N.V. KONINKLIJKE SPHINX GUSTAVSBERG v. COOPERATIEVE CENTRALE, RAIFFEISEN-BOERENLEENBANK B.A.

HCCL 188/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.188 OF 1997

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J U D G M E N T

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Introduction

1. This action arises out of an irrevocable Standby Letter of Credit No.ILC00102 which was issued by the Hong Kong branch of the defendant bank on 8 February 1995.

2. This credit was in the sum of NLG 2,000,000, and was issued in favour of the plaintiff as beneficiary in consideration of the plaintiff granting a document against acceptance facility to one Siu Fung Strategy Ltd, a company which is described in the L/C as 'Secured Party' and as party to a Sales Agreement dated 14 October 1994.

3. The credit was subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) - otherwise known as the 'UCP 500' - and was governed by Hong Kong law.

4. The plaintiff's presentation of documents under this L/C was rejected by the defendant bank on the basis that the documents were discrepant.

5. In this case the plaintiff says that the defendant bank was not justified in its decision to refuse the documents, and to refuse payment under the credit, but that if the documents were discrepant as alleged, that the bank took too long to notify the plaintiff of its decision. Accordingly the plaintiff seeks payment under the credit of the entirety or at least a part of the sum for which the credit was issued.

6. This action is of some age, the writ having been issued on 14 October 1997. In the circumstances it is perhaps fortunate that the legal issues dividing the parties are narrow, as is the factual context.

The factual background

7. The plaintiff, which I shall henceforth refer to as 'KS', is part of a group which manufactures and sells porcelain sanitary products. It was selling these products to Siu Fung Ceramics Holdings Ltd, a Hong Kong company now in liquidation, pursuant to a Sales Agreement dated 14 October 1994.

8. The standby L/C the subject of this case was issued in favour of KS, and was intended to represent security for the due fulfillment of the purchase obligations of Siu Fung Ceramics. In fact, by clause 7 of the Sales Agreement it was contemplated that a demand bank guarantee, confirmed by ING Bank, would be issued to secure the buyer's payment obligations, but in the event it was a standby L/C which ultimately was issued.

9. This standby L/C was intended to be a security of last resort. In the ordinary course payment by Siu-Fung for the sanitary products it was purchasing was intended to be effected by the honouring of bills of exchange drawn by the seller, KS, upon Siu Fung, and delivery was to occur upon acceptance by the buyer of the drafts drawn upon it. The sale of these products, therefore, was contemplated to be on D/A terms.

10. The L/C was amended twice, first on 9 February 1995, which amendment removed the restriction upon partial drawings, and thereafter on 30 January 1996, thereby extending the L/C expiry date from 31 January 1996 to 31 October 1996.

11. On Thursday 31 October 1996, apparently before noon on the final day of the currency of the L/C, the relevant documents were presented to the defendant, via ABN Amro, in circumstances of obvious haste, Mr Dejong of the plaintiff having flown from the Netherlands to Hong Kong, arriving on Wednesday 30 October 1996, in order personally to convey these documents to ABN Amro, the plaintiff's Hong Kong bank.

12. On Wednesday 6 November 1996 by SWIFT message the defendant formally rejected the documents on the basis of discrepancies. This rejection took place on the fourth banking day following presentation.

13. The plaintiff thereafter purported to make subsequent presentations after the expiry of the L/C, on 18 and 29 November 1996, seeking thereby to "remedy the discrepancies". This presentation again was rejected by the defendant.

The Standby Letter of Credit

14. This particular L/C secured KS, the seller of the goods and the beneficiary thereunder, against "the due fulfilment of the secured party's obligations under the Sales Agreement", notwithstanding that the latter document was entered into between KS and Siu Fung Ceramics Holdings Ltd whereas under the L/C the 'Secured Party' is named as Sin (sic) Fung Strategy Limited.

15. In any event, the L/C provided for two ways in which payment could be triggered thereunder, namely either by what has come to be known as 'route A' or 'route B' :

"This standby letter of credit, if exercised, is available upon receipt by us of either (A) 1. The beneficiary's first demand through its banker to us accompanied by the beneficiary's statement declaring the amount due and unpaid by the secured party under the Sales Agreement. 2. The beneficiary's draft for the unpaid amount duly accepted by the secured party. And 3. Inspection Certificate by certified public surveyor certifying that no colour difference of whole consignment of goods under the Sales Agreement been observed OR (B) The beneficiary's certificate, authorized signature(s) on which has/have duly been verified by the beneficiary's banker, evidencing that the secured party fails to take delivery of goods in accordance with the Sales Agreement" (emphasis added)

The presentation of documents

16. The presentation in this case comprised four documents submitted under cover of a letter from ABN Amro dated 31 October 1996, the final day of validity of the credit. In order to trigger payment under 'route A' it was necessary for the beneficiary to make a demand through a banker, and in this letter ABN Amro identified the total claim as NLG 1,667,225.50.

