ELITE BRILLIANT LTD v. BST (HK) LTD

HCA88/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 88 OF 2012

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J U D G M E N T

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Introduction

1.  This is an application by the defendant (“D”) for summary judgment against the plaintiff (“P”) on D’s counterclaims, for a total sum US$2,116,516.08 as follows:

(i) US$ 1,977,729 under paragraph 37 of the Defence and Counterclaim (“Counterclaim”);

(ii) US$138,789.08 under paragraph 43 of the Counterclaim.

The Law

2.  D’s application was issued under Order 14 Rule 5 of RHC.  

3.  There is no dispute that where a defendant to an action begun by writ has served a counterclaim, then the defendant may, on the ground that the plaintiff has no defence to a claim made in the counterclaim, or to a particular part of such a claim, apply to the court for summary judgment on that claim or part, subject to such claim not being a claim referred to Order 14 rule 1 (2) of RHC[1]. Further Order 14 rules 2, 3 and 4 shall apply to such an application, subject to modifications[2].

4.  Order 14 rule 5 is said to be useful in two respects: (1) it avoids multiplicity of proceedings, so that a defendant who has a cross-claim against the plaintiff to which there is no defence, is not compelled to begin a separate action in order to apply for summary judgment; and (2) it discourages a person from adopting what is sometimes thought to be a tactical advantage of being a plaintiff when in fact there is an unanswerable cross-claim against him.[3]

5.  It is further said that a defendant to an application for summary judgment may show cause against the application by a preliminary or technical objection, or on the merits[4].

Brief Facts

6.  P, a Hong Kong company, is a member of ILC Group in India (“ILC”). It was not disputed that originally, it was intended that P would be the seller and D would be the buyer, and thus an agreement was entered into between P and D on 27 May 2010 for D to buy 70,000 wet metric tons (“WMT”) (+/-10%) at the seller’s option, of iron ore fines (“Goods”) from P at US$137.50 per dry metric ton (“DMT”)[5].

7.  It was then agreed between the parties that P’s supplier based in India, Mineral Embassy, would act as direct seller, and thus the above contract was replaced by the following:

(i) An agreement dated 27 May 2010 for services to be provided by P, at a remuneration of US$3 per DMT, for the purchase of the Goods by D (“Remuneration Agreement”)[6];

(ii) An agreement dated 28 May 2010 for Mineral Embassy in India to supply 70,000 WMT (+/-10%), at the seller’s option, of the Goods to D at US$134.50 per DMT (“Supply Contract”)[7].

8.  The Remuneration Agreement sets out P’s role thereunder and provides that D shall pay remuneration to P at the rate of US$3 per DMT for the Goods based on independent assayer report documents as per the terms of contract on completion of loading the cargo and on producing the copy of B/L, and the “Remarks” stipulates that “Remuneration Payment to be done with 3 days after receipt of clean documents as per L/C and contract at Bank Counter or BST (HK) Ltd”.

9.  The Supply Contract sets out the quantity of Goods to be purchased, and further in clause 6 that D shall open within 7 working days an irrevocable letter of credit in favour of Mineral Embassy for an amount in US Dollar sufficient to cover 100% of the CFR contract value, including 98% for provisional payment and 2% for balance.  Clause 6 further sets out the terms respectively as to provisional payment and final payment and Clause 7 sets out the 7 items of documents required respectively for provisional payment (“Documents”).

10.  D then entered into an agreement on 28 May 2010 to sell to a PRC company Rizhao Zhongrui Native Produce Co Ltd (“Rizhao”) through its agents the 70,000 WMT, +/-10%, of the Goods at a higher price of US$139.50 per DMT (“Sub-Sale Contract”)[8], under which the same set of 7 items of the Documents would be required for provisional payment.

11.  Payment under both the Supply Contract and the Sub-Sale Contract was to be by letter of credit.  The main one was established by D as applicant with Mineral Embassy as beneficiary (“Main L/C”) issued by Standard Chartered Bank (“SCB”) with the beneficiary bank being the State Bank of India (“SBI”), and the other one was established by Rizhao as applicant in favour of D as beneficiary, with SCB being the beneficiary bank (“Back to Back L/C”). Again, the same set of the Documents was listed under both the Main L/C and the Back to Back L/C for provisional payment.

