Guangdong Transport Ltd v. Ancora Transport N.V. and Another
Read the full judgment text of CACV 19/1987 on BabelCite. This Court of Appeal judgment.
1. This is the judgment of the court on an appeal from an order of Rhind, J dated 23 rd February 1987, that an injunction, granted by him on 21 st January, 1987 against the first and second defendants should be discharged.
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IN THE COURT OF APPEAL 1987 No. 19 BETWEEN
Coram: .Roberts, C.J. & Yang V.P. Dates of Hearing: April 8th, 9th, 10th Date of Delivery of Judgment: 29th April, 1987 _____________ JUDGMENT _____________ Roberts, C.J. - Background 1. This is the judgment of the court on an appeal from an order of Rhind, J dated 23rd February 1987, that an injunction, granted by him on 21st January, 1987 against the first and second defendants should be discharged. 2. China Metallurgical Import & Export Corporation (“China Metallurgical”), purchased an abandoned steel mill in the United States of America, with the object of dismantling it and shipping it to China for re-erection there. 3. China Metallurgical entered a contract for the carriage of the dismantled steel mill to China with Ancora Transport N.V. (“Ancora”), the first defendant. Ancora is a subsidiary of Armilla International B.V. (“Armilla”), a Dutch shipping company. 4. The contract between China Metallurgical, as the merchant, and Ancora, as the carrier, to ship the steel mill was effected by a liner booking note (“the Note”) in the Conlinebooking form, which was dated 25th October, 1986 The Note shows Armilla as the general agent fo Ancora and Dodwell Shipping Limited (“Dodwell”) as the local agent. China Metallurgical's agent was shown in the Note as Guangdong Transport Limited (“G.T.L.”), the plaintiff. 5. The Note required the mill to be shipped in two lots, between 1st November, 1986 and 31st December, 1986. The first lot was guaranteed to be a minimum of 20,000 revenue tons, 10% more or less at the merchant’s option. 6. Attached to the Note were various addenda, the first of which made provision for the freight rate at US$41.50 per revenue ton, less 2½% commission to G.T.L. 7. Paragraph 6 of Addendum No. 1 to the Note was in these terms -
8. Though the Note required China Metallurgical to open an irrevocable bank guarantee ("the guarantee") with the Bank of China (“the Bank”) by the 6th November at the latest, it had not been opened by 8th November. 9. There then followed an exchange of telexes between Armilla, acting as Ancora’s agent, and G.T.L., as to the intended effect of the guarantee. Armilla emphasized that the effect of the guarantee was only to provide an extra security and that it would automatically be cancelled once the freight had been paid. 10. On 13th November the Bank opened an irrevocable bank guarantee in favour of Ancora, up to a maximum of US$810,000, this representing an estimate of the freight charges on the first shipment. 11. The guarantee was contained in a telex sent by the bank to Ancora on 11th November in the following terms -
12. In relation to this document the Judge found, and this was not challenged before us, that this was an on-demand bank guarantee in the nature of a performance bond. 13. On 13th November, G.T.L. furnished to the Bank a letter of indemnity, in the standard form which is used where a bank has opened a performance bond at the request of its customer. The indemnity covered all “demands, liability, claims, losses, damages, costs, demands and expenses” which might be incurred by the Bank by reason of the issue by it of the guarantee. 14. Ancora chartered the “Webberspost” to carry the first consignment of steel mill parts. This ship arrived at Houston about 15th November, 1986 and began loading on 17th. It did not sail for China with its cargo until 3rd December. 15. On 4th December, Armilla, on behalf of Ancora gave notice to G.T.L. by telex that, in addition to freight, Ancora would be claiming for extra freight due (dead freight), and for extra expenses incurred by reason of the non-availability of cargo or delays and overtime. 16. This claim was amplified in a letter addressed by Armilla to G.T.L. on 9th December, 1986, in which, in addition to a claim for freight, at the agreed rate on 18,000 revenue tons, amounting to US$728,325, the following claims were listed –
