BANK OF CREDIT AND COMMERCE HONG KONG LTD. v. OVERSEAS TRADING & CO.

IN THE COURT OF APPEAL

No. 68 of 1995
(Civil)

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J U D G M E N T

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Leonard, J. (giving the judgment of the Court) :

1. This is an appeal from a decision of Seagroatt J. who on 17th February 1995 allowed an appeal against a decision of Mr. Registrar Betts who on 29th November 1994 had entered judgment for the Plaintiff (the Appellant) under R.S.C. O.14 for the sum of US$214,913.96 and costs. Seagroatt J. gave unconditional leave to defend and also gave leave to amend the Defence as well as making certain orders as to costs.

2. The Appellant is a bank in liquidation and the Respondent became its customer in 1991. It is common ground between the parties that by an agreement in writing, dated 22nd January 1991 headed "General Agreement for Commercial Business" ("the Agreement"), the Appellant agreed to give credit to or to perform banking services for the Respondent. The Agreement provided among other things for the repayment by the Respondent on demand of all monies advanced to it by the Appellant with interest. In addition, Clause 10 is in the following terms :-

"That where you discount purchase or make any collection on any of my (our) bills, drafts or documents upon my (our) request, I (we) agree that any discounted or purchased amount received from you or any credit given by you for any such bills, drafts or documents is conditional and is subject to collection and receipt by you of full payment thereof and I (we) agree to refund or reimburse you for the amount so discounted, purchased or advanced together with the accrued interest and all expenses and charges on demand. ...

It is agreed that the indebtedness as shown by you against me (us) in our account, shall at all times be conclusive evidence of the amount owing by me (us). Our liability hereunder shall be joint and several ..."

3. Having sold some goods to a purchaser in Indonesia, the Respondent drew a draft on its purchaser and discounted it to the Appellant which, pursuant to the terms of a Letter of Credit issued by PT Bank Pacific ("the issuing bank"), was to present it with other documents to the issuing bank for payment. For the purposes of the transaction, the Respondent signed the Appellant's standard form ("the application") entitled "Application for Collection/Discount/Negotiation of Documentary Bill(s)". The application was dated 30th January 1991.

4. The Appellant accepted and acted upon the application, and the following words, which appear in the application, thus became an express term of the agreement :

"We" (i.e. the Respondent) "engage to reimburse you for any advances made in anticipation of collection as well as all disbursements made in effort to [collect] the same."

5. On 5th February 1991 the issuing bank by telex authorized the Appellant to negotiate the documents notwithstanding certain discrepancies, and on 8th February 1991 the Appellant negotiated and/or discounted the documents and advanced US$165,206.67 to the Respondent, crediting that sum to the Respondent's account.

6. Today, some four years and five months later, the Appellant remains unpaid. The issuing bank, instead of paying, has purported to set off against the money payable certain sums which it claims to be owed by "BCC" in respect of unpaid travellers' cheques. The Appellant has repeatedly told the issuing bank that the Appellant is a legal entity quite different and separate from Bank of Credit and Commerce International Overseas Limited and from Bank of Credit and Commerce International SA, one of which may owe money to the issuing bank, so that no set off may be made. The issuing bank, however, apparently insists on treating all entities whose name includes "Bank of Credit and Commerce" as one. In a telex dated 13th August 1993, it said : "We deal with Bank of Credit and Commerce (BCC) as an institution".

7. Thus it may be seen that it is not due to any fault on the part of the Respondent that the Appellant remains unpaid by the issuing bank. There is a private dispute between the banks. Nevertheless, the fact is that the Appellant has not been paid and it claims the reimbursement to which, on the clear terms of its agreement with the Respondent, it is prima facie entitled. The Appellant is not suing the Respondent as drawer of the draft. It seeks reimbursement under its agreements with the Respondent.

8. When the matter came before the Registrar, there was before him a Defence, supported by an affirmation made on 1st August 1994 by Mr. Lau Sik Wei, a partner in the Respondent, who said that at a meeting at the Hilton Hotel on 17th January 1991, he had been led by the representations of two named officers of the Appellant to believe that the Appellant was an agent for the issuing bank and could make immediate payment against the Letter of Credit, though it was not to mature for 180 days. Had it not been for those representations, according to the Respondent at that time, it would not have negotiated the draft to the Appellant and would have dealt with its own bankers. The affirmation made on the Appellant's behalf in support of the Order 14 application suggested that the Defence disclosed no defence to the claim. The Registrar entered judgment for the Plaintiff.