12.  The Goods were loaded in India between 27 and 30 May 2010.  The bill of lading was issued on 30 May 2010[9] (“Bill of Lading”).  Inspection certificates were issued on 31 May 2010 at the loading port by the Inspectorate Griffith India PVT Ltd.  The Goods were discharged in Lanshan Port in Shandong Provision in PRC between 14 and 18 June 2010.

13.  The certificate of quality issued on 31 May 2010 (“Certificate of Quality”)[10] stated the moisture content to be “2.33 pct”, but the certificate of weight issued on the same day (“Certificate of Weight”)[11] stated the moisture content of the Goods to be “2.73 pct”.  Thus, although the Goods shipped were 69,394.54 DMT, according to the Certificate of Weight, it was certified to be 69,110.335 DMT only.

14.  The Main L/C was first opened on 14 June 2010[12], and later amended on 18 June 2010[13]. This was opened for negotiation until 25 June 2010. The date of presentation of the Documents to SCB was originally within 10 days after the date of the Bill of Lading, but this was amended to 25 days.  The last day would thus be 24 June 2010.

15.  D complained that at the Indian end, no one had checked the two Certificates properly.  The discrepancy was not spotted by P or the staff of ILC in India or by SBI.

16.  A provisional invoice for payment of 98% of the Goods under the Main L/C was issued by Mineral Embassy on 15 June 2010 (“Provisional Invoice”)[14]. The Provisional Invoice was based on 69,394.54 DMT and at @US$134.50 per DMT, the invoiced amount was thus US$9,333,565.63.

17.  The Back to Back L/C was opened on 19 June 2010[15], and under the Back to Back L/C, the Documents had to be presented within 5 days of the opening.  Thus, the last day would be 24 June 2010.

18.  From emails produced by D[16], it appears that on Sunday 20 June 2010, certain documents were sent by ILC to D, and then early in the morning of Monday, 21 June 2010, Ms Yau, D’s administrative assistant, sent an email to ILC informing them the need for amendment, and requesting for the Provisional Invoice.  This was duly sent by ILC that morning.  On the same day Ms Yau requested ILC to advise up-dated status of the shipping documents and if they had already sent to SCB, the relevant courier number for her information and tracking.  In reply, ILC sent to D on the same day the following documents:

(i) Provisional Invoice

(ii) Bill of Lading

(iii) Certificate of Quality

(iv) Certificate of Weight

(v) Certificate of Origin

19.  Then on 23 June 2010, at 1:11pm, upon discovering the discrepancies, Ms Yau informed ILC by email the amendments required urgently on the Certificate of Quality and Certificate of Weight[17]. The revised drafts were then sent immediately by ILC for D’s confirmation, and then on 23 June 3:11pm, Ms Yau replied to say the attached draft revised certificates were OK[18], and she told ILC D needed 1 original + 3 copies for each of the two Certificates[19].

20.  ILC sent a representative to fly to Hong Kong to personally deliver the corrected Certificates to D and these were duly delivered.  Ms Yau  sent an email at 12:36pm on 24 June 2010 to ILC to confirm that the Certificate of Weight and Certificate of Quality “just “ brought to D’s office were in order, and that for the incorrect ones, they would send them back to ILC as soon as they received them from the bank[20]. P relied on this email (“Waiver Email”) as part of the evidence of their case that D had agreed to waive the discrepancies.

21.  P then issued a debit note on 24 June 2010 to D for US$208,183.62[21], being the amount payable under the Remuneration Agreement, namely US$3 per DMT for 69,394.54 DMT (“Debit Note”).

22.  According to Ms Yau, after receiving the corrected Certificates, she took them to SCB “outward bills department” but they refused to accept them.  Ms Yau said that she then took one set to the “inward bills department” for the purpose of the Back to Back L/C, and they were accepted for that purpose.

23.  On 25 June 2010, SCB issued the Refusal Advice notifying SBI that negotiation was rejected, and D was notified.  According to D thereafter, Rizhao knew the negotiation had failed and by that time the prices of the iron ore fines had fallen drastically.  D had to renegotiate with Rizhao the price of the Goods downwards from US$139.50 per DMT to US$111 per DMT and an “Addendum” was added to the Sub Sale Contract on 14 July 2010[22].

