COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. v. BANK OF CHINA

HCCL 56/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.56 OF 2001

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J U D G M E N T

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Introduction

1. This is an action arising by reason of non-payment under a letter of credit.

2. The L/C in question, No.LC9101152/99 in the amount of US$1.4 million, was issued by the Zhejiang branch of the defendant bank on 26 October 1999, and was advised through the defendant's Hong Kong branch two days later.

3. Payment under the credit was declined, the Zhejiang branch issuing a rejection notice on the ground of non-compliant presentation on 22 November 1999.

4. The plaintiff, the Hong Kong branch of a Belgian bank, pursues this claim in the capacity of a negotiating bank. It maintains that the documentary rejection was wrong, and seeks payment of the sum of US$1,401,495.42, together with interest thereon.

5. The credit was subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision ('UCP 500').

The facts

6. On 26 October 1999 a Zhejiang company, China Tuhsu Zhejiang Tea I/E Corp ('China Tea') applied to the Zhejiang branch of the Bank of China for a letter of credit in favour of an Hong Kong company named Jialing Xin Tuo International Ltd ('Jialing').

7. The credit issued by the bank on the same day, No.LC9101152/99 in the amount of US$1.4 million, stated China Tea to be the applicant, Jialing to be the beneficiary, and was to expire in Hong Kong on 1 December 1999.

8. It was stated to be "available with ... by ... any bank by negotiation" of drafts at 45 days sight for 100% of the invoice value marked as drawn under the L/C.

9. Under the documents listed as required for presentation, item 3 read : "Certificate of Origin in triplicate issued by Chamber of Commerce in Malaysia."

10. The instructions under the credit to the paying/accepting/negotiating bank were that all documents were to be sent in one lot to the Bank of China, Zhejiang branch, at 320 Yan An Road, Hangzhou, China 310006, the Zhejiang branch undertaking that "all drafts drawn under and in compliance with the terms of this L/C will be duly accepted on presentation at this office and paid at maturity".

11. On 28 October 1999 the Hong Kong branch of the Bank of China advised Jialing of the credit.

12. On the same day, 28 October 1999, Jialing in turn applied to the plaintiff bank for a back-to-back letter of credit in favour of one Shin Yang Trading Sdn Bhd. ('Shin Yang'), a Malaysian company from whom it was buying a quantity of Sarawak round logs for the purpose of onsale to China Tea.

13. On 29 October 1999 the plaintiff issued letter of credit number ILC 90512. This L/C, advised through Standard Chartered Bank, Malaysia, named Shin Yang as beneficiary thereunder, and was in the amount of US$1.315 million, plus or minus 5%. No doubt the difference in amount between the two credits was to represent Jialing's profit on the transaction.

14. On 29 October 1999 the plaintiff informed the Zhejiang branch of the defendant that with regard to L/C 9101152/99 dated 26 October 1999 and issued in the sum of US$1.4 million, the beneficiary thereunder, Jialing, had assigned this credit to the plaintiff "as continuing security for the payment of all amounts" due from the beneficiary to the plaintiff, and that the assignment included all the beneficiary's "rights, title, benefit and interest both present and future with regard to the said credit."

15. On 5 November 1999 the Standard Chartered Bank in Malaysia advised the plaintiff bank that it had negotiated the bill of exchange drawn under ILC 90512, that is, the credit issued by the plaintiff upon the application of Jialing; at the same time the SCB presented the documents required by that L/C and requested that the plaintiff remit the proceeds to Standard Chartered's branch in New York. Consequent upon their receipt, the plaintiff checked the documents thus remitted and established that they were compliant.

16. On 9 November the Zhejiang branch of the defendant amended its own credit, changing the tenor of the bill drawn thereunder from '45 days sight' to '85 days sight'.