9. By the time the matter came before Seagroatt J. on 17th February 1995, there was a supplemental affirmation from Mr. Lau, made and filed on 9th February 1995 and put in evidence with the leave of the judge. Mr. Lau said in that affirmation that upon reading a letter which had been exhibited to his previous affirmation, he had remembered that at the meeting in the Hilton Hotel on 17th January 1991, the Appellant's officers had expressed a wish to visit the Respondent's office. As a result, there had been a further meeting at about 5:00 p.m. that day in Mr. Lau's office at Dominion Centre.

10. Part of Mr. Lau's affirmation is in these terms :

"The Plaintiff's Officers assured me that after negotiation of the L/C, the Defendant would be completely out of the picture and the Plaintiff would not pursue any payment from the Defendant since the Plaintiff had exclusive and close connection and active mutual inter-bank accounts and business dealings maintained with (the issuing bank). The Plaintiff's Officers further represented to me that since the Plaintiff was the authorised agent and advising bank for the L/C, the Defendant could only obtain payment through the Plaintiff and further, it would cause me great trouble and delays if I should negotiate the L/C or obtain payment through other banks in Hong Kong. The Plaintiff's Officers created an impression on me that the Defendant could obtain payment through the Plaintiff only and not through other banks in Hong Kong".

In addition, Mr. Lau stated in his supplemental affirmation that it was not until April 1993 that he received a letter from the Plaintiff advising him that the issuing bank had refused to honour the Letter of Credit, which should have been payable in mid-1991. He said :

"For over 2 years after the maturity date of the L/C, the Plaintiff has failed to notify me of the status thereof for me to take immediate remedial action against all relevant parties, including the Plaintiff's Officers".

Mr. Lau claims as a result to be relieved of all liability "under the Draft and the L/C".

11. The Appellant contends that the law relating to bills of exchange is irrelevant and that the general law of contract applies since the Appellant is relying not upon its rights against the Respondent as drawer of the draft but on the Respondent's liability under the agreements. It has been pointed out, however, by Mr. Denis Chang, Q.C. for the Respondent that the application contains the following instruction to the Appellant :

"Advise non-acceptance/non-payment by air mail/cable".

We note that the instruction appears under the heading "For bills not under L/C".

12. So far as Seagroatt J. was concerned, the supplemental affirmation appears to have tipped the scales in favour of the Respondent. This is what he said in his judgment :

"The linking of that subsequent affirmation with the original, raises in my view the possible defence of oral collateral contract which overrides the written terms and conditions of 22.1.91 and the application of 30 January 1991. Criticism has rightly been made of the basis upon which the Defendant has sought to put forward his Defence. I have had serious reservations because of the lateness of the Defendants contention both in relation to time generally and because it only emerges with any degree of clarity in the second affirmation. But I also have to bear in mind that approximately 2 years elapsed before the plaintiffs gave notice of their intention to claim from the Defendant. That lapse of time is open to a number of inferences, one of which supports the Defendant's contention, that it was given to understand that there would be no recourse against it. I certainly cannot say the Defence is a sham. There is a defence of some substance. I allow the appeal. In my view, it will be necessary to amend the Defence in order to plead with clarity".

13. In due course, the Respondent filed an amended Defence. The principal defence now relied on is that the agreement between the parties was subject to an express oral term that the documents were discounted and/or negotiated without recourse to the Defendant. There is a further and alternative defence that the oral assurance given by the Plaintiff's (named) officers led to a binding collateral contract, the consideration for which was the Defendant agreeing to enter into the agreement relied on by the Appellant.

14. The particulars given showed that the alleged assurance was given at a meeting between the Plaintiff's officers and Mr. Lau at Mr. Lau's office at about 5:00 p.m. on 17th January 1991. The assurance was said to be that upon the negotiation by the Defendant of the credit issued by the issuing bank in favour of the Appellant, the Respondent would be completely "out of the picture" and the Appellant would not seek payment from the Respondent but would seek it from the issuing bank. It is alleged that by that assurance the Plaintiff warranted that it would negotiate the credit without recourse to the Defendant.

15. With regard to the defence of collateral contract, Mr. Faulkner for the Appellant reminded this Court of the words of Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at p. 47 :

"But such collateral contracts must from their very nature be rare. ... Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contract but the existence of an animus contrahendi on the part of all the parties to them must be clearly shewn. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject-matter."