17. In the order identified in this letter these documents comprised :

(1) Pro forma invoice for the goods therein specified, to the value of NLG 419,689.20, bearing value date of 28 October 1996;

(2) 'Beneficiary's Statement', dated 29 October 1996;

(3) Inspection Certificate, from the TNO Institute of Applied Physics, dated 28 October 1996; and

(4) 'Officers Certificate', dated Maastricht, 29 October 1996.

18. It is accepted by the plaintiff that the presentation under 'route A' was discrepant, in particular in that the "unpaid beneficiary's draft", referred to in Amro's letter as being in Rabobank's possession, in fact was drawn by Deutsche Sphinx Sanitar GmbH, the assignee of KS, and not by KS, and further that the Inspection Certificate, which on its face identified Siu Fung Ceramics Holding Limited as party to the Sales Agreement with KS, did not correspond to the identification of that party on the face of the L/C as Sin (sic) Fung Strategy Limited.

19. However it is not accepted that the document presented in order to trigger payment under 'route B', that is, the 'beneficiary's certificate', was in any way discrepant.

Issues for decision

20. Against this background two issues present themselves for decision: first, was the presentation under 'route B' discrepant?; and second, given the admittedly discrepant presentation under 'route A', did the time taken by the defendant bank to refuse the documents exceed the time permitted under the UCP 500, so that by reason thereof the bank is precluded from relying upon such discrepancies, and therefore must make payment under the credit?

The evidence

21. The plaintiff called one witness of fact, Mr Paul Dejong, the retired export manager of the plaintiff, whose largely undisputed evidence went to the background to the opening of the standby letter of credit, the presentation of the documents under the credit, and the rejection of such documents as discrepant. He was but barely cross-examined.

22. The defendant called two factual witnesses, namely Mr Sunny Cheung Chun-On, at the material time the head of the bills department of Rabobank, and Miss Kennis Ku Yuk-Ha, who at the time was a supervisor of the bill checkers in the import department of Rabobank.

23. The other two viva voce witnesses in the case were both banking experts: for the plaintiff Mr John Turnbull, and for the defendant Mr Howard Palmer. There was a certain amount of common ground, but in those instances upon which the experts disagreed, and where the court is in the position of having to choose between their respective views, I favour those of Mr Palmer.

The respective claims under 'routes A and B'

24. Before moving to the arguments mounted by each side in support of their positions regarding recoverability under the two routes, it may assist to identify what sum is claimed under which route.

25. In this context I accept the evidence of Mr Palmer that there was confusion as to what amount was being claimed under either route, and that the documents themselves are less than clear. In summary the position appears thus :

(i) The covering letter from ABN Amro, dated 31 October 1996, specified the 'Bill Amount' as NLG1,667,22 5.50.

(ii) The 'Beneficiary's Statement', dated 29 October 1996, is in the form of a letter signed by Messrs Visser and van der Kolk on behalf of N.V. Koninklijke Sphinx Gustavsberg addressed to the defendant, Rabobank. It declares that the secured party under the L/C, Siu Fung Strategy, has failed to meet its obligations under the sales agreement of October 14, 1994, and claims, "on behalf of ourselves and on behalf of Deutsche Sphinx Sanitar GmbH" the amounts due and unpaid of NLG630,398 and NLG616,612, and notes that "the accepted drafts are in your possession". The final part of this document further asserts a claim for goods not taken under the sales agreement in "the aggregate amount" of NLG420,215.50.

These three sums totalled NLG1,667,225.50, the amount stated on the face of the ABN covering letter, although it is unclear whether all three sums are sought under 'route A' or the first two amounts under that head and the third amount, of NLG420,215.50, under 'route B'; in any event there is no reference to the sum appearing on the face of the Pro forma invoice, one of the other three documents presented, which specified goods in the sum of NLG419,689.20.