17. On 6th January, 1987, Ancora addressed two letters to G.T.L. claiming an amount of US$663,685.76 as due in respect of “freight” from China Metallurgical, this being 90% of the figure of US$728,325 which Armilla had shown as the amount due for freight in its statement of 9th December (US$655,492.50) plus US$8,193.26 in relation to “Gradall” cargo. (The latter charge is not in issue). 18. The second letter of 6th January, headed “Additional Expenses”, asked China Metallurgical to pay US$299,084.50, the total of the invoices listed above. Between 7th and 9th January, there was an exchange of telexes between G.T.L. and Armilla as to how the figure of US$655,492.50 was calculated. There was no reference in the telexes to the claim for US$299,084.50. 19. On 9th January, G.T.L. instructed the Bank to remit US$655,492.50 in the manner requested in Ancora's letter of 6th January, 1987. 20. On 15th January, Johnson, Stokes and Master, solicitors for Ancora, wrote to the Bank claiming a sum of US$299,084.50 under the guarantee. The letter claimed that G.T.L., as debtor, had failed to make payment of the sum of US$299,084.50, being due under the Conlinebooking note of 25th October, 1986, and called on the Bank to pay this amount in terms of the “letter of guarantee”. 21. The Judge found, and this again was not disputed on the appeal, that this letter from Johnson, Stokes and Master to the Bank was an adequate declaration in writing for the purpose of giving effect to the bank's obligation to pay under the guarantee. 22. The Bank (which has behaved impeccably throughout) insisted to G.T.L. that it had to pay and wrote to G.T.L., on 19th January, stating that it had been advised that international bank guarantees are “analogous to documentary credits where the issuing bank is not concerned with the underlying contract. The only recognized exception is where fraud on the part of Ancora is established. As a matter of fact, fraud has never been alleged by you.” 23. On the evening of 21st January, 1987, G.T.L. applied to Rhind J. for injunctions to restrain Ancora from demanding, and the Bank from making payment of, the sum of US$299,084.50 under the guarantee. 24. Rhind, J., granted the injunctions sought giving liberty to Ancora and the Bank to apply for the discharge of the injunctions on two days' notice. This Ancora did on 23rd January. The judge heard an inter partes application to discharge his earlier injunctions on 26th January, 1987. At the end of his hearing, he discharged them both. G.T.L. appeals against his order of discharge. 25. The notice of motion of G.T.L. contained a number of grounds of appeal, some of which were not pursued before us. We propose to deal only with three -
Payment under a Letter of Guarantee 26. The main principle which has been adopted by the English courts in relation to payment under bank guarantees has been recently re-stated as follows by Sir John Donaldson, M.R. in Bolivinter Oil S.A. v. Chase Manhattan Bank(2)
27. In this Court, in Bollore Furniture Ltd. and Another v. Banque Nationale de Paris(3) Fuad, J.A. observed -
28. Lord Denning, M.R. in Edward Owen Engineering Ltd. v. Barclays bank International Limited(4) commented
29. The rule is not absolute, in that it is well established that there is a limited exception where fraud is shown. A number of cases applying this proposition were referred to by Rhind, J. in his judgment, among them Discount Records Ltd. v. Barclays Bank Ltd.(5), R.D. Harbottle (Mercantile) Ltd. v. National Westminster bank Ltd.(6) and Edward Owen Engineering Ltd. v Barclays Bank International Ltd. 30. Just how difficult it is to establish a sufficient case of fraud to persuade a Court to grant an injunction to restrain payment under a performance guarantee can be seen in the Discount Records Case(5). In this case there was evidence that the beneficiary under a letter of guarantee had shipped containers full of rubbish, instead of the electrical goods which were the subject of the contract. The court refused to restrain payment of sums claimed under an irrevocable letter of guarantee. 31. The exception, where fraud is established, is one of good sense for, in the words of Ackner, L.J. in United Trading v. Allied Arab Bank(7) -
32. Mr. Waung, for G.T.L., did not argue that the conditions for payment specified in the guarantee had not been met. However, he sought to persuade us that the various authorities to which we have referred, only sought to deal with disputes between the customer and the beneficiary and not between the customer and a bank which had issued a letter of guarantee. 33. In the latter circumstances, he argued, it was open to the Court to examine the underlying transaction, and to grant an injunction even if a dispute between the customer and beneficiary fell short of fraud. 34. To support this proposition, Mr. Waung relied on Potton Homes Ltd. v. Coleman Contractors Ltd.(8), in which Eveleigh, L.J. said -
