Sinom Shanghai Import & Export Co Ltd v. Exfin (India) Mineral Ore Co Pvt Ltd
Read the full judgment text of HCCT 45/2006 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 19 June 2006 before Mr Recorder K Kwok SC in Chambers.
Construction and Arbitration Proceedings — Contract for sale of iron ore between Shanghai plaintiff and Indian defendant — Payment by irrevocable, freely negotiable letter of credit issued by Standard Chartered Bank with Bank of Baroda as negotiating bank — Plaintiff sought injunction restraining defendant from drawing proceeds of letter of credit — Court examined principles from United City Merchants restricting bank’s obligation to documents and fraud exception — Fraud not established on facts — Jurisdiction assumed but not decided — Injunction refused due to lack of risk of dissipation and absence of plaintiff's asset or presence in Hong Kong — Court rejected plaintiff’s novel contention that money becomes defendant’s upon issuing bank’s decision to pay — Compensation and costs awarded to defendant for losses from injunction — Application for stay of discharge refused. This case underlines the critical treatment of documentary credits as transactions based on documents, not underlying goods, and confirms the stringent test for restraining payment or dealing with proceeds where no fraud or risk of dissipation is shown. The defendant’s assured right to payment was preserved, and injunction was discharged accordingly.
Legal issues: Fraud Exception to Bank’s Obligation under Documentary Credit · Jurisdiction to Grant Injunction Against Defendant · Whether Injunction Should Restrain Defendant from Dealing with Proceeds of Letter of Credit · Whether Letter of Credit Payment Creates Defendant's Money and Courts Can Restrain Defendant's Use
Outcome: Order granting injunction dated 29 May 2006 discharged; Plaintiff to pay compensation for losses caused by injunction plus costs payable forthwith; inquiry to be held into amount of losses.
Cited by 1 case · Cites 3 cases
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HCCT 45/2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 45 OF 2006 ____________ BETWEEN
____________ Before: Mr Recorder K Kwok SC in Chambers Date of Hearing: 12 June 2006 Date of Reasons for Judgment: 19 June 2006 __________________________________ REASONS FOR JUDGMENT __________________________________ The applications and the Order made 1.By an Order dated 29 May 2006, Reyes J granted the following injunction against the defendant:-
2.By summons dated 30 May 2006, the plaintiff applied to continue the injunction. By summons dated 1 June 2006, the defendant applied to discharge the injunction. Both summons came before me on 12 June 2006. After hearing counsel for the parties, I formed the clear view that the injunction should be discharged and not be continued. At about 4 pm I pronounced my judgment to discharge the injunction and said that reasons for my judgment would be handed down. Mr John Kerr, counsel for the plaintiff, applied for a stay of the discharge of the injunction pending the plaintiff’s appeal. As I was clearly of the view that the injunction should be discharged, I declined to grant a stay of the discharge of the injunction pending appeal. However, I was prepared to preserve the position to give the plaintiff time to apply to the Court of Appeal. 3.I made the following Order:-
4.Reasons for my judgment follow. The background 5.The plaintiff is a Shanghai based company carrying on the business of, inter alia, iron ore trading. The plaintiff does not carry on any business in Hong Kong and makes no allegation that it has any asset in Hong Kong. 6.The defendant is an Indian business carrying on the business of, inter alia, trading and exporting of iron ore. The plaintiff makes no allegation that the defendant has any presence or asset in Hong Kong. 7.By a contract dated 4 January 2006 the defendant sold and Sinom (Hong Kong) Ltd, an associated company of the plaintiff, purchased iron ore. There is no complaint about this transaction. 8.By a contract dated 9 March 2006 as amended by an Addendum dated 3 April 2006, the defendant sold and the plaintiff purchased 50,000 wet metric tons +/- 10% at the defendant’s option iron ore fines at US$55.50 per dry metric ton CFR FO one main port China based on 60% Fe. 9.Clause 6 of the sale and purchase contract provided for payment by letter of credit, payable at sight at the counters of the negotiating bank (not the issuing bank) by negotiation of documents:-
10.Clause 17 is a provision on title and risk and it also confirms the parties’ contemplation of the involvement of a negotiating bank:-
11.The letter of credit, as amended on 7 April 2006, was issued by Standard Chartered Bank on the application of the plaintiff. The plaintiff’s case is that the letter of credit complied with the contract, in particular clause 6. Mr Lee Siu Yung deposed in paragraph 10 of his [first] Affirmation that:-
12.The letter of credit was sent to Bank of Baroda in India. It was irrevocable, and:-
13.Article 3 a of The Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No. 500 provides that:-
14.Article 4 provides that:-
15.Article 9 a iv provides that:-