24.  Upon a new deal being struck between D and Rizhao, the original Bills of Lading were eventually released by SCB sometime in July 2010 after D made an interim payment to Mineral Embassy under the agreement mentioned hereafter, so that Rizhao could take possession of the Goods. 

25.  As between D and Mineral Embassy, there was eventually arbitration proceedings in Singapore over the balance of the payment in December 2011 and their disputes were resolved.

26.  P issued a writ and statement of claim against D on 17 January 2012 for the sum of US$208,183.62 due under the Remuneration Agreement, as per its Debit Note which had remained unpaid.

27.  D filed the Counterclaim on 13 March 2012, denying P’s claim and counterclaiming a total of US$3,383,042.99.

28.  One of D’s counterclaims is that D suffered loss of $1,977,729 under the new deal with Rizhao, for which D is seeking summary judgment.

29.  D also alleges in the Counterclaim that P had wrongfully suggested to D to negotiate with Mineral Embassy a settlement agreement (“Settlement Agreement”) in exchange for Mineral Embassy’s Documents, including the set of original Bills of Lading, when it was P and/or Mineral Embassy which were in breach.  D claims that P had wrongly suggested D to pay Mineral Embassy at US$130 per DMT (by a provisional payment of 98% at US$113 per DMT and a balance of US$17 per DMT later) under this Settlement Agreement.  Further, as to the balance of US$17 per DMT, D alleges that P wrongfully requested D to agree to pay US$5 per DMT on or before 31 December 2010, with the balance of US$12 per DMT to be paid by instalments against future shipments.  

30.  As a result of P’s wrongful suggestion, D made an interim payment to Mineral Embassy of a total of US$7,728,064.79 on 22 July 2010 being 98% of the price at US$113 per DMT, and a further sum of US$138,789.08, being US$2 out of the above mentioned US$5 per DMT, was paid in advance as requested by P on or about 29 July 2010.  D counterclaimed the sum of US$138,789.08 from P, and this is the other claim for which D is now seeking summary judgment.  

31.  D had also counterclaimed against P for sums D paid Mineral Embassy under the arbitration settlement and the related costs of the arbitration, as it was D’s case that all such sums would not have had to be paid were it not for P’s breaches of the Remuneration Agreement, but these claims in the Counterclaim are not subject of D’s present application for summary judgment.

32.  P filed a reply and a defence to the Counterclaim on 8 May 2012.

33.  P’s defence to D’s Counterclaim is briefly:

(i) P had performed the Remuneration Agreement and was not in breach of it;

(ii) D had agreed to waive the discrepancies if P produced corrected documents at D’s offices in Hong Kong, which P duly did;

(iii) Even if there been no agreement to waive the discrepancies, D ought to have waived them as this would have avoided the alleged loss.

Discussion and Conclusion

34.  D’s Counsel, Mr Pirie, submitted that P only issued a “tactical” statement of claim, when clearly P was in breach of its obligations under the Remuneration Agreement.

35.  Mr Pirie further submitted that P’s defence to Counterclaim had no merits, for reasons including the following[23]:

(i) P was in breach of Clause 1 of the Remuneration Agreement, by failing to provide clean documents (para 4.01);

(ii) Mineral Embassy and/or P chose not to deliver the corrected Certificate of Quality and the Certificate of Weight to SBI to enable them to negotiate them with SCB, and P was thus in breach of the Remuneration Agreement (para 4.02);

(iii) P was in breach of the parallel requirements for provision of one set of clean documents under Clause 7 of the Supply Contract (para 4.03);

(iv) There was no waiver of the discrepancies on D’s part (para 4.04);

36.  As mentioned earlier, the Main L/C, as amended, provided that Documents must be presented within 25 days after the Bill of Lading date, being 30 May 2010.  Thus, the latest date for presentation of the Documents under the Main L/C was 24 June 2010.

37.  Under the “Remarks” of the Remuneration Agreement, the payment was to be done within 3 days after receipt of “clean documents” as per the Main L/C and contract at bank counter or D (emphasis added).