(iii) Even if this could be reconciled as a 'route A' claim of NLG1,667,225.50, as per the ABN Amro covering letter, plus a 'route B' claim of NLG419,689.20, as per the Pro forma invoice presented, this would total NLG2,086,914.70, thereby exceeding the stated maximum amount available under the standby L/C of NLG2,000,000.

26. In fact, this case has been fought on the basis that the 'route A' claim is for the sum stated in the ABN Amro covering letter, namely NLG1,667,225.50, and that the 'route B' claim is for the sum of NLG419,689.20.

The 'route B' claim

27. On the face of the credit this route is an alternative avenue for claim in circumstances where the secured party has failed to take delivery of the goods in accordance with the Sales Agreement.

28. In order to trigger payment under 'route B', one document only, the Beneficiary's Certificate, was required to be presented :

"(B) the beneficiary's certificate, authorized signature(s) on which has/have duly been verified by the beneficiary's banker, evidencing that the secured party fails to take delivery of the goods in accordance with the Sales Agreement".

29. The document which the plaintiff presented in an attempt to fulfil this requirement was intituled not 'Beneficiary's' but 'Officers Certificate', and read thus :

"The undersigned, T.C.A. Visser and A.G.M.L. van der Kolk, authorized signatories of N.V. Koninklijke Sphinx Gustavsberg, hereby state, pursuant to section 3(b) of the stand by letter of credit, issued by Rabobank Nederland, Hong Kong branch, dated February 8, 1995 with Siu Fung Strategy Limited as secured party, that the secured party fails to take delivery of goods in accordance with the sales agreement in the aggregate amount as specified on annexed pro forma invoice." (emphasis added)

It seems clear that the final eleven words were added to the Certificate precisely for the reason suggested in opening by Mr Bartlett, namely that absent a claim amount/identification of the goods being stated therein, the Certificate effectively would be meaningless.

30. By SWIFT message sent at 16.23 hours on Wednesday 6 November 1996 the defendant bank sent to ABN Amro its notice of refusal to pay and to accept the documents presented under the credit. Item 4 of those reasons related to the 'route B' presentation, and read :

"Beneficiary's Certificate does not state amount claimed".

31. On behalf of the plaintiff Mr Sussex SC contended that this document was not discrepant. He says that in contrast to the requirements under 'route A', the terms of the standby L/C did not require that the beneficiary's certificate should state the amount claimed, a simple proposition with which Mr Palmer had agreed, and that the plaintiff is thus entitled to be paid the amount of its claim under this head, that is NLG419,689.20.

32. Mr Bartlett for Rabobank disagreed. His position was that even if the view was taken that the L/C did not require the Certificate to state on its face the amount claimed, the Certificate in this case purported to state the amount by reference to another document, which thus imported into the Certificate the vice of attempting to locate outside the Certificate the actual amount intended to be so certified, a problem compounded by the fact that whilst the Certificate referred to "the aggregate amount as specified on the annexed pro forma invoice", no such document in fact was annexed; a document bearing that description, dated 28 October 1996, and in the amount of NLG419,689.20 had been included in the presentation, but as a 'loose' document. Moreover, he said, if the defendant sought to determine whether the amount on the face of the pro forma invoice, as presented, was the amount intended to be claimed under 'route B', the defendant then was confronted with the fact that the Beneficiary's Statement appeared to state a 'route B' claim for failure to take delivery of goods in the aggregate amount of NLG420,215.50, a different amount, under a different invoice, which had not been included in the presentation at all.

33. I agree with Mr Bartlett's analysis of the position. The Certificate was inconsistent with the other documents in the presentation, and as such these documents were inconsistent on their face contrary to Article 13(a) of the UCP 500. Where the defendant bank was, as here, presented with documentation that on its face raised an uncertainty, it was entitled to raise a discrepancy and to consider the presentation a bad tender.

34. However, Mr Sussex further prays in aid Article 14(d)(ii) of the UCP 500. He says that it is trite law that the bank is precluded from relying on additional discrepancies upon which it did not rely at the time, and that the words that were used in the refusal notice did not encompass the criticisms that now were made, and that it is not now possible for the defendant, with the assistance of his expert, to "massage" the words of the rejection notice in order to suggest that they are apt to convey a discrepancy which did not operate on the mind of the defendant bank when it rejected the tender.