16.Article 10 b i & ii provide that:-
17.Article 10 d provides that:-
18.The plaintiff’s case is that Bank of Baroda is the negotiating bank. Standard Chartered Bank accepted that Bank of Baroda is the negotiating bank. Mr Lee Siu Yung deposed in paragraph 21 of his [first] Affirmation that:-
In the email which appeared to be dated 24 May, Ms Freda Shen wrote:-
19.In proceedings issued in England by Bank of Baroda against Standard Chartered Bank PLC, Bank of Baroda claimed that documents required by the letter of credit were presented by the defendant to Bank of Baroda on about 19 April 2006; that Bank of Baroda negotiated the same documents by presenting them at the Standard Chartered Bank’s Shanghai branch to obtain payment by Standard Chartered Bank of the sum of US$2,338,138.62; and that the documents thus presented and negotiated included a bill of exchange for an amount of U$2,338,138.62 dated 19 April 2006 drawn by the defendant on Standard Chartered Bank in favour of Bank of Baroda. 20.The plaintiff’s case is that “the Cargo was laden on board the vessel MV Uttarkashi at Haldia and Vizag, India on or around 13 April 2006 as evidenced by a bill of lading dated 13 April 2006, see paragraph 11 of Mr Lee Siu Yung’s [first] Affirmation. 21.By a fax dated 25 April 2006, Standard Chartered Bank informed the plaintiff that a set of documents drawn under the letter of credit had been received and that the set of documents were available for inspection at Standard Chartered Bank’s office and asked for instructions as per the bank’s Document Instruction form. 22.By 29 April 2006, the parties came to know about an order made by the Dalian Maritime Court in China on the application of one Red Horse Resources (H.K.) Ltd attaching 17,000 metric tons iron ore fines on board M/V Uttarkashi and owned by the defendant and ordering the defendant to provide security in the sum of US$1,084,800. 23.On about 29 April 2006, the defendant sent the following email:-
24.On 1 May 2006, the defendant sent another email:-
25.Mr Lee Siu Yung stated in paragraph 3 of his [first] Affirmation that the plaintiff was applying for an injunction prohibiting the defendant from “drawing down funds against” the letter of credit. 26.Mr Lee Siu Yung deposed in paragraph 7 of his second Affirmation that:-
27.Various other matters had been raised in the plaintiff’s affirmations. There is a suggestion that the documents do not comply with the documentary credit. If that suggestion is correct and if Standard Chartered Bank pays, the plaintiff will have its remedies against Standard Charter Bank. The plaintiff does not question Standard Chartered Bank’s financial ability to satisfy any judgment which may be awarded against it in connection with the letter of credit. Hearing bundles 28.Copy documents produced by the deponents in their affirmations were put together in one exhibit for each affirmation, without separate identification of any document and without a list or index. Solicitors’ convenience means that I had to spend much time trying to locate or search for a particular document. My task was eased to some extent by Mr Clifford Smith SC who helpfully submitted a Chronology with page references. 29.There are 2 copies of the letter of credit in the hearing bundle. They look different. They also seem incomplete. I asked for but did not get a better and complete copy of the letter of credit. 30.I asked for but did not get a copy of ICC Publication No. 500. I had to consult leading textbooks on documentary credit. 31.I asked for but did not get a copy of the draft or bill of exchange under the letter of credit. The fraud point 32.Mr John Kerr alleged and argued fraud against the defendant at the hearing before Reyes J. He told me that the learned judge was of the view that fraud had not been established. I would have thought that that should be the end of the matter so far as fraud was concerned. However, Mr John Kerr raised fraud at the hearing before me. He contended that as the defendant was represented, I might be satisfied that the plaintiff had a good arguable case of fraud against the defendant. I have no hesitation in rejecting this contention. The defendant has no case to answer on fraud and the plaintiff’s position cannot and is not improved by any alleged failure of the defendant to exonerate itself on a charge on which the learned judge held that the defendant had no case to answer. There are other reasons why the plaintiff must fail on the fraud point and I shall come back to them below. Jurisdiction 33.By clause 16 of the sale and purchase contract, the parties agreed to settle disputes or differences by friendly negotiations, failing which by arbitration at the Hong Kong International Arbitration Centre by applying English law. Counsel agreed that for the purpose of the hearing before me, I should assume (without deciding) that the Court has jurisdiction to grant an injunction against the defendant. Both parties reserved their position on the jurisdiction point. Scope of order sought by plaintiff 34.It was not clear to me from the terms of the Order whether Standard Chartered Bank would be in breach of the Order if it should pay in accordance with the letter