We were reminded that those remarks were quoted by Lord Goff of Chieveley in Universal Dockyard Ltd. v. Trinity General Insurance Co. Ltd. [1989] 2 HKLR 160 and by this Court in Ip Ming Wai v. World Ford Development Limited (CA 187/92). Mr. Faulkner submitted that there was more than the usual suspicion in the present case given the lateness of the raising of the issue of collateral contract.

16. According to the evidence presently before the Court, the Respondent's first reaction to the Plaintiff's claim is contained in a letter of 4th May 1993 in which the Respondent's solicitors said :

"It is unconscionable to involve our client as an innocent customer in your dispute with Bank Pacific. Our client will of course join Bank Pacific" (the issuing bank) "as a Third Party in any litigation, who will in turn counterclaim against you in a circular litigation."

It is submitted on behalf of the Appellant that the fact that it apparently did not occur to the Respondent in May 1993 to allege the existence of an oral collateral contract suggests that such a collateral contract did not exist. It is pointed out by Mr. Faulkner that in his original affirmation Mr. Lau says that reliance was placed on matters other than the alleged promise not to have recourse to the Respondent.

17. Those arguments will be available to the Appellant if this matter goes to trial but at this stage it seems to us that the proper and well known approach is that to be found in the line of cases which includes Banque de Paris et Des Pays-Bas (Suisse) S.A. v. Costa de Naray and Christopher John Walters [1984] 1 Lloyd's Rep. 21, Murjani v. Bank of India [1990] 1 HKLR 586 and Ng Shou Chun v. Hung Chun San (CA 182/93). The Court must look at the whole situation to see whether the Respondent has satisfied it that there is a fair and reasonable probability of a bona fide defence. It is not for the Court to embark on a mini trial of the action on affidavit evidence in Ord. 14 proceedings. As Godfrey J.A. said in Ng Shou Chun :

"It will in future be sufficient for the court to ask itself the simple question : 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is, not whether the defendant's assertions are to be believed; it is whether those assertions are believable".

18. Seagroatt J. was well aware that the defence was raised very late, and that was a matter which evidently concerned him. It was, however, his duty to look at the defence in its whole context. On the evidence before him and before this Court, the situation was extraordinary in that whereas the Respondent believed that the draft drawn in January 1991 was to mature in 180 days from sight, the Appellant first told the Respondent in a letter dated 21st April 1993 that it had not been paid. It may not be surprising if the Respondent's first reaction upon hearing that was to tell the Appellant to sort the matter out with its opposite number and to leave the Respondent out of their private quarrel.

19. It is true that there is evidence that the issuing bank had repeatedly purported unilaterally to extend the maturity date but it is at first sight curious nonetheless that the Appellant did not see fit to tell its customer what was going on. The liquidation and the ensuing turmoil did not prevent an active correspondence between the two banks and there is nothing to suggest that there was anything to prevent the Appellant from writing to its customer as soon as the date for maturity had passed. That date was 17th July 1991, the day when the order for the provisional liquidation of the Appellant was made.

20. Notwithstanding the lateness of the articulation of the main defence, and even bearing in mind that the defence is of a kind which is not easy to establish, we do not feel able to say that the defence is not credible. It may well be that at the trial of the action it will fail. Nevertheless, there is an issue or question in dispute which ought to be tried.

21. At the hearing of the appeal, there was a question as to whether the original affirmation of Mr. Lau taken together with his subsequent affirmation could be said to support the pleaded defence. In response to a question from the Court, Mr. Chang told us from the Bar that he had express instructions to the effect that the drafting of the supplementary affirmation did not fully accord with instructions which had been given to his instructing solicitors. We therefore took the unusual course of giving leave to file a further affirmation. When it was served, Mr. Faulkner for the Respondent conceded that the evidence in its final form met his argument that it did not in law support a collateral contract. By pre-arrangement, Mr. Faulkner made further written submissions in relation to the second supplemental affirmation. He submitted the evidence to detailed scrutiny and sought to cast doubt upon its credibility. We have taken those submissions into account, but they do not cause us to doubt whether Mr. Lau's assertions are believable. Having found that there is a credible defence to the Appellant's claim, even though it may not be believed at trial, we would dismiss the appeal, and allow to stand the order of Seagroatt J. giving leave to defend. We make an order nisi that the Respondent's costs of the appeal be taxed if not agreed and paid by the Appellant, save that there be no order as to the costs of the preparation of the second supplemental affirmation of Mr. Lau : the need for Mr. Lau to make that affirmation only arose because of deficiencies in his first supplemental affirmation.