The Bank of East Asia Ltd v. Luen Hop Hong (A Firm)
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IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION ACTION NO. 151 OF 1971 ----------------- BETWEEN
----------------- Coram : Blair-Kerr, Ag. C.J. in Court Date: 3 July 1972 ------------------------ J U D G M E N T ------------------------ 1. In this case, counsel decided to call no evidence because the facts are, to all intents and purposes, not in dispute; and the question in issue is one of law. 2. For some time prior to 1970, the defendants were customers of the plaintiff bank. Their current account (no. 1217) was kept at the Aberdeen branch of that bank; and, in this judgment, I shall refer to the Aberdeen branch as “the bank”. 3. On 16th February 1970, the defendants requested the bank to open a letter of credit in favour of a company named Mirch (U.K.) Ltd. The application, so far as relevant, reads as follows:-
4. On 24th February 1970, the bank received another application from the defendants in precisely the same terms; and it is clear that the defendants had purchased from Mirch (U.K.) Ltd. 4 Secondhand Gardner 8L3 Diesel engines, with Gardner model 3 U.C. 3:1 reduction marine gearboxes, and that the cost of each of the four units C. and F. Hong Kong was £2,450, the total cost of the 4 units being £9,800. 5. Pursuant to the two applications, on 18th February and 26th February 1970, the bank, through their London agents (Midland Bank Ltd.), opened two credits in favour of Mirch (U.K.) Ltd. in accordance with the defendants’ mandates. 6. On 13th April 1970, the Midland Bank received the various documents required by the two credits viz. drafts, bills of lading and signed invoices; and, on 14th April, they paid out sums totalling £9,800, presumably to the beneficiaries of the credits, Mirch (U.K.) Ltd. The documents were then forwarded to Hong Kong; and they reached the bank on or about 27th April 1970. In response to a telephone call from the manager of the bank, a partner of the defendant firm called at the bank and accepted both drafts by signing each document on the back and affixing the defendant firm’s chop thereto. When he did so, the partner had before him the two invoices signed by the beneficiary, Mirch (U.K.) Ltd. 7. These invoices are dated 3rd April 1970; and each document refers to the shipment by the shipment by the ss “Glenearn” from London to Hong Kong of 2 Diesel engines, the indent no. being P.J. 504. Each invoice continues thus:-
8. As regards the two bills of lading, each document referred to the indent P.J. 504, the shipper Mirch (U.K.) Ltd., the consignee “To the order of Bank of East Asia Ltd. notify Luen Hop Hong, Hong Kong,” the vessel “Glenearn”, the port of loading viz. London and the port of discharge viz. Hong Kong. At the foot of each bill of lading appeared the words: “number of packages in words two (2).” On the first bill under the heading “marks and numbers,” there appeared this entry:-
On the second bill of lading the entry was identical except that the figures “3/4” appeared after the word Hongkong. On each bill, the goods were described thus:
9. As I have said, the defendants’ request was that the drafts be drawn at sight; and ordinarily a sight draft must be paid at once. But I am told that, upon acceptance or endorsement of a draft, a bank in Hong Kong does not usually demand payment from a purchaser until the goods arrive here. It is considered to be a good practice because merchants do not like to pay for goods which have not arrived. Banks charge interest on bills held by them; and so they lose nothing. That is what happened in this case, although, strictly, under the terms of the defendants’ applications for credits, the bank could have debited the defendants’ account at once. 10. It is agreed by the parties that the shipper, Mirch (U.K.) Ltd., sent a duplicate set of documents to the defendants. 11. The cargo arrived in Hong Kong about 5th June 1970 when it was found that Mirch (U.K.) Ltd. had not shipped 4 Gardner 8L3 diesel engines, but 4 Gardner diesel engines model 5LW, which was a much smaller model costing £70 only, whereas the cost of an 8L3 engine was said to be £2,450. 12. The defendants informed the bank that certain engines had arrived but that these were not the engines which they (the defendants) had ordered. On 10th June 1970, the bank debited the defendants’ account with the amount of the drafts the result of which was that the account was overdrawn to the extent of $24,395.95. Between 10th June and 21st August, various other transactions resulted in the account being overdrawn to the extent of $27,854.32; and the bank’s claim in this action is for the sum of $27,854.32 being money lent to the defendants’ together with interest. 13. The defendants’ say that they are not liable to re-imburse the bank because the latter paid the fraudulent London shipper’s drafts against documents (namely the bills of lading and the invoices)which did not conform strictly with the requirements of the credits. They have 4 complaints, and their pleading reads as follows:- “(i) The bills of lading merely described the goods as ‘two cases diesel engines’. (ii) The bills of lading were not clean and regular on their face in that the weight of the goods shipped had been obliterated but the obliterations had not been endorsed or authenticated in any way by or on behalf of the ship owners. (iii) The bills of lading did not correspond with the invoices in that the marks and numbers did not tally. The bills of lading stated the marks and numbersto be ‘MUKL made in Britain Hongkong nos.1/2’ and ‘MUKL made in Britain Hongkong nos.3/4’ respectively. The invoices stated the marks to be ‘MUKL made in Britain. nos.1 & 2’ and ‘MUKL made in Britain nos.3 & 4’ respectively. (iv) The description of goods contained in the invoices did not correspond with the requirements of the said credits in that the word ‘model’ was omitted from the description in the invoices.” 