates were forged and hence nullities.

99. If I understood Mr. Boyd correctly, he contended that the fact of these documents being nullities was sufficient of itself to justify Mercantile Bank rejecting the tender of them, even from a negotiation bank.

100. I think Mr. Boyd was wrong on that. The effect of the U.C.P., especially Articles 7 and 8(b), is that, provided there was nothing to suggest that the negotiation bank failed to examine the documents including the Inspection Certificate with reasonable care, then, so long as the documents appeared on their face to be in accordance with the terms and conditions of the credit, the Mercantile Bank, as issuing bank, was obliged to pay the negotiation bank: Gian Singh Ltd. v. Banque de I'Indochine (P.C.) [1974] 1 W.L.R. 1234.

101. Assuming the opener of the credit and the issuing bank both to be innocent of any fraud, then it is, to my mind, fair as a matter of policy, that the opener of the credit should suffer the loss due as a result of the seller's fraud. The opener of the credit was the one responsible for introducing the seller into the triangular relationship involving the opener of the credit, the seller and the bank, and the opener of the credit could always have guarded himself against the consequences of fraud by insisting on a performance bond from the seller.

102. The actual term of the letter of credit dealing with Inspection Certificates reads:-

"Inspection Certificate issued and signed by Mr. P.U. Melwani (or Mr. P.P. Melwani, as the case may be, my parenthesis) whose signature must be verified by Mercantile Bank Ltd., Hong Kong, stating that the goods have been inspected and found correct and in good order."

According to Far East Confirmers, that term is worded in such a way that only the genuine signature of the Mr. Melwani in question and only genuine verification by Mercantile Bank will suffice for conformity with the credit. That, in my opinion, is simply wrong. Provided the Certificate of Inspection appears to be signed by the Mr. Melwani named in it and provided its signature appears to be verified by Mercantile Bank, that is good enough to make the Certificate of Inspection conform with the credit for the purpose of the U.C.P.

103. In my view, both of the Inspection Certificates in the present case conform on their faces with the terms of the relevant credit, and Mercantile Bank was bound to accept them from a negotiation bank.

104. A further point taken on behalf of Far East Confirmers in relation to the Certificates of Inspection was that Mercantile Bank's prefacing confirmation of the signature with the words "Without responsibility on the part of the bank or the signing officer" was incompatible with verification. According to Far East Confirmers, a qualified verification was in effect no verification at all, and without verification, there was no compliance with the terms of the credit. I do not accept Far East Confirmers' argument as correct on that.

105. I do not think those words have any effect on the position between parties standing in the relationship of banker and own customer, as the Mercantile Bank and Far East Confirmers do here, but are included solely to forestall any contentions from third parties that they are entitled to hold the banker responsible for representations made.

106. There was a final point taken by Far East Confirmers about the Inspection Certificates. This centred on the date of the Certificates, namely June, 21st, 1983. In the body of the Certificate, it is stated that the goods were loaded on board on 21st June 1983. According to Far East Confirmers, the Thai Banks should have realized that it was impractical for the goods to have been loaded in Bangkok, Mr. Melwani to have issued and signed the Certificate, and the Mercantile Bank to have verified it all on 21st June. That should have aroused the suspicions of the Thai Banks, according to Far East Confirmers.

107. Mr. Rattee pointed out the fallacy of that line of argument. There was no requirement that Mercantile Bank had to make its verification on the very day the goods were loaded or the very day Mr. Melwani signed the Certificate. In my opinion, there is nothing about the date on the Inspection Certificate which gives rise to any reasonable suspicion that forgery had occured.

108. Despite clause 16 of the bill of lading and despite the title "Combined Transport Bill of Lading", do the bills of lading conform with the letters of credit which explicitly forbid trans-shipment?

109. The answer is "Yes", according to the Mercantile Bank, which seeks to rely on Article 21(b) of the U.C.P.

110. I Will set, out the whole of Article 21:-

111. Unfortunately for the Mercantile Bank, Article 21 appears in a group of articles under the heading "Marine Bills of Lading". After that group of articles, there then comes Article 23 which bears the heading "Combined transport documents". There is nothing in Article 23, nor elsewhere, which permits printed clauses prohibiting transhipment in combined transport documents to be disregarded.

112. Somewhat unsurprisingly, I come to the conclusion that these bills of lading carrying the heading "Combined Transport Bill of Lading" are combined transport documents and I hold that Article 21(b) has no application to them. In reaching that conclusion, I draw comfort in finding myself on the same side as Professor Goode (see his Commercial law at p. 555 footnote 60, and p. 633 footnote 212).

113. True, the bills of lading in the present case could be used where the transport was to be performed by one mode only. There is an emdorsement to that effect, which I now set out:-

"

RECEIVED in apparent good order and condition, unless otherwise stated herein, for transportation on board the ocean vessel mentioned herein or on board the feeder vessel or other means of transportation (rail or truck) if place of receipt is named on reverse side of bill of lading the goods or packages or containers said to contain goods, hereinafter called "the Goods", specified herein for carriage from the port of loading named herein or place of receipt if mentioned herein, on & voyage as described and agreed by this Bill of Lading and discharge at the port of discharge named herein or delivery at the place of delivery if mentioned herein, such carriage, discharge or delivery being always subject to the exceptions, limitations, conditions and liberties hereinafter agreed, in like order and condition at the port of discharge or place of delivery if named as the case may be, for delivery unto the Consignee mentioned herein or to his or their assigns where the Carrier s responsibilities shall in all cases and all circumstances whatsoever finally cease.