of credit. I asked Mr John Kerr whether he was seeking to prevent Standard Chartered Bank from paying. I hope I am not doing him an injustice when I say that he did not give me an unequivocal answer. If the plaintiff was seeking to prevent Standard Chartered Bank from paying, it should be forthcoming and say so expressly by seeking an order in terms which make it clear what Standard Chartered Bank must not do. Banks have an international reputation to protect, and unless they are enjoined by a clear and precise court order, they should not be put at risk of losing their credibility in the banking and commercial communities. Seller’s assured right to be paid under documentary credit and the fraud point 35.United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] AC 168 is a case which raised a question of law which is of general importance to all those engaged in the conduct and financing of international trade for it challenges the basic principle of documentary credit operations that banks that are parties to them deal in documents only, not in the goods to which those documents purport to relate, per Lord Diplock at p. 180. 36.The whole commercial purpose for which the system of confirmed (Mr John Kerr did not argue that there is any difference for negotiable) irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment. Lord Diplock stated the governing principles and commercial purpose at pp. 182 – 183:-
37.Fraud is the established exception. The relevant time is the presentation by the beneficiary to the confirming bank, or the negotiating bank in this case. To come within this exception, bank documents must contain, expressly or by implication, material representations of fact that are to the knowledge of the beneficiary untrue. The following is another oft-cited passage by Lord Diplock (at pp. 183 – 184):-
38.In Group Jose Re v Walbrook Insurance Co. [1996] 1 WLR 1152 at pp. 1160 – 1162, Staughton LJ cited United City Merchants and held that knowledge acquired subsequent to the presentation of documents was irrelevant and that applications to restrain the beneficiary from asking for payment should fail:-
39.There is simply no evidence that the defendant knew at the time of the presentation of the documents to Bank of Baroda that the bill of lading, or any other document presented, contained, whether expressly or by implication, any material representation of fact which was untrue. I decline to speculate on when the defendant might have acquired knowledge that Red Horse was seeking to attach part of the cargo. 40.Fraud should never have been raised again in this case. 41.Even if fraud was established, that is not the end of the matter. Balance of convenience has to be considered. To quote the words of Ma J (as he then was) in Prime Deal (HK) Enterprises Limited v The Hongkong and Shanghai Banking Corporation Limited and another, unreported, HCA 2142/2002, 15 July 2002, at paragraph 14 (8) and (9):-
42.The letter of credit was freely negotiable. The inherent probabilities are that a freely negotiable letter of credit would have been negotiated before shipment. The plaintiff’s evidence was that Bank of Baroda was the negotiating bank. That points to Bank of Baroda having given value and being entitled under the credit to be reimbursed by Standard Chartered Bank. Even if fraud had been established, I would still have declined to grant an injunction. I am appalled by the possible ramifications of the granting of an injunction in the circumstances of this case on the innocent third parties, i.e. Standard Chartered Bank and Bank of Baroda. The plaintiff cannot possibly be entitled to obtain the advantage of an order restraining payment at the expense of the business rights of innocent third parties, merely by proffering him an indemnity in whatever form, cf Galaxia Maritime S.A. v Mineralimportexport [1982] 1 WLR 539. 43.On the second aspect, there is no allegation and no evidence of any inability on the part of the defendant to pay damages. 44.For reasons given above and my reasons below for rejecting the plaintiff’s contention, that part of the Order which restrained the defendant from continuing to request Standard Chartered Bank to remit any of the proceeds of the letter of credit must be discharged. Plaintiff’s contention 45.I hope I have not misunderstood Mr John Kerr by summarising his contention as follows:-
46.I reject his contention for the following reasons. 47.No authority is cited in support of his contention. The Bhoja Trader case is against it, see paragraphs 54 and 55 below. 48.His contention seems to me to be an attempt to circumvent the documentary credit point. 49.Payment under the letter of credit is by sight drafts drawn on Standard Chartered Bank. I do not have a copy of the draft and do not know if it was drawn by the defendant and payable to Bank of Baroda, as alleged by Bank of Baroda. I interpose to state that it is incumbent on the plaintiff to satisfy me that an injunction should be granted. What Mr John Kerr is contending is that once the drawee of the draft, i.e. Standard Chartered Bank, decides to pay, the amount payable under the draft becomes the defendant’s money:-