35. I do not consider that this submission succeeds either. It is true that the discrepancy within item 4 is tersely expressed in what is no more than shorthand, and it is also true that, as Mr Palmer indeed accepted, the discrepancy might have been worded better. However, I accept his view that the discrepancy was sufficiently covered. The Certificate clearly (and understandably) set out to specify the amount claimed, and it is equally clear, as Mr Turnbull accepted, that the 'route B' claim could not have been a blanket demand for the entire L/C amount but was for the pro forma invoice amount.

36. Reference to this other document, which in any event was not annexed, was directed by the specific wording of the Certificate, and it is equally clear that the difficulty perceived by the bank focused upon identifying the precise amount thus claimed under the 'route B' tender, and this in a situation in which the amount appearing on the face of a non-annexed document did not tally with the amount appearing on the face of the Beneficiary's Statement. In the circumstances the bank stated the nature of the complaint in the manner in which it did, which shortly indicated the nature of the difficulty that was perceived. Other formulations may well have been better, but it is established that it is not necessary for an advice as to discrepancies to be treated like a pleading, and in my judgment the criticism thus levelled does not get the plaintiff home.

37. I find in favour of the defendant on the 'route B' claim.

Delay : the time taken by the bank to refuse the documents

38. The plaintiff's case on delay is that, irrespective of discrepancies under either 'route A' or 'route B', the defendant bank nevertheless is precluded from relying on its Notice of Discrepancies by reason of exceeding a reasonable time for the examination, determination and notification of the decision to the plaintiff's bank, ABN Amro.

39. There are two elements to this debate, which arises by reason of the contractual incorporation of the UCP 500 into the standby L/C : first, that following presentation of the documents the bank is obliged to take no more than "a reasonable time" to determine whether to take up the documents; and second, once it decided to refuse the documents, it must do so "without delay".

40. These considerations are encompassed within Article 13b, 14d i, and Article 14e of the UCP 500, the terms of which are set out hereunder :

"Article 13b

The issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and to determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.

Article 14d i

If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.

Article 14e

If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and /or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit."

41. In response to the two contractual time restraints prayed in aid on behalf of the plaintiff, Mr Bartlett took a preliminary point of construction. This was that the preclusionary operation of Article 14e - "fails to act in accordance with the provisions of this Article" - is limited solely to breach of Article 14, and thus that the only timing issue that could trigger the preclusion within Article 14e is the failure, where a decision has been made to reject the presentation, to give notice of that decision in accordance with Article 14d i, that is, "without delay but no later than the close of the seventh banking day following the day of receipt of the documents."

42. If this be right, he contended, the plaintiff's case on the preclusionary effect of delay must be limited to a narrow focus, namely not the time taken for examination or in arriving at a decision, but solely the period between decision and notification. In support of his argument he relied upon the ordinary and natural meaning of the words within Article 14e, and pointed out that in this context there had been a distinct change between the UCP 500 (1993 Revision) and the terms of the UCP 400 (1983 Revision). In the latter the equivalent provisions to Articles 13 and 14 were contained within Article 16, the equivalent of the current Articles 13b and 14d i being found in the then Article 16c and 16d, and the preclusionary provision within the old Article 16e specifically related back to Articles 16c and 16d - a situation demonstrably different to the position as found in the current Revision.

43. Mr Bartlett further suggested that the content of ICC Publication No.511, which dealt with the changes between UCP 400 and UCP 500, indicated a conscious decision to limit the preclusionary effect of Article 14e to Article 14 alone. For my own part I am less confident than Mr Bartlett about why the current Revision is in the form in which it now undoubtedly is, and there appears to be no authority on this point. In any event I have concluded that in this submission he is correct, and that the effect of Article 14e is confined to the operation of that Article, and thus that the preclusionary effect of delay has a narrower focus, namely, not the time taken for examination or in arriving at a decision, but only, as per Article 14d i, the period between decision and notification.

44. If I be wrong in this conclusion, I should in any event have been prepared to find that in the very particular circumstances of this presentation the overrall examination/decision/notification process was compliant with the "reasonable time" specified in Article 13b. It is fair to say, however, that the thrust of Mr Sussex's closing argument focused solely upon the time taken between the decision to reject and the notification to the plaintiff of that decision.