38.  Mr Pirie submitted that the words “clean documents” referred to all the Documents, and further the word “clean” means not discrepant.

39.  Mr Smith, Senior Counsel for P, on the other hand, submitted that the words “clean documents” must refer to the bills of lading, as the word “clean” is not used except in relation to transport documents, such as bills of lading, and means that there should be no reservation (or “clausing”) on the face of the bill of lading stating that the goods were shipped in a damaged condition[24]. As pointed out by Mr Smith, the importance of the bill of lading being clean is that a bill of lading is a document of title to the goods and its value as a document of title depends upon it being clean.

40.  Mr Smith  relied on  the reference to “Full set of “Clean on board” ocean B/L made out “to Order”, blank endorsed, marker “Freight Payable as per Charter Party” Notify “To Order” in the list of Documents set out in the Supply Contract to support his submission that “clean documents” meant only the bills of lading.  Further, this was what was referred to on the list of the Documents required for provisional payment in the Main L/C and in the Back to Back L/C.

41.  In the present case, the Bill of Lading was clearly marked “Clean on Board”[25], and the complete set of Bill of Lading was sent to SCB on or before 24 June 2010. By 24 June 2010, all the Documents under the Main L/C were either at SCB or in the hands of D, and thus Mr Smith said P should be entitled to the payment under the Remuneration Agreement.

42.  In the Remuneration Agreement, the words in the  “Remarks” was expressed to be a continuation of the sentence in Clause 2 a, and thus the sentence should read “BST shall pay by way of remuneration to Elite USD 3… for Fines per DMT based on independent assayer report documents as per the terms of contract on completion of loading the cargo and on producing the copy of B/L Remuneration Payment to be done within 3 days after Receipt of clean documents as per L/C and contract at Bank Counter or BST (HK) Ltd” .

43.  In the Main L/C and the Back to Back L/C, and also in the Supply Contract, the words “Clean on Board” only referred to the Bill of Lading, and no other of the Documents was stated to have to be “clean”.  In my view, there are merits in Mr Smith’s submissions that “clean documents” only referred to the Bill of Lading. 

44.  P accepted that there were some discrepancies in the first set of Documents submitted to SCB, such as the Certificates of Quality and Weight, but upon discovering these discrepancies, P’s case was that D asked for and ILC agreed to send the corrected Certificates to D for submission to SCB.

45.  Mr Smith pointed out that as some of the Documents were discrepant, SCB was bound to proceed in accordance with Article 16 under USP 600 which meant:

(i) It could refuse to honour the Main L/C: Art 16 a;

(ii) It could approach D for a waiver of the discrepancies: Art 16 c iii;

(iii) If it does not honour the Main L/C, it must hold the documents and it cannot pass them to D unless D waives the discrepancies: Art 16 c iii.

46.  Thus, Mr Smith submitted that unless D waived the discrepancies, SCB would not be able to present any of the Documents under the Back to Back L/C because the Documents presented would be retained by SCB.

47.  It is P’s case that D agreed to waive the discrepancies if ILC sent over to Hong Kong the corrected Certificates to replace those discrepant ones.  This was borne out by the fact that ILC’s representative hand carried the documents to Hong Kong and by D sending the Waiver Email. 

48.  These corrected Certificates were further required for the purpose of presenting them for negotiation under the Back to Back L/C, but as pointed out by Mr Smith, such negotiation would not be possible without a full set of the Bill of Lading, together with all the other Documents under the Main L/C, which would not be available for further negotiation unless D waived the discrepancies.

49.  Mr Smith therefore submitted that when D sent the Waiver Email, it was intending to waive the discrepancies in order to obtain from SCB the full set of Documents for negotiation under the Back to Back L/C, and that any problems that arose from the Main L/C and the Back to Back L/C not being honoured were entirely caused by D’s own failure to honour its promise to waive the discrepancies.

50.  Mr Smith further submitted that even if there had been no promise by D to waive the discrepancies, there was no commercial reason for it choosing not to waive the discrepancies, when, by 24 June 2010 it had come into possession of the corrected Certificates that would have enable it to make a valid presentation under the Back to Back L/C by tendering the corrected Certificates along with the other of the Documents that would have been available upon SCB honouring the Main L/C following a waiver by D.