17. On the same day Jialing gave the plaintiff bank a document intituled 'Collection Order'. The documents submitted pursuant to this document included a bill of exchange drawn in favour of the plaintiff in the sum of US$1,401,495.42 at 85 days after sight, together with commercial invoices, packing lists and bills of lading relevant to the underlying China Tea/Jialing transaction involving the sale and purchase of the shipment of Sarawak round logs. Under the heading 'Further instructions' on this Collection Order, the plaintiff was requested to "Please negotiate the above bill and pay our import bill under your ref ... ILC 90512 favouring Shin Yang Trading Sdn. Bhd. for US$1,316,404.63".

18. On 12 November 1999 the plaintiff bank sent to the Zhejiang branch the documents required under the L/C issued by that branch sixteen days previously. In addition to the documents required for presentation the plaintiff enclosed the bill of exchange addressed to the Bank of China, Zhejiang Branch and drawn by Jialing at 85 days sight in the amount of US$1,401,495.42 for value received against its invoice no.990018 drawn under L/C 9101152/99 dated 26 October 1999. On the face of the accompanying form letter the plaintiff stated: "We have today negotiated the above bill and endorsed the amount on the face of the original credit", and requested that upon maturity of the bill the funds be remitted to its stipulated account at the Bank of New York. This letter was received by the Zhejiang branch three days later, on 15 November 1999.

19. On 19 November 1999 the plaintiff remitted to Standard Chartered Bank payment in the sum of US$1,316,344.63 in respect of the back-to-back credit ILC 90512 which had been issued by the plaintiff, Standard Chartered Malaysia earlier having negotiated the bill drawn under that L/C in favour of its own customer, Shin Yang.

20. Also on 19 November 1999, the plaintiff bank sent its customer, Jialing, two separate documents, which in the circumstances of argument in this case have come to assume some importance.

21. First was a 'Credit Advice' of that date which read thus :

"Our ref EBP91714 for USD1,401,495.42

Your ref No : INV990018 under Bank of China,

Zhejiang Branch L/C No.LC9101152/99

We have today negotiated the above bill for USD1,316,404.63 and T/T remitted to Shin Yang Trading Sdn. Bhd. Malaysia as per your instruction."

Two matters arise for comment on the face of this Advice. The monies thus remitted in fact had not gone to Shin Yang Trading, the vendor of the logs in the underlying transaction, but to Standard Chartered Malaysia, which had negotiated the documents presented by Shin Yang and which, in the capacity of negotiating bank, had reverted to the plaintiff, as issuing bank, to be placed in funds. Moreover, the contemporaneous documents indicate that the actual sum thus remitted to SCB, Malaysia was not the amount specified in the Advice, but the reimbursement amount SCB had requested, namely USD1,316,344.63. Whether the additional sum of USD60 represented bank charges I know not, and this minor discrepancy in the figures does not appear to be of any consequence.

22. The second document sent to Jialing by the plaintiff on 19 November 1999 was a corresponding 'Debit Advice', the material part of which reads as follows :

"In accordance with details shown below, we have today debited your Advance Account - Import Loan with us :

Amount of Advance Account	: USD***1,316,404.63
Value Date	: 19 Nov 99
Interest Rate	: 7.625%"

23. On 22 November 1999 the Zhejiang branch issued a notice rejecting this documentary tender. In material part the narrative of this rejection notice reads thus :

"In accordance with Article 14 of UCP 500, we refuse to accept the a.m. (aforementioned) documents since we have found the following discrepancy(ies) in the docs :

1. Certificate of Origin not issued by Chamber of Commerce as per L/C requirements.

We have conveyed the same to the applicant for consideration. Meanwhile we hold the docs at your risks and responsibilities. Pls advise us your disposal instructions, if any. However, we will release the docs to applicant against payment/acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance.

 

Best Rgds,

Import L/C Dept."

24. On 23 November 1999 the plaintiff responded by a SWIFT message maintaining that the Certificate of Origin was compliant, and in a similar case had been accepted as compliant under another L/C issued by the Zhejiang branch. To this, on the next day, 24 November, the Zhejiang branch replied that the Certificate, whilst certified and signed, had not been issued by the Chamber of Commerce, and stated that the fact that the applicant previously had accepted discrepant documents did not mean that the discrepancy did not exist. This message concluded with the words "Docs are held at your disposal".

