Swiss Singapore Overseas Enterprises Pte Ltd v. China Citic Bank Corporation Ltd, Xiamen Branch
Read the full judgment text of HCCL 11/2009 on BabelCite. This HCCL judgment was delivered on 14 August 2013.
1. This action concerns a contract for the shipment of iron ore fines from India to the Mainland of China. The plaintiff is a company incorporated in Singapore and contracted to sell iron ore fines to Xiamen C & D Inc (“XCD”), a state owned enterprise which is a major trading company in Xiamen, China. The plaintiff and XCD entered into a Sales Contract dated 18 July 2008 whereby the plaintiff agreed to sell to XCD 45,000 WMTs (Wet Metric Tons) (+/- 10% at seller’s option) of iron ore fines at th
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HCCL 11/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 11 OF 2009 ------------------------ BETWEEN
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----------------------- J U D G M E N T ----------------------- 1.This action concerns a contract for the shipment of iron ore fines from India to the Mainland of China. The plaintiff is a company incorporated in Singapore and contracted to sell iron ore fines to Xiamen C & D Inc (“XCD”), a state owned enterprise which is a major trading company in Xiamen, China. The plaintiff and XCD entered into a Sales Contract dated 18 July 2008 whereby the plaintiff agreed to sell to XCD 45,000 WMTs (Wet Metric Tons) (+/- 10% at seller’s option) of iron ore fines at the price of US$183 per DMT (Dry Metric Ton) CFR FO on the basis that the iron ore fines would have a content of 63.50% Fe. Payment was to be made by irrevocable letter of credit, payable at sight, issued by a bank, either on the Mainland or in Hong Kong, covering 100% of the cargo value. The letter of credit was required to confirm with the latest revision of the rules of the Uniform Customs and Practice for Documentary Credits (“UCP 600”), and any subsequent amendment as on the date of issue. Partial shipment was not allowed. 2.Even before the letter of credit had been issued, 23,947 WMT of iron ore fines have been loaded on board MV Dubai Freedom at Haldia port in India for shipment and discharge at a main port in China, as evidenced by a bill of lading dated 19 July 2008. Another bill of lading dated 23 July 2008 evidenced the loading of 20,553 WMT of iron ore fines, also on MV Dubai Freedom, which had been loaded in Paradip port in India for shipment to a main port in China. Both bills of lading were consigned to order. The combined weight of the iron ore fines amounted to 44,500 WMTs, which was within the tolerance permitted under the Sales Contract. At the rate stipulated in the Sale Contract, the shipment value was US$7,185,105.43. 3.On the same date as the date of the second bill of lading, the Singapore branch of Bangkok Bank Public Company Limited (“Bangkok Bank”) advised the plaintiff, without engagement on its part, of the issue on 22 July 2008 of an irrevocable letter of credit by the Xiamen Branch of the defendant bank (“the Bank”) for US$8,235,000 in favour of the plaintiff as beneficiary. The letter of credit was expressed to be subject to UCP 600. Under Field 45A of the letter of credit, which dealt with the description of goods, the quantity of goods was stipulated to be “45,000 MTS (+/- 10 pct at beneficiary’s option)”. Under Field 47A of the letter of credit, which contained additional conditions, it was stipulated that “both L/C amount and commodity quantity 10 pct more or less allowed”. 4.As was conceded at trial, documents evidencing the shipment of iron ore fines of the value of US$7,185,105.43 would be outside the tolerance limit stipulated in the letter of credit. The plaintiff and XCD had been in communication regarding the terms of the letter of credit to be opened and some those terms had been corrected at the request of the plaintiff. Notwithstanding that the terms of the letter of credit contradicted the terms of the sales contract in that the former stipulated a minimum delivery of 40,500 DMTs (90% of 45,000 MTS) at US$183 per DMT totalling US$7,411,500, no request was made to amend the terms of the proposed letter of credit in relation to amount and permitted quantity. Indeed, by an e-mail dated 21 July 2008, the plaintiff confirmed to XCD that the proposed terms of the letter of credit to be opened were acceptable. When Bangkok Bank advised on 23 July 2008 that the letter of credit had been issued, it also advised the plaintiff to arrange for an amendment of the credit if it did not agree with its terms and conditions or was unable to comply with any of them. Again, no attempt was made to amend the terms of the letter of credit in relation to amount and permitted quantity, even though it must have been apparent, from the second bill of lading dated 23 July 2008, that the total quantity of iron ore fines on its way to China fell short of the minimum quantity stipulated in the letter of credit. 5.On 30 July 2008, the plaintiff presented documents to the Bangkok Bank for negotiation under the letter of credit in question and specifically requested Bangkok Bank to “please check documents and advise discrepancies, if any”. I accept the evidence of Mr Manish Tibrewal, as supported by the bank statements in Bundle D[1], that Bangkok Bank did not, at that time, negotiate the letter of credit and make any payment to the plaintiff, and that it was only subsequently, on 8 September 2008, that Bangkok Bank advanced the invoice amounts of these two shipments, less charges, by way of advance against export bills receivable. I would not speculate on the reason why Bangkok Bank did not negotiate the letter of credit in question, which was available for negotiation by any bank. Perhaps it did not do so because it had formed the view that the documents were discrepant. 6.The cargo arrived in Fangcheng, China, on 2 August 2008 and was discharged on 3 August 2008. On 4 August 2008, Bangkok Bank posted the documents to the Bank by courier under a covering letter stating that it was forwarding the documentary bill drawn under the Bank’s letter of credit, and requesting the Bank to remit the proceeds by T/T to their account with the Deutsche Bank Trust Company in New York. The covering letter included the following certification:
7.I do not understand why Bangkok Bank certified that the documents were complying when it had not negotiated the letter of credit and when, clearly, the documents presented were discrepant, unless, perhaps, its staff routinely provided such certification even when Bangkok Bank was only acted as a correspondent bank presenting documents on behalf of the beneficiary to the issuing bank. But this is speculation on my part, as I have not received any evidence on this matter. 8.In addition to sending the documents by courier, Bangkok Bank, on the same day, also sent a SWIFT[2] message to the Bank, using Form MT799, which is the form for a free format message, to inform the Bank that it had forwarded the documents drawn under the letter of credit in question by courier and that “all terms and conditions fully complied with”. 9.The Bank received the documents on 6 August 2008. At 20:28 on 12 August 2008, which was the fifth banking day after receipt of documents, the Bank issued a SWIFT message using form MT734 (“MT752”) to convey an advise of refusal, stating that it was holding the documents at Bangkok Bank’s disposal and identifying 4 discrepancies as follows :
10.The first discrepancy related to the fact that the plaintiff applied to draw US$7,185,105.43 being an amount which exceeded the 10% tolerance specified in the letter of credit. 11.The second and third discrepancies related to this specification in the letter of credit that “45,000 MTS (+/- 10 percent at beneficiary’s option)” of cargo was to be delivered without partial shipment being allowed. The quantity of the shipment, being 44,500 WMTs, was equivalent to about 40,017.50 DMTs and was outside the tolerance range of +/-10% of 45,000 DMTs. 12.The fourth discrepancy concerned adjustments to the value of the cargo based on the iron content of the same. Even with the adjustments being made, the cargo shipped remained outside the +/-10% tolerance. 13.The rejection of the documents has to be understood in the context of the market which had been in “free fall” since the end of July 2008, dropping at one stage to less than US$75 per metric ton at the end of October 2008. 14.Against this background, negotiations took place between the plaintiff and XCD. Finally, on 22 September 2008, the plaintiff agreed to reduce the price of the cargo from US$183 per DMT to US$128 per DMT CFR FO. An addendum to the sale contract was executed to record this price reduction. The value of the cargo was accordingly reduced to US$5,122,240 and invoices reflecting the revised value were issued by the plaintiff endorsed with the words “in mitigation and without prejudice to [the plaintiff’s] rights”. 15.On 22 September 2008, Bangkok Bank sent the following SWIFT MT799 free format message to the Bank on behalf of the plaintiff :-
16.On 23 September 2008, XCD instructed the defendant to pay the plaintiff this sum, and the defendant arranged the payment to be made by Sumitomo Mitisui Banking Corporation which effected payment to Bangkok Bank on 23 September 2008. On the same day, the defendant also released the documents to XCD. 17.If these were the only relevant facts, this case would have been a run of the mill export transaction in the course of which the shipper of goods, who was presented discrepant documents in a falling market, has to make the best of a difficult situation. In these circumstances, after a reduced price has been agreed by the parties, the issuing bank would pay a lesser sum than that stipulated in the letter of credit and is released from the obligation to pay the sum stipulated in the letter of credit, in consideration of the issuing bank accepting discrepant documents. However, the present case is not a run of the mill case and the plaintiff has sued the Bank for the difference in the value of the documents presented and the payment subsequently received from the Bank, being the sum of US$2,192,424.77, on the ground that, prior to its rejection of the documents on 12 August 2008, the Bank had given notice to the beneficiary that it would honour the letter of credit. Having given this notice, the plaintiff contended that the Bank could not afterwards change its mind and reject the documents. 18.On 11 August 2008, the defendant had sent the following SWIFT message using SWIFT Form MT752, which was the SWIFT form to authorise payment, acceptance or negotiation, and which was usually used in response to a SWIFT message MT750 advising that documents were discrepant. That message stated:
19.However, on 12 August 2008, the defendant sent the following message on SWIFT Form MT799, which stated:-
20.In the alternative to its primary submission that the MT752 message was an unequivocal representation that the Bank had accepted the documents, and from which the Bank could not resile, the plaintiff also asserted that the Bank had failed to act in accordance with Article 16 of UCP 600 and, therefore, was precluded from claiming that the documents did not constitute a complying presentation. 21.It is appropriate at this point to set out some relevant articles from UCP 600:
22.Mr Charles Sussex SC, who appeared before me for the plaintiff, submitted, as he did before Reyes J and before the Court of Appeal, that MT734 dated 12 August 2008 could not stand alone and constitute a valid “single notice” of refusal to honour given within 5 banking days following the day of presentation and containing the particulars required, by Article 16c(i) - (iii), to be stated in the notice. The bank had given 3 notices: MT753 on 11 August 2008, which was a notice of acceptance; MT799 dated 12 August 2008 whereby the Bank purported to reverse its earlier acceptance in MT752 and which, by itself was insufficient notice of a refusal to honour because it failed to comply with the requirements of Article 16c(i) - (iii); and the notice of refusal MT734 sent out in the evening of 12 August 2008. After the Bank had decided to refuse to honour, it gave 2 notices instead of 1 single notice, one in the morning of 12 August 2008, which cancelled the reimbursement of authorization and contained the implied statement that the bank was refusing to honour, and the other that was sent out in the evening of the same day, MT734, which contained the express refusal to honour. By giving 2 notices of refusal, instead of the single notice, the Bank was precluded by Article 16(f) from claiming that the documents did not constitute a complying presentation. 23.On the strength of these contentions, the plaintiff sought and obtained summary judgment from Reyes J on 3 May 2010. His reasons are expressed in §§ 32 and 34 of his judgment in these terms :