35. Accepting this passage as a statement of the law, and it does not appear to be backed by any other authority, and that performance of a letter of guarantee may be restrained where, prima facie, a seller has lawfully avoided the contract, such circumstances do not apply here. There is no suggestion that the contract was not fulfilled, only about the payment of expenses involved in its execution. 36. Nor are we disposed to accede to Mr. Waung's invitation to us to widen the circumstances in which performance guarantees may be restrained. Indeed, we regard it as most important, in the interests of Hong Kong as a commercial centre, that international performance guarantees should be certain of fulfilment save in the very limited circumstances where fraud is established. 37. In any event, even if it had been able to establish that payment could restrained in circumstances other than fraud, where a dispute has arisen between customer and beneficiary, such an exception could not apply in these proceedings, in which an injunction has been sought to restrain the Bank from paying under its letter of guarantee. 38. For the above reasons, we think that the first ground must fail. Was there fraud? 39. As has been seen above, the terms of the guarantee issued by the Bank were wide, in that it undertook to "stand surety" for up to US$810,000 “for the payment by Guangdong Transport Ltd., Hong Kong, ... of all the latter owes or will become owing to Beneficiary by reason of payment obligations arising from a Conline Booking note dated Hong Kong 25th October, 1986 …” 40. On any reading of the facts, there can be no doubt that the claim for US$299,084.50 was a debt claimed by Ancora under that Conlinebooking note. 41. It would, therefore, have been open to the Judge to have decided that, under the terms of the letter, which was backed by an indemnity signed by G.T.L., the bank was obliged to pay the sum claimed on receipt of the appropriate declaration in writing from Ancora. No difficulty would have arisen, since the guarantee is in wide enough terms to comprehend all the items claimed in Armilla's letter of 9th December, totalling US$299,084.50. 42. However, the Judge chose to examine the exchange of telexes between Armilla and G.T.L., which preceded the issue of the letter of guarantee by the Bank. He came to the conclusion that this correspondence made it clear that, whatever the actual terms of the letter of guarantee might be, it was intended by both parties to be limited to payments due under the heading of “freight”. He therefore decided, on the basis of this extrinsic evidence, that the guarantee was subject to a condition that Ancora was to draw on it only in respect of “freight”. This finding was not challenged in the appeal. 43. The Judge next considered whether the various items claimed in the letter of 9th December could reasonably and properly be comprehended within the term "freight". 44. It was argued for Ancora that the term “freight” should be given a broader meaning than that ascribed to it by G.T.L. and that it was understood by Ancora to include all the payments due under the Note. 45. Counsel for G.T.L. replied that “freight” must be given a narrow meaning and should be limited to the amount due after multiplying the number of revenue tons of material carried by the “Webberspost” by the unit price set out in the Note. Thus, the amount of $663,685.76 paid by the bank to Ancora on 12th January would be “freight” but the US$299,084.50 would not be. 46. Therefore, he argued that, on the basis of the judge's finding that it was a condition of the agreement between G.T.L. and Ancora that a letter of guarantee should be executed by the Bank for the recovery only of “freight”, Ancora, by seeking to recover the amount of $299,084.50, 50, which was a combination of items which could not be properly described as "freight", was guilty of fraud. 47. The correct approach to the establishment of fraud was set out in the following passage in the judgment of Ackner, L.J. in United Trading v. Allied Arab Bank(7) -
48. As Ackner, L.J. observed in a later passage, the question of fraud, for this purpose, must depend on establishing that the beneficiary acted with fraudulent interest in making its claim -
