Chiyoda Steel Co Ltd v. Bank of China (Hong Kong) Ltd

HCA 2024/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2024 OF 2013

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Before: Deputy High Court Judge S T Poon in Chambers

Date of Hearing: 25 July 2014

Date of Judgment: 28 August 2014

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J U D G M E N T

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1.The Plaintiff (“Chiyoda”) seeks summary judgment against the Defendant (“BOC”) under Order 14, rule (1) of the Rules of the High Court (“RHC”).

2.The subject matter is an irrevocable letter of credit (“L/C”) issued by BOC in respect of the sale of 3,000 metric tons of steel deformed bars by Chiyoda of Japan to Shinwon and Co Ltd of Korea.  The L/C was opened by Cheongfuli (Hong Kong) Co Ltd (“Cheongfuli”) as the Applicant and the advising bank was Sumitomo Mitsui Banking Corporation (“SMBC”) in Japan.  The total contract price of the goods was JPY¥161,757,648.00.

3.The issue in this matter is very narrow.  Upon presentation of the L/C, together with the bill of ladings and packing list (“P/L”) as required under the L/C, BOC refused to honour payment to Chiyoda on the ground that the P/L presented does not conform to one of the conditions prescribed under the L/C.

4.What was required under the L/C in respect of the P/L was stipulated as follows:

“3. Detailed packing list in 1 original and 1 copy showing steel grade, net weight and gross weight and packing: Mill’s standard export packing.” (emphasis added)

5.The dispute between the parties is whether the P/L shows the steel grade of the goods.

6.BOC maintains that the P/L does not show the steel grade of the goods and therefore the requirement under the L/C is a not complied with.  The relevant part of the P/L presented to BOC is reproduced as below:

DESCRIPTION OF GOODS	QUANTITY	BUNDLES	NET WEIGHT (MT)	GROSS WEIGHT(MT)
DEFORMED BARS	LOT1
KSD3504 SD400	D10MM X 8M	106	199.492	199.492
	D13MM X 8M	157	299.870	299.870
ORIGIN: JAPAN
TOTAL		263 bundles	499.362	499.362

7.On the other hand, Chiyoda asserts that the steel grade of the goods has actually been shown on the P/L under the description column.  It is understood that the description “KS D3504 SD400”, with “KS” stands for Korean Standard and “D3504 SD400” the type of steel bar used, the specifications “Deformed Bars KSD3504 SD400” actually represented the steel grade of the goods. 

8.This is evidenced by the affirmation of Kuniomi Ibe, a director of Chiyoda, filed for the purpose of the present application.

9.Mr C Y Li S.C., counsel for Chiyoda, submitted that all that the L/C required was for the steel grade to be shown on the P/L, and this has been clearly complied with by giving the description “KSD3504 SD400” on it.  Mr Li submitted that there is no requirement to have the two words “Steel Grade” appearing on the P/L.  The legal requirement is not that the content of the P/L must be identical to the wordings used under the L/C.  It would be sufficient if the P/L corresponds in all material particulars of the terms of the L/C.

10.Mr Li submitted that, since the goods had been consistently described as “Deformed Bars, KSD3504 SD400” in the L/C and in all other documents supplied to BOC, namely the Bill of Lading, the commercial invoices and the P/L, it must be apparent on the face of the documents that “KSD3504 SD400” was a reference to its steel grade. 

11.Further, Mr Li submitted, since the steel grade (i.e. KSD3504 SD400) forms part of the description of the goods, absent clear express words in the L/C it is quite unreasonable to expect “KSD3504 SD400” to be specified in the P/L by a separate item named “Steel Grade: KSD3504 SD400”.  To require the actual words “Steel Grade” to also appear on the P/L would be to adopt an overly literal and robotic approach in relation to the requirement of “Showing Steel Grade” in the L/C.

12.Moreover, Mr Li emphasized that, subsequent to the refusal of payment by BOC but before the expiry date of the L/C, Chiyoda had informed BOC, through SMBC, that the description “KSD3504 SD400” actually shows the steel grade of the goods. However, BOC still insisted on not honoring the L/C.

13.BOC exhibited in its affirmation in opposition a draft defence.  It basically maintained its position that there was a non-compliance of the L/C as the steel grade was not shown on the P/L.  Although it is not admitted in the draft defence that “KSD3504 SD400” represents the steel grade of the goods, BOC did not adduce any evidence to rebut the same.

14.Mr Khaw, counsel for the Defendant, submitted that even if “KSD3504 SD400” actually represents the steel grade, the bank is not supposed to know about this without any indication from the P/L that it does.  There is also no information whatsoever on any documents presented to the bank showing that it represents or has anything to do with steel grade.  Although SMBC did inform BOC that “KSD3504 SD400” is the steel grade after payment was refused, BOC could not simply take the face value of this representation given that instructions had been given by the Applicant not to waive the non-compliance.

15.Mr Khaw submitted that the bank’s duty is to examine the documents on their face.  It is not required to go beyond that and investigate the goods, the underlying transaction which is financed or secured by the letter of credit, or the underlying facts as to how a document came about[1].

Discussion

16.As submitted by Mr Li, the legal principles on non-compliance of letters of credit are not controversial. 