24.Reyes J also dismissed the Bank’s defences based on variation and estoppel and held that the Bank had no arguable defence to the plaintiff’s claims. 25.The Bank appealed against the decision of Reyes J to the Court of Appeal. On 7 December 2010, the Court of Appeal allowed the appeal and granted unconditional leave to defend. Their reasons for doing so were expressed by Rogers JA as follows:
The plaintiff’s primary contention 26.In order to understand the plaintiff’s primary contention, that the Bank was bound by article 15 of UCP 600 to honour the letter of credit, it is necessary to look more closely at the terms of letter of credit and also to have regard to the evidence of Mr Xu Jian Yun, the bank manager of the Bank. 27.The irrevocable letter of credit issued on 22 July 2008, and notified on 23 July 2008, contained the following terms :
28.Mr Xu gave evidence that he was a superintendent in the international banking department of the Bank in July 2008. XCD was a major trading company in Xiamen, being the largest state-owned enterprise in Xiamen with a registered capital of over US$76m. The Bank’s practice was not to require any security, guarantee, or indemnity from such enterprises. XCD had been a customer of the Bank for a number of years and, under the Comprehensive Credit Facility Contract dated 3 February 2008, enjoyed facilities to the tune of RMB350m in 2008. XCD had provided a copy of the sales contract in question to the Bank and had applied to issue the letter of credit in question pursuant to a notice to drawdown from credit facility limit dated 22 July 2008. No guarantee or security was obtained from XCD by the Bank before it issued the letter of credit. 29.Mr Xu explained that, whereas the letter of credit that was opened provided that the payment was to be made at 90 days after sight and appeared to be contrary to the sales contract that stipulated that the payment was to be by letter of credit at sight, condition 15 under Field 47A permitted usance drafts to be negotiated at sight basis regardless of the tenor of the draft, with relevant interest and charges being for the account of the applicant, XCD, so that, if the plaintiff elected to negotiate the presented documents, it would not have to wait 90 days for payment. Mr Xu also gave evidence that if the letter of credit had not been negotiated by the nominated bank, and if the nominated bank merely presented the documents on behalf of the beneficiary according to the terms of the letter of credit, payment would be made after 90 days in accordance with the term at Field 42C which stipulated for draft at 90 days after sight. 30.Whatever may be understanding of Mr Xu about the effect of the terms and conditions of the letter of credit, I have great difficulty accepting the suggestion that the letter of credit provided for immediate payment, when the documents were negotiated by a nominated bank, but only provided for a deferred payment when the documents were simply presented by the nominated bank, without negotiation of the credit, on behalf of the beneficiary. 31.Article 6(b) of UCB 600 provides that :
32.Article 7(a) of UCB 600 states :
33.“Honour” is defined in Article 2 of UCB 600 to mean:
34.Under this definition, the obligation to honour does not include the obligation to negotiate. However, if the nominated bank does not negotiate, the issuing bank must honour the credit in one of the 3 ways stipulated in Article 7(j) of UCB 600. If the obligation of the negotiating bank is to pay at sight, it is difficult to construe the letter of credit as stipulating that the issuing bank could honour the credit by making a deferred payment. As stated in Ellinger & Neo’ s Law and Practice of Documentary Letters of Credit at p114:
35.I accept the submission of Mr Sussex that the proper construction to be given to this letter of credit is that it was payable at sight notwithstanding that Fields 42C and 43A of the letter of credit stipulated for a draft payable after 90 days drawn on the Bank of America, New York. The sales contract called for letter of credit payable at sight. It was made clear, by Condition 15 under Field 47A, that usance drafts could be negotiated at sight basis regardless of the tenor of the draft and that the relevant interest and charges were for account of the applicant. In addition, Field 78 of the letter of credit included a promise by the issuing bank to remit the proceeds upon receipt of documents in strict compliance with the terms and conditions of the letter of credit. I conclude that the effect of Article 7(a)(iv) is to require the issuing bank to pay the usance drafts at sight basis, regardless of the tenor of the draft, if the nominated bank fails to negotiate the letter of credit. This effect of Article 7(a)(iv) is further reinforced by the condition under Field 78 of the letter of credit requiring the issuing bank to remit the proceeds upon receipt of complying documents. 36.In this connection, I accept the submissions of Mr Sussex that the draft that was called for from the beneficiary under the letter of credit was a superfluous document so far as the payment obligations on the part of negotiating bank or the issuing bank were concerned. The bill of exchange was not drawn on either the nominated bank nor on the issuing bank but on a third party reimbursing bank which had no obligation to make any payment under the letter of credit. Mr Sussex found support for his submission from Ellinger & Neo’s Law and Practice of Documentary Letters of Credit at p.17:
37.However, the arrangement made in this case was not superfluous. As Mr Xu explained, it was done to facilitate XCD to use the credit facility provided by the Bank without having to pay the amount drawn under the letter of credit immediately. Condition 15 under Field 47A stipulated that the relevant interest and charges were for the account of XCD. The arrangement was for Bank of America, New York to effect immediate payment and then charge interest until it received payment some 90 days later from the Bank. The applicant was liable to pay that interest, which is likely to have been lower than any interest XCD would have had to pay to the Bank, if the latter had effected immediate payment from Mainland China. 38.Mr Wong Yan Lung, SC who appeared for the Bank, submitted that, even if the terms of the letter of credit, imposing an obligation on the negotiating bank to make immediate payment and a different obligation on the issuing bank to make a deferred payment, were inconsistent with Article 7a(iv) of UCP 600, it was clear from Article 1 of UCP 600 that the UCP rules were “binding on all parties thereto unless explicitly modified or excluded by the credit.” He submitted that the express terms of the letter of credit prevailed in this case. On my construction of the terms of the letter of credit, I have concluded that there is no inconsistency between the terms of the letter of credit and UCP 600. My construction of the letter of credit gives effect to the commercial intent behind this transaction, as reflected by the stipulation in the sales contract for payment by letter of credit at sight, and as reflected in Condition 15 under Field 47A and in Field 78 of the letter of credit. The sales contract called for a letter of credit complying with UCP 600, and Field 40(e) of the letter of credit stipulated that the latest version of the UCP applied to the letter of credit. I have not seen any evidence of any express instruction from XCD to the bank to depart of any provision of UCP 600. 39.I return to the evidence of Mr Xu. I accept his evidence that he believed that Bangkok Bank was a negotiating bank and not simply a presenting bank, presenting documents on behalf of the beneficiary. Given the certificate of compliance contained in the covering letter dated 4 August 2008 as well as in the SWIFT message of the same day, he had every reason for so believing. Acting on that belief, Mr Xu sent MT752 at 18:00 on 11 August 2008 to Bangkok Bank to authorise it to claim reimbursement at sight basis from Bank of America, the reimbursement bank. Although the documents had been received some time prior to that day, I accept his evidence that he had not had an opportunity to examine them at the time that he sent MT752. I also accept that he had sent MT752 to Bangkok Bank and the reimbursement authorisation to Bank of America, New York without first examining the documents to see if they were compliant because he had two more days, until 13 August 2008, to do so before being precluded by Article 16 of UCP 600 from rejecting discrepant documents, and because he could cancel the reimbursement authorisation given to Bank of America, New York at any time pursuant to Article 8 of the ICC Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (URR525, replaced by URR725 in 2008), and because he believed that, even if the reimbursing bank had effected payment, the Bank could recover the reimbursement made to Bangkok Bank pursuant to Article 16(g) of UCP 600, should the documents turn out to be discrepant. 40.Although MT752 was sent on 11 August 2008, the value date of the reimbursement was dated 13 August 2008. Mr Xu explained that was the last day on which the Bank was supposed to make payment against complying documents. In response to a question which I had put him, Mr Xu explained that he did not give the reimbursement authorisation on 13 August 2008, after examining the documents, because the reimbursing bank would need one or two days to make arrangement for the reimbursement. When asked why he used MT752 to authorize Bangkok Bank to make reimbursement when that form was only used to respond to a request for authorisation to pay, accept or negotiate, notwithstanding that the documents were discrepant, Mr Xu answered that there was nothing in the SWIFT manual which specifically dealt with reimbursement authorisations. 41.The last question I put was:
42.His answer was:
43.I accept the evidence of Mr Xu that, at the time he had sent the reimbursement authorisation to Bangkok Bank and to Bank of America, New York, the Bank had not examined the documents to see if they were complaint; that he had sent those instructions to enable Bank of America to make arrangements to effect the reimbursement on the last day that payment was due, namely, 13 August 2008; and, further, that, if it was later discovered, upon the subsequent examination of the documents by the Bank that they were discrepant, he could cancel the reimbursement authorisation given to Bank of America, New York pursuant to Article 8 of URR725, and, even if reimbursement had been effected by then, that he could claim refund of the bank of bank reimbursement pursuant to Article 16(g) of UCP 600. 44.The commentary under Article 8 of URR725 supports such banking practices :
45.Mr Xu’s evidence on the banking practice regarding bank‑to-bank reimbursements is also supported by Article 16(g) of UCP 600 which specifically states that, when an issuing bank refuses to honour and has given notice to that effect in accordance with that article, it shall then be entitled to claim a refund, with interest, of any reimbursement made. The editors of Jack: Documentary Credits, 4th Ed., state at §6.44 :
46.However, the proper construction of MT752 depends, not on the subjective understanding of Mr Xu, but on its objective meaning. MT752 must be construed in the context of the terms of the letter of credit, the provisions of UCP 600, and current banking practice. So far as the provisions of UCP 600 are concerned, the relevant provisions can be found in Article 13 which I set out as follows :
47.Whilst it is accepted that the letter of credit in question did not state that it was subject to URR725, Mr Wong made the cogent submission, which I accept, that Article 13 of UCP 600 was revised from its predecessor in UCP 500 in a way so as to conform to URR525[4]. Support for this proposition can be found in James E. Byrne, The Comparison of UCP 600 and UCP 500 (2007) at pp.120 & 122 where Professor Byrne stated:
48.I was invited by Mr Wong not to ignore the prevailing banking practice of bank-to-bank reimbursements and the internationally recognised practice rules that bankers operated upon when I construed MT752 and Condition 20 under Field 47A of the letter of credit. Mr Wong pointed me to the passage in Jack: Documentary Credits, 4th Ed., which I already quoted above, to the effect that the reimbursed amount is liable to be returned to the issuing bank with interest, if the documents were found to be discrepant. 49.That leads me to the central question in the present case, namely, whether I should give a literal construction to Condition 20 appearing under Field 47A of the letter of credit, as submitted by Mr Sussex, or give it a purposive construction, as submitted by Mr Wong, in order to give effect to well-known and recognised arrangements and practices in respect of bank-to-bank reimbursements and which did not conflict either with the terms of the letter of credit or the relevant provisions of UCP 600. Mr Wong submitted that I should construe the words “upon receipt of complying presentation” in Condition 20 to mean “upon receipt of certificate of compliance with the terms and conditions of the credit” so as not to destroy the efficacy of the bank‑to‑bank reimbursement arrangements. As explained by Mr Xu, he issued MT752 two days in advance of the value date, which was the last date on which the Bank could reject the documents as being discrepant, so as to enable Bank of America, New York to have time to arrange the reimbursement on value date. The implication that arises from that evidence is that, if the Bank had to examine the documents first, in order to determine whether or not they were complaint, before they could give reimbursement instructions, the bank would have had to examine the documents earlier than the last date available to it, in order to ensure that the reimbursing bank had sufficient time to arrange the reimbursement. 50.In my judgment, giving effect the literal meaning of the words contained Condition 20 does not render the bank-to-bank reimbursement arrangements otiose. It merely results in a reduction of time available to the Bank to examine the documents if it wishes to give time to the reimbursing bank to arrange the reimbursement. Alternatively, it may result in some delay in making reimbursement, if the documents are examined on the 5th banking days after receipt, and reimbursement authorisation is given after such examination. I find that neither of these scenarios is so compelling as would require me to depart from the clear wording contained in Condition 20 which required the issuing bank to send a reimbursement authorisation upon receipt of a compliant presentation, not upon receipt of a certificate of compliance. 51.Notwithstanding that the bank-to-bank reimbursement arrangements enable reimbursement authorisations to be given before the issuing bank had examined the documents, and enable the issuing bank to obtain repayment of the amount reimbursed, with interest, if the documents were later found to be discrepant, on my construction of Condition 20, namely, that the issuing bank would send a reimbursement authorisation upon receipt of complying presentation, I find that MT752, instructing Bangkok Bank to:
contained a representation by the Bank that it had received documents which complied with the terms of the letter of credit and was authorising Bank of America, New York, the drawee under the bill of exchange, to make reimbursement. Although Mr Xu believed, at the time, that Bangkok Bank was a negotiating bank, the fact that it was only a presenting bank, claiming payment on behalf of the beneficiary, did not detract from or otherwise negate the representation contained in MT752 that the Bank was in receipt of documents which complied with the terms of the credit. 52.However, as I have found, the Bank had not, at the time MT752 was issued, examined the documents and it had not, at that time, determined that the presentation was compliant. What is the legal effect of MT752, representing that the documents were compliant, when the bank had not made any such determination. Is a representation, without an actual determination, that the presentation is complying, sufficient to engage Article 15(a) of UCP 600 and oblige the bank to honour? 53.The preclusion effect of Article 16(f) only applies if the issuing bank fails to give timely notice of refusal, or fails to state every discrepancy upon with the bank relies to refuse to honour; in the latter case, the bank is precluded from relying on any discrepancy not so specified. Where the bank makes a representation that the documents are compliant, Article 16(f) does not preclude the bank from withdrawing that representation and giving notice of refusal to honour stating the discrepancy or discrepancies relied upon, provided that such notice is given within 5 banking days after the documents were received. Although I make no determination on this point, as I have not heard submissions on it, the position under UCP 600 appears to be that a bank is precluded from relying on the fact that the documents were presented after the expiry of the credit, if this was not stated in its notice of refusal[5]. The position under UCP 500 was otherwise: see Bayerische Vereinsbank Aktiengessellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 67. This provides some support for my conclusion that the Bank was not precluded from giving notice of refusal in this case, notwithstanding its earlier representation that the documents presented were compliant. In my judgment, a representation without an actual determination of compliance does not trigger the obligation under Article 15(a) of UCP 600. 54.However, as was made apparent in the case of Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 79, the bank may be estopped where “the circumstances are such as to create a factual or promissory representation with regard to any or all of the objections now raised and if so whether the plaintiffs acted upon such representation so as to preclude the defendants from now raising such matters”. The same point was made by the editors of Gutteridge and Megrah’s Law of Bankers’ Commercial Credits, 8th Ed., who quoted[6] from a previous edition of this work:
55.The plaintiff has not raised any plea of estoppel that is said to arise from the representation contained in MT752 dated 11 August 2008. By §22 of the Amended Statement of Claim, it asserted that the Bank was in possession of the documents and fully aware of the alleged discrepancies and of the options available to them and that, by MT752, the Bank unequivocally represented that it was accepting the documents as presented, thereby electing to accept the alleged discrepant documents and, accordingly, waived its rights to rely on the alleged discrepancies. To establish waiver, it is not enough to show that the Bank had an opportunity to examine the documents and did not avail itself of the opportunity. It is necessary to establish that the Bank knew, at that time, that the documents were discrepant and knew, at that time, that it had the right to reject them: see Wilken and Ghaly’s The Law of Waiver, Variation and Estoppel, 3rd Ed., at §4.45. Given my finding that the Bank had not, at the time MT752 was issued, examined the documents, and that it did not know, at that time, that the presentation was discrepant, the plaintiff’s case based on waiver must fail. Absent any plea, or evidence, of detriment suffered by the plaintiff that flowed from any reliance on the representation contained in MT752, I conclude that the Bank is not estopped, by reason of that representation, from subsequently rejecting the documents as discrepant. Was MT734 a valid notice of refusal? 56.If I had found that MT752 of 11 August 2008 did not contain a representation by the Bank that it had received documents which complied with the terms of letter of credit, it must follow that MT799 of 12 August 2008 likewise did not contain the opposite representation, namely, that the documents were discrepant and that the Bank was cancelling its earlier reimbursement authorisation for that reason. On that basis, MT734, issued later on 12 August 2008, would have been a valid notice of refusal being a single notice of refusal stating each discrepancy in respect of which the Bank refused to honour and given no later than the close of the 5th banking day following the day of presentation, as permitted under Article 16 of UCP 600. 57.However, I have found that MT752 of 11 August 2008 contained a representation by the Bank that it had received documents which complied with the terms of the letter of credit and was authorising Bank of America, New York to make reimbursement. It must follow, on my construction of Condition 20, that MT799 of 12 August 2008 cancelling the reimbursement authorisation contained the implied statement that the Bank was cancelling the reimbursement authorisation and refusing to honour the letter of credit because the presentation was not compliant. It is clear from the evidence of Mr Xu, which I accept, that upon discovering, on the morning of 12 August 2008, that the documents were discrepant, he made a decision not to honour the letter of credit and issued MT799 to Bangkok Bank asking it to disregard MT752 issued on 11 August 2008. MT799 did not set out the discrepancies relied upon to refuse to honour the letter of credit. The statement of discrepancies was only set out in MT734 issued on the evening of 12 August 2008. I find, as Reyes J had earlier found, that by giving two notices, one containing an implied statement of refusal and a second one containing an express statement of refusal and setting out the discrepancies relied upon, instead of a single notice setting out the said discrepancies, the Bank was precluded by Article 16(f) of UCP 600 from claiming that the documents did not constitute a complying presentation. Variation 58.After the rejection of the documents and faced with a falling market, the plaintiff commenced negotiations with XCD which resulted in an agreement, evidenced in an addendum made and signed on 22 September 2008, whereby the discrepancies were waived by XCD and the price reduced to US$5,122,240. Mr Tibrewal accepted that the addendum was a variation of the sales contract. I agree with the submissions of Mr Wong that the revised invoice of the same date, containing the statement “this invoice is issued in mitigation and without prejudice to [the plaintiff’s] rights”, has no bearing on the issues before me; nor has the letter of 8 October 2008 from the plaintiff to XCD which contained a similar statement. These statements only concern the sales contract and do not affect the obligations as between beneficiary and issuing bank that arise under the letter of credit. 59.After agreement had been reached on the reduced price, the plaintiff sent an instruction to Bangkok Bank on the same date requesting it to send a message to the Bank that the value of the bill had been reduced and to release the documents to XCD upon receipt of the reduced value, and that “all other terms and conditions remain unchanged”. Bangkok Bank then sent MT799 on 22 September 2008 to the Bank in the terms as set out in §15 above. The reduced sum was then paid and the documents released to XCD on 23 September 2008. 60.As confirmed by Mr Tibrewal in his evidence, I find that the reference to “value of the bill” in MT799 dated 22 September 2008 was a reference to the bill of exchange drawn under the letter of credit. Given the instruction letter from the plaintiff to Bangkok Bank, which stated that all terms and conditions of the letter of credit remained unchanged, apart from the reduction in price, and given the contents of MT799 of 22 September 2008 from Bangkok Bank to the Bank stating that the value of the bill of exchange had been reduced, I conclude that the plaintiff dealt with the Bank upon the footing that the letter of credit was subsisting. I do not accept the submission of Mr Sussex that, by its conduct, the plaintiff had accepted the Bank’s repudiation of the contract contained in the letter of credit so that there was no subsisting letter of credit to be varied. 61.I do not accept the further submission of Mr Sussex that any variation of the letter of credit could only be effected by complying with the provisions of Article 10(a) and (c) of UCP 600 which provide that :