14. Counsel for the bank, Mr. Zimmern, has no quarrel with the so-called doctrine of strict compliance. The reason for the rule is conveniently stated in Schmitthoff’s text book “The Export Trade” 5th Ed. at p.202. The author says:‑ “The legal principle that the bank is entitled to reject documents which do not strictly conform with the terms of the credit is conveniently referred to as the doctrine of strict compliance. The reason underlying this rule - which is not always appreciated by exporters - is that the correspondent bank is a special agent of the issuing bank and the latter is a special agent of the buyer; if such agent who has a limited authority acts outside his authority (in banking terminology : his mandate) the principal is entitled to disown the act of the agent, who cannot recover from him and has to bear the commercial risk of the transaction. …........... the bank deals in finance, not in goods; it has normally no expert knowledge of the usages and practices of a particular trade. If the documents tendered are not strictly in conformity with the terms of the credit and the bank refuses to accept them, the exporter should at once contact his overseas buyer and request him to instruct the bank to accept the documents as tendered; the refusal of the bank to depart even in a small and apparently insignificant matter not sanctioned by the instructions or the Uniform Customs, where applicable, from its instructions will, in the overwhelming majority of cases, be upheld by the courts if litigation ensues.” 15. The famous passage from the judgment of Lord Sumner in Equitable Trust Co. of New York v. Dawson Partners Ltd.(1) is still good law. He said:- “.….. the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is noroomfor documents which are almost the same, orwhich will do just as well. Business could not proceed securely on any otherlines. The bank’s branch abroad, which known nothingofficially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, itacts at its own risk.” 16. In Rayner v. Hambros Bank Ltd.(2), a bank issued a letter of credit to a firm available on production of certain documents, including a bill of lading covering shipment of “Coromandel groundnuts in bags.” The firm presented an invoice in which the goods were correctly described as “Coromandel groundnuts,” but the bill of lading described the goods as “machine shelled groundnut kernels.” The bank refused to honour the draft presented in pursuance of theletter of credit; and the Court of Appeal held that they were justified in so doing. 17. I do not think that Rayner’s case is of any assistance to the defendants in this case. As pointed out by McNair J. in Sopromo v. Marine and Animal By-products Corporation(3), in the letter of credit in Rayner’s case, there was no clause corresponding with Article 33 of the Uniform Customs and Practice for Documentary Credits (hereinafter referred to as “the U.C.P.”) then in force. This Article read:- “The description of the goods in the Commercial Invoice must correspond with the description in the credit. Wherever the goods are described in the remaining documents, description in general terms will be acceptable.” 18. The U.C.P. (1962 Revision) is reproduced as Appendix A in “The Law of Bankers’ Commercial Credits” by Gutteridge and Megrah (4th Ed.). Article 30 reads:- “The description of the goods in the commercial invoice must correspond with the description in the credit. In the remaining documents the goods may be described in general terms.” This is substantially to the same effect as the former Article 33; and, as I have, the defendants, in applying to the bank for credits to be opened, stated the credits would be “subject to” the U.C.P. (1962 Revision). 19. In Midland Bank v. Seymour(4), Devlin J. reiterated the doctrine of strict liability in these words (p.151):-
Devlin J. held that if the terms of the credit require that the bill of lading should contain a certain description, then the bill must contain that description; but, in the absence of any such requirement in the letter of credit,