50.The proposition that once the drawee of a draft decides to pay, the funds payable under the draft becomes the drawer’s money is intrinsically wrong. 51.Propositions (b) and (c) are quite novel to me and I reject them in the absence of any compelling or persuasive authority. Restraining defendant from dealing with the proceeds of the letter of credit 52.Next, I have to consider whether an order should be made restricting or restraining the beneficiary from dealing with the proceeds of the letter of credit. 53.To quote Ma J again (at paragraph 14(10) & (11)):-
54.In Intraco Ltd. v Notis Shipping Corporation (the ‘Bhoja Trader’) [1981] 2 Lloyd’s Rep 256, at pp. 257 – 258, Donaldson DJ, delivering the judgment of the Court of Appeal, stated:-
55.It is noteworthy that Donaldson LJ was referring to the stage of cash being “received” by the beneficiary, not the earlier stage of the issuing bank deciding to pay. Donaldson LJ was contrasting that with an injunction preventing the beneficiary from obtaining the cash which is what the plaintiff is seeking under the second part of the Order. 56.No attempt has been made by Mr John Kerr to identify the proceeds of the letter of credit or the cash in the defendant’s hands. Nevertheless, it is clear that the proceeds of the letter of credit are assets outside Hong Kong’s jurisdiction. 57.In Bank of India v Bhagwandas Kewalram Murjani and others [1989] 2 HKLR 318, the Court of Appeal considered the circumstances in which a Mareva injunction restraining the disposition of assets outside the jurisdiction and gave the following guidance at pp. 319 – 320.
58.A “good arguable case” is no doubt the minimum which the plaintiff must show in order to cross the threshold for the exercise of the jurisdiction, but at the end of the day the court must consider the evidence as a whole in deciding whether or not to exercise this jurisdiction, see Ninemia Maritime Corp. v Trave GmbH [1983] 1 WLR 1412 at p. 1417. The ultimate test is (at p. 1426):-
59.I have to be satisfied on the materials before me that it is just and equitable to grant an injunction restraining dealings with assets outside the jurisdiction on the application of a plaintiff which has no presence or assets in Hong Kong against a defendant which has no presence or assets in Hong Kong in the absence of any evidence that the defendant does not have the financial means to satisfy any monetary award. 60.Unless the Court is satisfied that there is a real risk that the defendant may take steps designed so to dispose of or conceal foreign assets as to render the judgment nugatory by the time that it is given, an injunction restraining the defendant from dealing with the proceeds of the letter of credit may not be granted. 61.Plainly, there is no evidence of dissipation of assets. Mr John Kerr argued that there were 2 aspects of dishonesty or commercial immorality:-
62.On the first point, the parties to the documentary credit dealt with documents, not goods and the defendant had an assured right to be paid before he parted with control of the goods. The defendant has presented a set of documents to Bank of Baroda. If they are conforming documents, the defendant has an assured right to be paid. If they are not and if Standard Chartered Bank pays, the plaintiff will have its recourse against Standard Chartered Bank. Just as there is nothing dishonest or commercially immoral for a holder of a cheque to prosecute a claim on a dishonoured cheque to final judgment and to enforce payment, notwithstanding and despite any dispute in respect of the underlying contract, there is no dishonesty or commercial immorality for the defendant to obtain its assured right under the documentary credit. A beneficiary under a documentary credit is entitled to press for payment under the credit for cargo lost in transit. Unless an insurance document forms part of the documents under a credit, the presence or absence of any insurance contract is irrelevant under the credit. 63.On a fair construction of the email referred to in paragraph 23 above, the defendant was passing on what its then lawyers said. That the defendant was not devious is clear from the fact that the defendant said that the recipient could discuss with its own legal department and with the defendant’s then lawyers. I see nothing devious in the email referred to in paragraph 24. This case is quite different from Honsaico Trading Ltd v Hong Yiah Seng Co. Ltd. [1990] 1 HKLR 235, and does not come near unacceptably low standard. 64.For the reasons given above, the plaintiff has not made out a case for restricting or restraining the defendant from dealing with the proceeds of the letter of credit and that part of the Order restraining the defendant from dealing with or attempting to deal with the proceeds of the letter of credit must be discharged. Conclusion 65.The Order must be discharged.
Mr John Kerr, instructed by Messrs Ince & Co., for the Plaintiff Mr Clifford Smith SC, instructed by Messrs Stephenson Harwood & Lo, for the Defendant Application for a stay of the discharge of an interlocutory injunction to Court of Appeal not acceded to. Please refer to CACV208/2006 dated 21 June 2006 |
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