62.These provisions apply to the amendment of the letter of credit prior to the presentation of documents by the beneficiary. After the presentation of discrepant documents, negotiations often take place between the seller and the buyer resulting in a reduced price being agreed by the parties and the issuing bank accepting discrepant documents and paying a lesser sum than that stipulated in the letter of credit. These matters have to be concluded speedily so as to save demurrage and port charges and, particularly, when the transactions involve perishable goods or markets where prices are unstable. Matters would be unduly delayed if the issuing bank had to issue a formal amendment to the letter of credit and await the beneficiary’s acceptance thereof before, on the one hand, making payment of the reduced sum to the beneficiary, and, on the other hand, releasing the discrepant documents to the buyer. In my judgment, a variation of the contract between the beneficiary and the issuing bank that arises from the letter of credit can be effected, without the need to amend the letter of credit in accordance with Article 10 of UCP 600, by the agreement between them that the issuing bank would only pay a lesser sum than that stipulated in the letter of credit in consideration of its acceptance of discrepant documents. In this case, I find that the Bank made that payment in the belief that it did so in “the discharge of [the Bank’s] payment obligations under the … L/C”, as evidenced by the statement contained in its MT799 free format message dated on 24 September 2008 to Sumitomo Bank instructing the latter to make payment of the reduced sum under the letter of credit in question. 63.On the finding of facts I have made in this case, the only possible answer that can be made against the defence of variation raised by the Bank is that it was not supported by consideration. In the usual case, the consideration to support the issuing bank’s release from its obligation to pay the sum stipulated under the letter of credit is the latter’s acceptance of documents which are discrepant and which it is not obliged to accept under the terms of the letter of credit. However, the agreement to accept discrepant documents cannot constitute consideration in the present case because, as I have found, the Bank lost its right to reject the discrepant documents by reason of its failure to comply with the requirement in Article 16 of UCP 600 to give a single notice of refusal setting out all the discrepancies relied upon. Is the Bank able to point to any other consideration that can support its case that the contract arising from the letter of credit was varied? 64.It is common ground that a promise to accept part payment in settlement of a debt, or where the liability for the full liquidated sum is not in dispute, cannot constitute an enforceable variation of the contract. However, it was submitted on behalf of the Bank that it had forgone its right to argue that it was under no obligation to pay under the letter of credit and, further, that it had forgone the security in the documents to cover any claims, or further claims, which might be made by the plaintiff. In my judgment, neither assertion is valid. 65.This is not a case where the Bank gave up its right to argue that it could reject the documents on the grounds that they are discrepant. It had acted throughout on the basis that it had rightly rejected the documents on the grounds that they were discrepant and that it was under no obligation to make any payment under the letter of credit. 66.As regards the latter assertion, I find that the Bank did not have any security interest in the documents to give up that could constitute consideration to support the variation, and I do so for the reasons expressed by Reyes J in §§45 and 46 of his judgment dated 3 May 2010:
67.That, however, is not the end of the matter. Mr Wong made the alternative submission that the Bank would not have released those documents to XCD unless some kind of security arrangement had been put in place to cover the Bank’s exposure to the sum of almost US$2.2 million, being the difference between the amount initially claimed and the reduced amount that was paid. In May 2009, when the plaintiff resiled from its representation that it was willing to receive the reduced sum and sued the Bank, the facility letter between the Bank and XCD had already been terminated in February 2009 and the Bank no longer had any documents in its possession. In reliance upon the authority of Compania Naviera Vasconzada v Churchill and Sim [1906] 1 KB 237 at p.250 per Channell J, Mr Wong made the further submission that the fact that, even without further security being provided, the Bank might have a cause of action to seek reimbursement of the sum of US$2.2 million from XCD, did not remove the detriment suffered. 68.It was clear from the terms of the notice to draw down from credit facility limit dated 22 July 2008 that the Bank did not require security from XCD in the course of their dealings and, further, that the Bank did not need the security of the documents to ensure that it would receive payment from XCD of the amount of the letter of credit as, by its terms, whilst the letter of credit was payable at sight, XCD was granted a period of 90 days to make reimbursement, with interest and charges on its account. But more than that, the loss of security from XCD to secure payment from XCD in the said sum of US$2.2 million could not constitute a detriment if XCD was not liable to pay that sum. In this case, the liability to pay that sum flowed from the Bank’s failure to comply with Article 16 of UCP 600. Whilst XCD was liable to reimburse the sum of US$5,122,240 to the Bank, it was under no liability, neither to the plaintiff nor to the Bank, to pay this amount of US$2.2 million. 69.In answer to these points, Mr Wong submitted that liability to pay under the letter of credit was hotly contested and that this was a case of a disputed claim, the compromise of which gave rise to accord and satisfaction. The issue of discrepant documents had been hotly contested at the time, with the plaintiff and Bangkok Bank asserting that the documents were compliant. If the documents were, indeed, compliant, the Bank would be liable to pay the full sum of US$7,185,105 and could have recourse against XCD for reimbursement; hence, it had acted to its detriment by releasing the documents without making the necessary security arrangements to cover this exposure. 