49. The Judge observed, and this was not disputed on appeal, that there is no evidence to suggest that Ancora's claim for US$299,084.50 was other than a genuine claim for real items of expense incurred by, or on behalf of, Ancora. 50. In this connection it is pertinent to note that the claim was submitted the day after the “Webberspost” sailed on 3rd December, and has been consistently maintained ever since. As the Judge observed, it would be fanciful to suggest that Ancora was “setting up G.T.L” from the beginning for a fraudulent claim. 51. On the assumption that the items contained in the claim were genuine in themselves; the only fraudulent element asserted by G.T.L. is that they were, nevertheless, nevertheless, not covered by the guarantee and that Ancora acted fraudulently in requiring the Bank to honour its guarantee in relation to these sums by alleging that they fell within the term “freight”. 52. An examination of the letter from Armilla to G.T.L. of 9th December, in which the various additional charges are set out, shows that most of the items de not fall within the word “freight” in the narrow sense argued by G.T.L. 53. Indeed, there is authority in Kish v. Taylor(9) to the effect that dead freight is not to be regarded as freight, though this is highly technical decision that might, on the face of it, be somewhat surprising to a layman. 54. However, at this stage, it is not our task to look at each item contained in that letter and decide whether or not, in law, it falls within the term “freight”. We have to adopt the approach suggested by Ackner, L.J. in United Trading v. Allied Arab Bank(7), namely, is the only realistic inference that Ancora could not honestly have believed in the validity of its demands on the guarantee? 55. We do not consider it necessary to reconsider in detail the evidence which was available to Rhind, J. as to the views of the parties on the meaning of "freight". Suffice it to say that there was evidence on which the Judge could come to his conclusion that it was reasonably possible that Ancora genuinely believed that “freight” had a broader meaning than that ascribed to it by G.T.L. and that it covered all payments due under the Note. 56. No doubt, to a lawyer experienced in this field, a definition of “freight” in the wide terms suggested by Ancora would not be easy to defend. But we have to examine the honesty of Ancora, as disclosed by the evidence of its freight manager, who testified that he thought the broader definition to be the correct one. 57. In layman’s terms it could well be argued that all the items comprising Ancora’s claim are at least “freight-related” in the sense that they all reflect different aspects of the cost of shipping the dismantled steel mill to China. If such a proposition is so patently insupportable as to amount to evidence that it could not be made honestly, it could be said that fraud was sufficiently established. Otherwise, it was not. 58. In the result, we see no reason to differ from the Judge’s finding that it is not seriously arguable that Ancora’s demand under the performance bond could be regarded as fraudulent. Granting of injunction 59. The third ground of appeal was that the Judge was wrong net to continue the interim injunctions, in accordance with the principles laid down in American Cyanamid Co. v. Ethicon Ltd.(1) since the plaintiff had an arguable case, and that there was a serious question to be tried. 60. As stated above, the Judge took the view, with which we agree, that the plaintiff would have to establish that it was seriously arguable that the only realistic inference was that Ancora could not honestly have believed in the validity of its demand on the letter of guarantee. 61. However, even if we had found in favour of G.T.L. in this regard, we would still not have thought it proper to grant an interim injunction since this is a matter in which G.T.L., if it were shown to be correct in its contentions, could be adequately and fully compensated in damages. 62. The continuation of an injunction being, in the last analysis, a matter of discretion, we would also have given weight to the undesirability of issuing injunctions to restrain those engaged in international commerce, the life-blood of Hong Kong, from carrying out obligations freely entered into by them. 63. Thus, even if we had found in favour of G.T.L. on either of its two main grounds, we would not have continued the interim injunctions and would have left the parties to their ordinary resolution of what, in our view, is essentially a dispute as to the terms of the contract between them. 64. The appeal must be dismissed. Mr. W. Waung (Lo, Wong & Tsui) for Plaintiff Mr. W. Stone (Johnson, Stokes & Master) for 1st Defendant Mr. LAM Wing-wo (Deacons) for 2nd Defendant. (1) [1975] A.C. 396 (2) [1984] 1 L1.L.R. 251, 257 (3) [1983] H.K.L.R. 78, 83 (4) [1978] 1 Q.B. 159, 170 (5) [1975] 1 L1.LR. 444 (6) [1977] 3 W.L.R. 752 (5) [1975] 1 L1.LR. 444 (7) [1985] 2 L1.L.R. 554, 561 (8) 28 B.L.R. 24, 28 (7) [1985] 2 LL.L.R. 554,561 (9) [1912] A.C. 604 (7) [1985] 2 L1.L.R. 554, 561 |
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