20. But for Article 30 of the U.C.P., the bank might well have found itself unable to recover from its customer, the defendants. The generic description “diesel engines” in the bill of lading would not have been good enough. The defendants ordered a particular type of diesel engine. However, Article 30 states that so long as the description of the goods in the invoice corresponds with the description in the credit, in the remaining documents (which, of course, includes the bill of lading) the goods may be described in general terms. 21. The description of the goods in the bills of lading is general; but it is not inconsistent with the description in the invoices. The two descriptions are “consistent between themselves,” the one being a general or generic description (“diesel engines”), the other being a description of a particular class or type of diesel engine. In my view, there is nothing in the defendants’ first complaint. 22. Turning then to the defendants’ second complaint. In each of the two bills of lading in the column marked “gross weight”, there isa black mark which might well lead one to think that possibly some figures may have been originally inserted as indicating the weight of the goods to be shipped, and that these figures had been obliterated. 23. Assuming this to be so, the first thing to remember is that the letters of credit did not call for the weight of the goods shipped to be shown on any of the shipping documents. In other words, the defendants themselves did not consider weight to be a material factor for purposes of documentation; and it is only the deletion or obliteration of anything material which requires authentication. 24. Of course the defendants saw the weakness of their pleading in that it alleged specifically that it was “the weight of the gods shipped” which had been obliterated. Therefore the line taken in argument was: “We do not know what was obliterated. It may have been a statement to the effect that something or other was damaged.” 25. Article 16 of the U.P.C. defines a clean shipping document as
26. Assuming that these marks on the bills of lading are deletions and not simply blots, why should the bank have assumed that something which may have been inserted in the “gross weight” column was something other than weight? And if some weight had been shown, it would have meant nothing to the bank because weight was not a material factor for purposes of documentation in this case. The obliteration did not, in my view, result in the bills of lading being “not clean and regular on their face,” as alleged by the defendants. The obliterations did not impair the legal effect of the bills in any way. How, in the circumstances of this case, could these obliterations have possibly prejudiced anyone? In my view, there was no duty cast upon the bank to call for the defendants’ further instructions before accepting the documents. 27. The defendants’ third complaint refers to the shipping marks. They say that the bills of lading did not correspond with the invoices because under the heading “marks and numbers” in the bills of lading, there appears the word “Hongkong” and the figures are expressed thus: “1/2” and “3/4”; whereas in the invoices, the word “Hongkong” is missing and the figures are expressed thus: “1 & 2” and “3 & 4”. 28. My note of the counsel’s submission on this point reads in part:‑
But the shipping marks form no part of the description of the goods, nor arethey an essential feature of the documentation, so far as thedefendants were concerned. They did not call for a packing list.They did not specify what marks each packingcase should bear. Theshipping marks in this case were merely forpurposesof identification as between the holder of the bills and the owner ofthe ship. As Collins L.J. said in Parsons v. New Zealand Shipping Company(5) (p.564):-
I see nothing in this 3rd point. 29. As regards the 4th point, the defendants’ submission is simply that the word “model” appears in the credits and that it is missing from the bills of lading and the invoices; that the de minimis rule does not apply in this class of case; that the bank could not possibly have known the significance of the word “model”; and that it cannot be said that there has been strict compliance. 30. This is tantamount to saying that strict compliance means that the description of the goods in the commercial invoice must really be a photo copy of the description in the credit. But Article 30 states that the description in the invoice must “correspond with” the description in the credit. It does not say the two descriptions must be identical in all respects. 31. In my view the omission of the word “model” from the bills of lading and invoices was not a matter of any importance whatsoever. The defendants ordered Secondhand Gardner 8L3 Diesel Engines with Gardnermodel 3 U.C. 3:1 reduction marine gearboxes. Clearly “8L3” is the number of a particular type of engine, a particular model; and “3 U.C. 3:1” is the number of a particular type of reduction marine gearbox, a particular model. The presence or absence of the word “model” with respect to each of those numbers made no difference whatsoever. Plainly, the invoices evidenced the shipment of 4 units Secondhand Gardner 8L3 Diesel Engines with Garnder model 3 U.C. 3:1 reduction marine engines, as stated in the credit. 32. It is common ground that the defendants’ have been swindled by Mirch (U.K.) Ltd.; and I can well understand why they now clutch at any straw in the hope that they may saddle their own bankers with the loss sustained. But, in my view, their defence must fail. 33. Judgment to the plaintiff for the sum of $27,854.32 together with interest at 8½% per annum from 10th June to 22nd August 1970 ($485.50), and interest on the sum of $27,854.32 from 23rd August 1970 to date of judgment; and costs.
Zimmern (Lo & Lo) for Plaintiff Mills-Owens (Johnson, Stokes & Master) for Defendants. (1) [1927] 27 Lloyds List Law Reports at p.52 (2) [1942] 2 A.E.R. p.694; [1943] K.B. p.37 (3) [1966] 1 Lloyds List Law Rep. p.367 at p.389 (4) [1955] 2 Lloyds List Law Rep. p.147 (5) [1901] 1 K.B. p.548 at p.564 | |||||||||||||||||||||||||||||