Full freight hereunder shall be due and payable by the Shipper in cash without deduction on receipt of the Goods or part thereof by the Carrier for shipment and shall be deemed to have been fully earned upon such receipt of goods. All charges due hereunder together with freight shall be due from and payable by the Shipper, Consignee, Owner of the Goods or Holder of this Bill of Lading (who shall be jointly and severally liable to the Carrier therefor) on demand at such port or place as the Carrier may require, vessel or other means, of transportation or cargo lost or not lost from any cause whatsoever.

The freight stated herein to be paid or payable has been calculated and based on the particulars of the Goods furnished by the Shipper to the Carrier. The Carrier shall be entitled at any time to open and re-classify or re-weigh or re-measure or re-value any goods, and freight shall be paid on the proper classification or the excess weight or measurement or value (if any) as the case may be so ascertained. The expenses of an incidental to re-classifying or re-weighing or re-measuring or re-valueing shall be borne by the Carrier if the classification or weight or measurement or value as furnished by the Shipper is found to be correct but otherwise such expenses shall be considered as freight and shall be borne and paid by the Shipper, Consignee. Owner of the Goods and/or Holder of this Bill of Lading, The Shipper shall, if required by the Carrier so to do, furnish forthwith on demand to the Carrier the invoice or true copy thereof relating to the Goods.

Agents signing this Bill of Lading on behalf of the Company or Line by whom this Bill of lading is issued have only the limited authority at  common law of a vessel's master signing a Bill of Lading.

Notwithstanding the heading "Combined Transport Bill of Lading", the provisions set out and referred to in this document shall also apply if the transport as described on the face of the Bill of Lading is preformed by one mode of transport only."

114. In fact, the bills of lading were filled out in the same way as if they had been ordinary ocean bills of lading. The port of loading was shown as Bangkok and the port of discharge was shown as Hong Kong. Nothing was typed in to show there was going to be transhipment in Singapore.

115. The bills of lading did conform in every respect with the term of the credit: -

"Full set original clean on board bills of lading made out to shipper's order and endorsed in blank and marked freight prepaid and notify credit opener."

116. However, as I have explained, they did not conform with the term prohibiting transhipment. Acting within its rights under these Combined Transport Bills of Lading, the shipping company did in fact tranship the goods.

117. In my opinion, the heading "Combined Transport Bill of Lading" should have operated like a red flag to warn banks that these bills of lading would not be conforming documents for a credit which forbade transhipment.

118. It was further contended on behalf of Far East Confirmers that a custom or practice exists to the effect that bills of lading headed "Combined Transport Bill of Lading" are treated as non-conforming documents where the letter of credit forbids transhipment.

119. Some evidence, adduced on behalf of Far East Confirmers, was allowed in de bene ease for the purpose of seeking to establish such an alleged practice or custom.

120. The argument which Mr. Boyd mounted so forcefully against Mercantile Bank's plea in support of a custom in its own favour served equally to destroy the custom or practice he now sought to pray in aid for his own client, Far East Confirmers. Where the U.C.P. apply, there is no scope for establishing additional customs or practices, for otherwise the essential "uniform" element would become meaningless. The documents which are accordingly ruled inadmissible are from the Plaintiff's Bundle, pages 1 - 14.

121. In view of the foregoing, I rule that Mercantile Bank should have rejected the documents tendered by the Thai Banks on the ground that the bills of lading did not conform with the terms of the credit.

(iii) Unauthenticated change of address on the invoices, packing lists, etc.

B. Alleged discrepancies in the Mariyos International credit

122. All of those particulars have been considered in the context t of whether documents strictly complied with the terms of the credit. Already, the court has, in effect, considered whether, objectively speaking, the Thai Banks could be said to have ascertained that the documents appeared on their face to conform with the credit. I see no advantage in going through the same exercise again,  since considerations of 'reasonable care', were inherent in determining whether particular documents could be said to appear on their ace to conform with the terms of the credit. I do not think that there was any duty of care on the part of Mercantile tank beyond that embodied in Article 7 of the U.C.P.

123. I have already made manifest which documents were not examined with reasonable care to ascertain that they appeared to conform on their face. Had I thought that the Thai Banks had acted with reasonable care, I would not have found the way I did in relation to the transport documents, the missing invoice, and about the direct despatch by airmail. On the other hand, because I could discern no absence of reasonable care, I found in favour of the Thai Banks' conduct in relation to the forged Inspection Certificates and their signatures, and also in relation to the unauthenticated alteration in the address of the beneficaries because I was satisfied the documents in question appeared on their face to be in accordance with the terms of the credit.

124. Having already indicated the documents which in my view were not examined with reasonable care by the Thai Banks, and having already spelt out the consequences of this in relation to Mercantile Bank's liability to Far East Confirmers, I see no advantage in exploring this topic further.

CONCLUSION

125. For the reasons set out above, I give judgment in favour of Far East Confirmers on the point in issue before me.

Representation:

Mr. Stewart Boyd, Q.C., and Mr. Edward Chan (instructed by Wilkinson & Grist) for Plaintiff.

Mr. Donald Rattee, Q.C., and Mr. Andrew Li (instructed by Johnson, Stokes & Master) for Defendant.