25. By a further SWIFT of 24 November 1999 the Zhejiang branch informed the plaintiff that :

"Pls be informed that we have received an injunction dated Nov.22, 1999 from the local court, forbidding us to pay the proceeds of the a.m. docs to your bank. The injunction has become effective since Nov.23, 1999."

Involvement of the Chinese courts

26. The existence of Chinese court orders restraining payment under the credit issued by the Zhejiang branch of the Bank of China is a matter which has loomed large in this case.

27. On 22 November 1999 the People's Intermediate Court of Wuhu City, Anhui Province, in (1999) Wu Zhong Jing Chu Zu No.111, handed down a property preservation order pursuant to sections 92(1) and 94(2) of the Civil Litigation Law of the PRC, by which :

(1) All documents under L/C 9101152/99 were made subject to attachment; and

(2) Payment under L/C 9101152 was ordered to be withheld.

28. The provenance of this Mainland court action appears to have had little, if anything, to do with the litigation presently before this court.

29. In the case before the Wuhu City Intermediate Court the parties were the plaintiff, one Wuhu City Hengsheng Trading Ltd of Wuhu City, the two defendants being one Grand Slam International Ltd, an Hong Kong company, and Jialing Xin Tuo International Ltd, the same beneficiary under the Zhejiang branch L/C the subject of these proceedings.

30. That which appears to have happened is that in an entirely separate sale and purchase transaction dated 8 February 1999, again involving the purchase of a similar consignment of Sarawak round logs - on this occasion entered into between China Tea, on behalf of Hengsheng Trading, on the one hand, and Grand Slam International (which subsequently was to assign its interest to Jialing) on the other - it was alleged that there had been a fraudulent presentation of documents by Jialing which had resulted in payment being made under a letter of credit issued by the Bank of Communications, upon the application of China Tea, in favour of Jialing, and pursuant to which Jialing had opened a similar back-to-back letter of credit through the Rabobank in Hong Kong, in this instance in favour of a party known as Lap Shing Company.

31. Hence the Chinese court injunction seems to have been the result of the attempt by Hengsheng to obtain de facto reparation from Jialing by stopping payment under L/C 9101152/99 for a further cargo of logs, albeit in the context of an entirely different transaction, and in which there was no allegation of fraud levelled against any entity, other than Jialing, in terms of such earlier transaction.

32. Subsequent to the grant of the injunction by the Wuhu court on 22 November 1999, on 23 November the court issued a 'Notice to assist in execution' to the Zhejiang branch of the defendant, wherein the bank was requested to "render assistance' in terms of attaching the documents and withholding payment under L/C No.9101152/99 - hence the SWIFT of the following day informing the plaintiff of the existence of this injunction.

33. Subsequent orders of the Wuhu Intermediate People's Court sanctioned the sale by auction of the cargo of 10,000 cubic meters of Sarawak round logs the subject of the underlying transaction in the present case.

34. Of more significance to the argument in this case, however, was the application made by the plaintiff herein, the Hong Kong branch of Rabobank, that the injunction and attachment issued by the Wuhu Court should be lifted.

35. By a Notice dated 26 July 2000 the Wuhu Intermediate People's Court dismissed this application, the Court in this Notice rejecting the plaintiff's argument, inter alia, that at the time of the attachment it already had negotiated the credit, and thus that the action taken was impermissible under the terms of the UCP 500. In the circumstances of this case, as reviewed by the Wuhu Court, it was held that there had been no negotiation of the credit and that Rabobank's position in presenting the bill and documents under the credit was that of a collecting bank only. Accordingly, the original order was affirmed.

36. By a Judgment dated 26 October 2001 the Higher People's Court of Anhui Province, in (2001) Wan Jing Zhong Zi No.150, rejected the appeal by Jialing against the order made by the Intermediate People's Court of Wuhu City, and affirmed the original judgment. This judgment came some six weeks after the plaintiff had issued its writ in the present proceedings.