45. In this connection Mr Sussex maintained that once a decision has been made to refuse the documents, the drafting and transmission of a notice to that effect ought to be relatively straightforward - he noted that in Seaconsar v. Bank Markazi [1997] 2 Lloyd's Rep 89, the English Court of Appeal observed that "it will ordinarily be a fairly simple task to give notice to the beneficiary". He argued that in this case the L/C was short, and its requirements were clear, and yet the Bank had required up to the fourth banking day after the day of presentation (Friday 1 November to Wednesday 6 November 1996) even if it was assumed, for the purpose of the present computation, that the morning of Saturday 2 November was not to be regarded as a 'banking day'.

46. The evidence as to what had occurred in the defendant bank upon receipt of this particular documentary presentation came from the defendant's two witnesses of fact, Mr Cheung, head of the bills department, and Miss Kennis Yu, then a supervisor of bill checkers within the bank.

47. Notwithstanding the extraordinary lapse of time which has occurred since the events of this case, they each did their best to assist the court in charting the progress of the checking of these documents and the evaluation of this presentation. They were strongly cross-examined, but I am satisfied that they were witnesses of truth, and I accept their evidence.

48. From Rabobank's internal documentation it is possible to identify the stages through which these documents passed as they were checked and evaluated within the import bills department.

49. It is clear that the process of checking commenced on Friday 1 November 1996, when a handwritten checklist was prepared bearing that date; this appears to have been initialled by three checkers. After his subordinates' work on the checklists, Mr Cheung himself considered the position and prepared his own handwritten document divided into two parts : the claim under 'condition A' and that under 'condition B'. This was intended to be the final list of discrepancies, and, he said, was probably created on Monday 4 November 1996.

50. Mr Cheung went on to say that after he had produced this final list he began the process of deciding whether to reject the presentation, and that this decision was made late on the following day, that is, on Tuesday 5 November 1996. A draft rejection notice was produced at about 6pm on that day, but this was not sent; the evening 'cut off' time for sending SWIFT messages had passed, and in any event the defendant bank had received from the plaintiff a letter of 5 November purporting to remedy certain discrepancies. The background to this was that on Monday 4 November the defendant had telephoned ABN Amro with the information that the documents presented contained a number of discrepancies, in turn ABN Amro had faxed this information to KS, and this letter had sought to correct the position.

51. On Wednesday 6 November 1996 a new draft notice of discrepancies was produced around midday, and following request for a test key the final version was sent at 4.23hrs on that day.

52. Mr Cheung was strenuously cross-examined as to when he made his decision to reject, but he repeated, and I accept, that the rejection decision was made on the evening of Tuesday 5 November 1996. I note in this connection that a draft SWIFT, which sought to elicit clarification from the plaintiff on the 'route A' and 'route B' elements of the presentation, appears to have been prepared at about 4.35pm on Tuesday 5 November, and I further accept Mr Cheung's evidence that ultimately this was not sent because, as discrepancies existed under either route, it would have been pointless to have inquired further, and thus his decision to reject came, or became crystallized, shortly thereafter.

53. Against this factual background, can it be said that the defendant infringed the requirements of Article 14d i so as to attract the preclusionary sanction within Article 14e?

54. The answer, in my view, is clearly 'No', and I so find. In the circumstances of this case a rejection notification of two days, in my judgment, does not fall foul of the contractual requirement to act "without delay", whilst of course the defendant bank was well within the overall time limit of "no later than the close of the seventh banking day following the day of receipt of the documents".

55. In my view it is surprising that the plaintiff has seen fit to pursue this case, which has been brought to trial an extraordinary 7.5 years after issue of the writ. The standby L/C in question had been extended for nine months, and the documentary presentation was made on the day of its expiry. Against this background it is ironic that the defendant bank should now be castigated for having taken too long, in terms of a day, or perhaps even in terms of hours, to notify the plaintiff of its decision to refuse a presentation which was described by Mr Bartlett, in my view with considerable justification, as a 'shambles', and a hasty shambles at that.

56. Given the expiry date of the credit, there was no question of affording an opportunity for a valid re-presentation, and the decision of the defendant bank was obviously crucial in the difficult circumstances of a rushed and ambiguous last day presentation in the unusual context of a standby L/C. In my judgment the bank had every right to consider this presentation in a prudent, careful and reflective manner, which clearly it did, within the boundaries of its obligations under the UCP 500, by its rejection of the presentation within four banking days.

57. I do not accept the plaintiff's submissions as to delay, which in my view are thoroughly unmeritorious.

Order

58. It follows from the foregoing that the Order of this court is that the plaintiff's case against the defendant is dismissed.

59. I make an order nisi that the costs of this action are to be to the defendant, to be taxed if not agreed.