51.  Mr Smith referred this court to the fact that a very high proportion of presentations under letters of credit involve some discrepancies in the documents presented, and in a very high proportion of such cases the discrepancies are waived by the applicant[26].

52.  D had suggested that for a waiver, any bank would require a letter of indemnity, or an additional cash deposit when considering a waiver.  D said they could not provide this, and neither P nor any member of the ILC had asked or offered a letter of indemnity against then unknown discrepancies[27].

53.  Mr Smith submitted that this would not be the case, since the contractual relationship in so far as the Main L/C was concerned was only between SCB and D, and there could be no question of SCB requiring an indemnity from D as a condition of deciding to honour the Main L/C following a waiver of discrepancies by D[28].

54.  In any event, so far as this court can see, there was no sufficient evidence that SCB had in this case actually required any letter of indemnity or additional cash deposit.  Ms Yau was the one who personally went to SCB with the corrected Certificates, and according to her, she went as she was told by her boss to try to help P.  There was no mention in her affirmation that she was told by SCB to provide indemnity or additional cash deposit.

55.  D further alleged that Mineral Embassy and/or P chose not to deliver the corrected Certificates to SBI to enable them to negotiate them with SCB.  As pointed out by Mr Smith, the email message from Ms Yau at 3:14 pm on 23 June 2010[29] made it clear that D was expecting ILC to send the corrected certificates by hand to arrive the following day, that being the last date for presentation of documents under the Main L/C.  Further Ms Yau had informed ILC that D needed the Original (emphasis added) and 3 copies of each of the Certificates.

56.  Since the originals could only be in one place, and they were to be hand delivered to Hong Kong, they could not have been handed to SBI.

57.  D’s director, Mr Ashish, said in his affirmation that SCB had rejected the corrected Certificates when these were presented to SCB by Ms Yau as those corrected ones did not originate from SBI[30]. It appears from what Mr Ashish said that SCB had rejected them on the day of presentation by Ms Yau.  P said there was no such evidence from Ms Yau, nor was there any letter from SCB to this effect.

58.  There were 4 discrepancies set out in SCB’s Refusal Advice.  Mr Pirie accepted that the first two discrepancies were not relevant.  The 3^rd and 4^th discrepancies related to the two old Certificates, before correction.

59.  I accept that P’s evidence concerning the agreement to waive the discrepancies is credible in light of the emails and the surrounding circumstances.  Further there are factual issues in relation to the agreement of waiver which cannot be decided on an Order 14 application.

60.  It has been said that Order 14 rule 5 should not be resorted to except in a clear case and in most cases in which a defendant might desire to apply for summary judgment on the counterclaim, the plaintiff will have already served his statement of claim; and unless the claim or claims made by the plaintiff can be shown to be unsustainable or not bona fide or wholly unconnected with the defendant’s counterclaim, the defendant may not be able to depose to his belief that there is no defence to his counterclaim or part thereof  in respect of which he seeks to apply for summary judgment[31].

61.  Having considered all the circumstances, P’s claim/s are cannot be said to be unsustainable or not bona fide or wholly unconnected with D’s Counterclaim. I am of the view that P’s defence to the Counterclaim has merits and P has raised credible triable issues, and that P should have leave to defend.

62.  As to whether any conditions should be imposed, there were no authorities put in by Mr Pirie, but it is clear from paragraph 14/4/15 of the Hong Kong Civil Procedure, 2013, Volume 1, that a conditional leave is usually granted when there is a good ground in the evidence for believing the that the defence set up is a sham defence, or where there is something suspicious in the defendant’s mode of presenting his case, or the court is left with a real doubt about the defendant’s good faith.  In the present case, I do not find that P’s defence to the Counterclaim falls within such a case.  I am of the view that conditional leave is not appropriate in the present case. 

63.  D’s summons is hereby dismissed.  Costs will be to P to be taxed and paid forthwith.  This is to be a costs order nisi which will be made final after 21 days.

64.  Finally, I would like to express my thanks to all the Counsel for their assistance to the court.