Involvement of the ICC

37. Consequent upon the rejection of the Certificate of Origin as discrepant, by letter dated 29 November 1999 the plaintiff sought the advice of the ICC on the point.

38. By its reply of 1 March 2000 the ICC, in the person of Mr Katz, 'Policy Manager, Banking Commission', opined that the Certificate of Origin presented "was not in the form required by the credit and is therefore discrepant". However, Mr Katz noted that the opinion thus rendered did not necessarily reflect the opinion of the ICC Banking Commission "until the Banking Commission renders its approval or disapproval" of his opinion at its next meeting.

39. Notwithstanding this opinion, the plaintiff bank pursued the issue, through the offices of one Mr K.T. Fung, whom on behalf of the plaintiff wrote to the ICC renewing the request for an opinion as to whether the Certificate of Origin was compliant, and enclosing therewith two examples of Certificates of Origin issued out of China and Greater Omaha. In this correspondence Mr Fung suggested that "the Certificate of Origin dated 3 November 1999, both in form and substance, appears to have satisfied the international banking practice and the L/C terms that it was issued by the Chamber."

40. On 5 July 2000 the ICC, once again in the person of Mr Katz, responded to Mr Fung and concluded, "from the information supplied" that "the Certificate of Origin complies with the credit terms and conditions." This letter contained a similar qualification to the effect that this view was subject to the approval/disapproval of the ICC Banking Commission.

41. On 22 November 2000 the ICC Banking Commission issued its formal Opinion, published as R.448 in 'ICC Banking Commission Collected Opinions 1995-2001' under the heading 'Criteria for a certificate of origin to be "issued" by a Chamber of Commerce'. In this Opinion the Banking Commission concluded, "from the information supplied", that the Certificate in this case was compliant.

42. Under its 'Analysis and Conclusion', the ICC stated that where a credit requires that a Certificate of Origin be issued by a Chamber of Commerce, the following criteria will apply :

"1) The condition is satisfied if the document is issued by a Chamber of Commerce i.e. on their letterhead or specified form - even though the detail(s) may have been completed by the beneficiary and the Chamber merely signs.

2) Another acceptable alternative to this would be where the document is 'neutral' i.e. no headed paper but where within the body there is evidence of completion and/or signature of a Chamber of Commerce.

3) A document issued on the letterhead of the beneficiary or any other party (that is not a Chamber of Commerce) would not be seen to comply with a requirement of "issued" by a Chamber of Commerce."

The evidence

43. This was not a case in which viva voce evidence has played a significant part.

44. The plaintiff called one factual witness, Mr Sunny Cheung Chun On, now Head of International Trade Services at Rabobank, Hong Kong, and for its part the defendant called one witness of fact, Mr Ji Jun, the Deputy Manager of the Zhejiang branch of the defendant.

45. Each of these gentlemen was but barely cross-examined.

46. Expert evidence on each side was also called. For the plaintiff Mr Soh Chee Seng gave the court the benefit of his views, contained within his Report dated 14 April 2003, as to standard banking practice as reflected in the UCP 500 and the Asia/Pacific region, whilst his counterpart for the defendant was Mr Michael Kennedy Brown, whose Report was dated 8 April 2003.

47. The defendant called one additional expert on PRC law, namely Professor Wang Guigo, whose Report was dated 10 April 2003, and who was not cross-examined.

The issues

48. Given that the primary facts of this case are undisputed, argument focused almost exclusively upon specific issues of law. There are five such issues requiring the decision of this court, and I am content in this judgment to proceed along the lines adopted by counsel in submission.

(i) The 'discrepancy point'

49. This represents the original legal issue in a case in which a number of other arguments have been superimposed. The requirement under the letter of credit stipulates :

"3. Certificate of Origin in triplicate issued by Chamber of Commerce in Malaysia."