17.The bank must examine all tendered documents to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation, i.e. whether they constitute a presentation in accordance with the terms and conditions of the credit, the applicable provisions of the UCP[2] and international standard banking practice[3]. The standard expected of the presented documents is one of strict compliance. 

18.The banker is not concerned with why the buyer has called for particular documents, that there is no room for documents which are almost the same, or which will do just as well, as those specified, that whilst the bank is entitled to put a reasonable construction upon any ambiguity in its mandate, the documents have to be taken up or rejected promptly and without opportunity for prolonged inquiry and that a tender of documents which properly read and understood calls for further enquiry or are such as to invite litigation are a bad tender but it must be noted that the emphasis is on documents having properly understood[4].

19.In the present case, there is undisputed evidence that the steel grade has in fact been shown on the P/L.  However, on the face of the P/L and other documents presented, there is nowhere saying that the description “KSD3504 SD400” actually stands for the steel grade. 

20.This is not a case where the wordings used in the documents presented are different from what was prescribed in the L/C.  The question being instead: whether the bank should be expected of knowing the information required under the L/C is shown on the document presented when it is not immediately apparent on the face of the document that it is. 

21.Mr Li relied on the Court of Appeal case Luen Hop Hong (a firm) v The bank of East Asia Limited[5] and submitted that the absence on the document presented of some prescribed words under the letter of credit does not necessarily render the presentation a non-compliance. 

22.In Luen Hop Hong, the letter of credit described the subject engines as “second hand Gardner 8L 3 Diesel Engines, with Gardner Model 3UC 3:1 reduction marine gearboxes”.  In the invoices tendered, the word “Model” was omitted in the description of the engines.  It was held that even in the absence of the word “Model” there could be no doubt that the notation “3UC” was a model number given what was stated in the letter of credit.  Hence, there was no material discrepancy between the invoice and the letter of credit.

23.In my judgment, with respect, the situation in Luen Hop Hong is quite different from the present situation in that it cannot be said in the present case that, when looking at the documents presented alone, there could be no doubt that the description “KSD3504 SD400” stands for  the steel grade of the goods.  Besides, the issue in Luen Hop Hong was whether the description of the goods on the document presented conforms to the description used in the letter of credit.  Whereas in the present case, the issue is whether it should be expressly indicated in the P/L that the description was in fact the steel grade.

24.Further, even if BOC has been informed of subsequently by SMBC that the description in fact represents the steel grade, it is at least arguable that the bank should not just take the words of SMBC at its face value and to assume a risk of litigation with the Applicant.

25.In my view, as submitted by Mr Khaw, the English Court of Appeal case J H Rayner & Co Ltd v Hambro’s Bank Ltd[6] is more relevant to the present situation. 

26.In Rayner, the letter of credit described the goods as “Coromandel groundnuts” and the seller tendered a bill of lading for “machine-shelled groundnuts kernel” accompanied by an invoice for “Coromandel groundnuts”.  At first instance, Atkinson J found that a sale of Coromandel groundnuts is universally understood to be a sale of machine-shelled kernels.  By saying “universally understood” Atkinson J means all the dealers who deal in groundnuts know.

27.In allowing the appeal, the English Court of Appeal held that the bill of lading failed to comply with the letter of credit.  The Court also took the view that whether “machine-shelled groundnuts kernel” actually meant “Coromandel groundnuts” was neither here nor there.  MacKinnon LJ had this to say in his judgment:

“… it is quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of every one of the thousands of trades for whose dealings he may issue letters of credit. A homely illustration is suggested by the books in front of me. If a banker were ordered to issue a letter of credit with respect to the shipment of so many copies of the ‘1942 Annual Practice’ and were handed a bill of lading for so many copies of the ‘1942 White Book’, it would be entirely beside the mark to call a lawyer to say that all lawyers know that the ‘1942 White Book’ means the ‘1942 Annual Practice’. It would be quite impossible for business to be carried on, and for bankers to be in any way protected in such matters, if it were said that they must be affected by a knowledge of all the details of the way in which particular traders carry on their business.”

28.I respectfully agree with Mackinnon LJ on his views.  If BOC is to be imputed of the knowledge of “KSD3504 SD400” actually stands for the steel grade without being informed of anywhere on the face of the documents presented, the bank will be placed with too heavy a burden to possess the technical knowledge on steel bars trading.

29.In my judgment, BOC has clearly raised a triable issue as to whether the bank should be placed with such a burden in deciding whether to honor a letter of credit upon presentation of documents.

30.I agree with Mr Khaw that BOC has all along made known to Chiyoda its defence and Chiyoda should have known that this is not an appropriate case for a summary judgment application. 

31.In the circumstances, I order that Chiyoda’s summons be dismissed with costs to BOC.  I am prepared to assess BOC’s costs summarily on the papers.  I direct that BOC is to furnish to the Court and serve to Chiyoda its statement of costs for summary assessment within 14 days from the date of this judgment.  Chiyoda is to furnish to the Court and serve its list of objections, if any, within 14 days thereafter.

Mr C Y Li, SC, instructed by Fred Kan & Co, for the Plaintiff

Mr Richard Khaw, instructed by K W Ng & Co, for the Defendant