70.I do not accept this submission for two reasons. The documents were discrepant and the Bank was not obliged to pay the sum of US$7,185,105 and, hence, it could not have any right of recourse against XCD for this amount. Accordingly, the Bank did not suffer detriment when it released the documents to XCD without making the necessary security arrangements to cover this alleged exposure. If XCD was not liable to pay this amount to the Bank, it was not liable to provide any security for such payment. Further, it is apparent from the evidence of the standing credit arrangements that the Bank did not require security from XCD in the course of their dealings. If it did not require security to cover the Bank’s liability to pay the amount stipulated in the letter of credit, which was a far greater sum than US$2.2m, it is unlikely to have made any arrangements to obtain security from XCD before releasing the documents to XCD on 23 September 2008. 71.Mr Wong also submitted that, by the message contained in MT734 dated 12 August 2008 that it was “holding documents at your disposal pending instructions”, the Bank was not making an unconditional promise to return the documents to the plaintiff, or to surrender them unconditionally to the plaintiff. In such a situation, the beneficiary would not instruct the issuing bank to release the documents to the applicant unless there had been a compromise with the applicant. The request made and contained in MT799 of 22 September 2008 led the Bank to believe that the Bank’s obligation under the letter of credit would be discharged by paying US$5,122,240, and that the release of the documents to XCD would be on that basis and the Bank, therefore, released the documents and made no alternative security arrangements with XCD. I do not accept this submission, which is similar to the submission I have already dealt with in the preceding paragraph, for the reasons set out therein. 72.For these reasons, the Bank’s defence based on variation fails. Estoppel 73.The defence of estoppel is based on MT799 dated 22 September 2008 from Bangkok Bank to the Bank which the Bank contended was a clear and unequivocal representation by the plaintiff that it would not be claiming from the Bank any shortfall between US$7,185,105 and US$5,122,240. The Bank asserted that it relied on this representation, to its detriment, such that it was inequitable for the plaintiff to claim the price difference. 74.Notwithstanding the contrary submissions of Mr Sussex, I have no difficulty in concluding that MT799 of 22 September 2008 contained a clear and unequivocal representation by the plaintiff that it would not be claiming from the Bank any shortfall between US$7,185,105 and US$5,122,240. I would not go so far as to say that the plaintiff was engaging in sharp practice and leading the Bank “up the garden path”. It is quite possible, and even likely, that the claim made against the Bank for the difference of these two amounts was made pursuant to legal advice obtained after 22 September 2008. I also find that the Bank relied on this representation as well as the instructions contained in MT799 before it released the documents to XCD. I find that the Bank would not have proceeded, on the one hand, to release the documents to XCD and, on the other hand, to make the payment of US$5,122,240 to the plaintiff, if MT799 of 22 September 2008 had contained an express reservation of right by the plaintiff to claim the difference between these two sums from the Bank. 75.If the Bank could demonstrate that, relying on the said representation, it had acted to its detriment then I would have had no hesitation in concluding that it would be inequitable for the plaintiff to resile from that representation and to seek to claim the difference in the sum of US$2,192,424.77. 76.Whilst the Bank would not have released the documents to XCD without the plaintiff’s representation that it was willing to receive the reduced amount and the instruction to release the documents to XCD, as I have already found above, the Bank did not suffer any detriment in releasing those documents to XCD. Absent detriment, the Bank cannot succeed on its plea of estoppel. Conclusion 77.For the reasons set out above, I find in favour of the plaintiff and enter judgment against the Bank in the sum of US$2,192,424.77 with interest on that sum at 1% over US Dollar prime from 12 August 2008 until today. I also make a costs order nisi that the Bank pays the costs of the action to the plaintiff, to be taxed if not agreed. 78.Commercial cases are determined, not on the perceived merits of the case, but by the cold and, often, hard application of the law to the facts as found. As this case demonstrates, to look for merits is often an elusive exercise. The Bank could have re-worded Condition 20 under Field 47A of the letter of credit to refer to a certificate of compliance, but did not. The plaintiff could have applied to amend the terms of the letter of credit to conform with the terms of the sales contract, but did not. The Bank could have expressly stated in its reimbursement authorisation that it had not examined the documents and had not determined whether or not they were compliant, but did not. The Bank could have, in the same message, cancelled the reimbursement authorisation and refused to accept the documents on the grounds of discrepancy, specifying each and every discrepancy relied upon, but did not. 79.I cannot conclude this judgment without expressing my gratitude to counsel for the assistance they have provided to me.
Mr Charles Sussex, SC and Ms Frances Lok, instructed by Smyth & Co, for the plaintiff Mr Wong Yan Lung, SC and Ms Zabrina Lau, instructed by Evershed, for the defendant [1] pp.297 to 412 [2] SWIFT (Society for Worldwide Interbank Financial Telecommunication) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardised and reliable environment. The majority of international interbank messages use the SWIFT network. [3] a reference to Bank of America, New York [4] UCP 600 came into effect in 2007 before URR 525 was replaced by URR725 in 2008. [5] Ellinger & Neo’ s Law and Practice of Documentary Letters of Credit at p.244 [6] at p. 150, footnote 50. |
Cases cited in this judgment
Further hearings and rulings under HCCL 11/2009