50. The Certificate of Origin as presented began life in the form of an exporter's declaration, signed and chopped by the shipper. On the face of this document have been added two chops of the Chinese Chamber of Commerce, Miri, Sarawak (one of which contains within it handwritten initials or signature), and, more important, a chop signed by the Executive Secretary, The Chinese Chamber of Commerce, Miri, Sarawak, Malaysia which bears the legend: "Certified to the best of our knowledge and belief to be incorrect and without prejudice."

51. In the circumstances the defendant bank maintains that this is not a chop 'issued' by a Chamber of Commerce, whilst the plaintiff maintains that it is compliant. It is precisely this point, of course, which occupied the ICC and produced the contrasting opinions to which reference earlier has been made. The expert witnesses are similarly divided. Mr Soh (whom, it emerged in evidence, was privy to the final decision of the ICC Banking Commission) stated that this is acceptable, whilst Mr Brown was of a contrary view; in fact, Mr Brown took a dim view of the form of the reservation expressed within the narrative of the chop signed by the Executive Secretary of the Chinese Chamber of Commerce, suggesting that in circumstances wherein such qualifying wording was used, such a document could not be regarded as fulfilling the independent verification function required of a Certificate of Origin.

52. With respect, I have difficulty in accepting this latter viewpoint, persuasively though it was put. It strikes me that it is no part of the duty of a document checker within the import bills department of a bank to undertake any such qualitative assessment of the language used in a document of this type, and to conclude, in effect, that the language employed within that document is couched in sufficiently qualifying terms such that it must be regarded as failing to discharge a function of independent verification. In my view such an approach would be to introduce into this process an unacceptable level of uncertainty. Had, for example, this certificate been presented under a Chamber of Commerce letterhead, rather than being in the form of a chop upon an existing declaration, it is difficult to believe that the niceties of the language employed therein would have resulted in the assertion that the Certificate had not been 'issued' by a Chamber of Commerce, as per the unambiguous requirement within this letter of credit.

53. In arriving at a decision as to the alleged discrepancy I have not been greatly influenced by the ICC's ultimate stance on the point. In light of the diametrically opposite positions as were taken, this was not the ICC's finest hour, although the concluded ICC view now embodies that which appears to be established international banking practice - the standard stipulated under Article 13a of the UCP 500 - in this area. At the end of the day, however, the decision on the 'discrepancy issue' is made primarily on the face of the document itself.

54. In this regard it seems to me that the submission of Mr Bunting SC is correct. He argued that in fact this document comprised two certificates : an underlying exporter's certificate and a superimposed certificate of a Chamber of Commerce in Malaysia, and the fact that this document, to which the Chamber of Commerce so evidently had given its imprimatur, did not bear on its face the letterhead or title of the Chinese Chamber of Commerce was substantively nothing to the point.

55. I agree. In my view the form of this document did not make it a document which had not been 'issued' by this Chamber of Commerce, and on the evidence before the court this seems unlikely to be the type of point which normally would be taken or regarded as a 'discrepancy' either by a bill checker or by that checker's supervisor. As earlier noted, in inter-bank correspondence the plaintiff bank had pointed out to the defendant that a certificate in this form had been accepted by the defendant in previous transactions, although clearly this was not the usual situation, as the existence of the collateral Chinese legal proceedings involving an allegation of fraud against Jialing would tend to indicate.

56. At the end of the day this is not an issue susceptible to further elaboration. Either the document is held to be discrepant, or it is not. Notwithstanding Mr Shieh's efforts to convince me otherwise, an argument heavily upon the 'independent verification/qualifying wording' premise, ultimately I have come to the conclusion that it is not, and that in the circumstances this alleged 'discrepancy' did not constitute a good reason for the Zhejiang branch of the defendant bank to reject the documentary presentation. Accordingly I am against the defendant upon this original issue, and I accept the plaintiff's case, including the evidence of Mr Soh, in this regard.

(ii) The 'rejection notice point'

57. This essentially formed a 'back-up' argument raised by the plaintiff should the court have been against it and have found that the Certificate of Origin was discrepant. In light of the conclusion in fact reached, a decision strictly is not required on this point, although should I be wrong in terms of the discrepancy argument I should perhaps indicate my view upon this issue also.

58. The question is whether the defendant's notice of rejection of 22 November 1999 - the text of which is set out earlier in this judgment - precluded reliance upon such 'discrepancy' by reason of the operation of Article 14(d)(ii) and (e) of the UCP 500.

59. Article 14(e) contains the preclusionary element. It provides that if the issuing bank fails to act in accordance with the provisions of Article 14 or fails to hold the documents at the disposal of the presenter, that bank shall be precluded from claiming that the documents are not compliant with the terms of the credit. Article 14(d)(i) provides that a notice of refusal of the documents must be given "without delay but no later than the close of the seventh banking day following the day of receipt of the documents", whilst Article 14(d)(ii) states :

"Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter."

60. Mr Bunting SC argued that the notice of rejection of 23 November 1999 plainly was non-compliant, in that it was not unconditional, pointing in particular to the final sentence of the notice, which reads :

"However, we will release the documents to applicant against payment/acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance."

61. In this context Mr Bunting relied upon a recent decision of Mr Justice Steel in the English Commercial Court in Credit Industriel et Commercial v. China Merchants Bank [2002] 2 All ER 427(Comm). In that case, when faced with a rejection notice in similar terms, the learned judge decided that the notice of rejection was of a conditional nature, and thus in breach of the requirements of Article 14(d). Mr Justice Steel held that the conditional nature of the rejection was not saved by the potential for acceptance of contrary instructions prior to payment, particularly where no notice was to be given, and thus the message in question constituted a continuing threat of conversion of the claimant's documents.

62. The plaintiff's submission as to the deficient notice of rejection stimulated three responses on the part of the defendant: first, that Credit Industriel, op cit, was wrongly decided, alternatively that the prevailing regional practice at the date of the first rejection notice was that such notices were permissible and effective under Article 14(d), and third, that in any event a second notice, sent on 24 November 1999, served to 'cure' any defects within the first notice, the defendant's subsequent SWIFT message, which had insisted upon the existence of the discrepancy earlier identified, unequivocally concluding with the words "Docs are held at your disposal ...".

63. I have reflected upon each of these responses. In my view none of them succeeds, or, at least, they would not have succeeded had the point remained 'live'. With respect, I do not consider that the decision (or the reasoning) in Credit Industriel should be regarded as incorrect, nor do I consider that the decisions cited by Mr Shieh, namely The "Royan" [1988] 2 Lloyd's Rep.250 (distinguished on its facts in Credit Industriel) and Bankers Trust v. SBI [1991] 2 Lloyd's Rep.443, provide the ammunition that he seeks.

64. In my view the crucial consideration within an Article 14(d)(ii) notice is that it should communicate that the rejected documents are being held at the disposal of the sellers, and that such statement should not be glossed with any conditional element. In this connection Mr Shieh commented that the first rejection notice was, in essence, 'self executing', but this, with respect, seems to me to be the intrinsic flaw. In my view that which the first notice has sought to do, to use an evidential analogy, is essentially to reverse the burden - instead of holding the documents at the seller's disposal and awaiting the seller's instructions, the bank is here saying that in circumstances of payment/acceptance the documents will be released unless contrary advice is received prior to this (doubtless often welcome) eventuality, thereby raising the possibility of such release in the interim between such communication and the seller's response. Whilst this may well be intended to be an helpful approach to dealing with a potential impasse between the parties to the underlying transaction, the short point is that this form of response goes above and beyond the necessarily unambiguous requirement laid down within Article 14(d)(ii) : either the documents are held at the seller's disposal, or they are not.

65. I can, I hope, deal with Mr Shieh's other arguments equally briefly. As to the allegation of a 'regional banking practice', subsisting at the time of the first notice, to the effect that such notices are permissible and effective under Article 14(d), this argument appears to depend entirely upon an impressionistic view of the situation taken by the defendant's expert, Mr Brown. Whilst Mr Brown is no doubt a banker of eminence and expertise, with respect I decline to elevate his impressions/recollections of that which certain banks were or may have been in the habit of doing into the status of a concluded 'banking practice' which has the effect of cutting across the specific requirement of Article 14(d)(ii) as laid down within the current UCP 500. In fact, Mr Soh commented that the ICC had prepared a paper critical of notices in the form of the first notice sent by the defendant in this case. And in any event I fail to see how 'banking practice' can override the contractual incorporation within this credit of the provisions of the UCP 500. So I do not consider that there is anything in this point.

66. As to the second 'notice' being curative of the perceived (and disputed) deficiencies of the first, it seems to me that the essence of a notice of rejection is that it should be both certain and precise and, most important, should accurately reflect the discrepancies which form the basis of the communicated rejection. In principle therefore (and subject perhaps to technical problems in communication, wherein a garbled message may have to be retransmitted/clarified) I do not consider it is open to Mr Shieh to say, as he persuasively did, that in effect the second notice 'superseded' the first, which for this purpose simply could be ignored. In the same way as it is established that the rejecting bank has only one opportunity under the UCP 500 to frame its discrepancies as the basis for rejection of the documentary rejection, and cannot return for a second 'bite of the cherry', it seems to me that in principle a like approach should be adopted in terms of notifying the presenting bank of the fact that the documents are being held at its disposal. Precision and certainty have not ceased to be benchmarks within modern letter of credit transactions.

67. Finally under this head, had it been relevant, on the evidence I should have declined to find in favour of the plaintiff's subsidiary argument that, even if the second notice was 'curative' as alleged, in any event it came too late on the basis that it was sent on the seventh banking day, that is, the outer time limit permitted under Article 14(d)(i). This is not, and never was, a case about delay, and I accept the evidence that the Zhejiang branch was busy, and that it had only one bill checker at the relevant time.

68. Accordingly, it follows from the foregoing that I find in favour of the plaintiff in the argument upon the first two issues for decision - namely, that the presentation, and in particular the Certificate of Origin, was not discrepant, but that in any event the notice of rejection was defective, so that had there been a discrepancy in fact the defendant bank would have been precluded from relying upon the 'discrepancy' allegedly thus identified.

69. I turn now to the other main strands of legal submission which have developed within this case.

(iii) The 'negotiation point'

70. In substance this is a locus point. The defendant says that this claim is pleaded and pursued by the plaintiff in the capacity of a negotiating bank, but that in reality it is not a negotiating bank but a collecting bank. A collecting bank acts only as agent for the beneficiary under the credit, and is not therefore entitled to bring a claim upon this letter of credit in its own right. Accordingly, says the defendant, the plaintiff's claim in this case must fail in limine.

71. This submission echoes that which earlier was made at the time of the plaintiff's application for summary judgment in this case in February 2002. Unconditional leave to defend was given, and no doubt it was this aspect of the argument which prompted the plaintiff, in the person of Mr Cheung Chun On, to make a witness statement dated 28 January 2003 which focused upon the issue/process of negotiation of this particular credit. This statement provides a commentary upon the documentary sequence, and asserts the fact of negotiation in terms of the giving of value for draft and documents pursuant to Article 10(b)(ii) of the UCP 500, but it is criticized by Mr Shieh as avoiding the nub of the negotiation argument, which is the assumption of risk on the part of the negotiating bank acting as principal. In this connection, Mr Shieh chose to argue this point solely upon the documents, and did not seek to cross-examine Mr Cheung on the fundamental issue of risk; whilst I accept that there is nothing to be gained by engaging in pure legal debate with a witness, a course which Mr Shieh naturally wished to avoid, with the benefit of hindsight it strikes me that the primary issue of the plaintiff's assumption of risk could usefully have been explored.

72. Be that as it may. The plaintiff has characterized itself as a negotiating bank. Does the evidence before the court justify this contention?

73. This was a situation of back-to-back credits. On the strength of the credit issued on 26 October 1999 by the Zhejiang branch of the defendant in favour of Jialing, as beneficiary thereunder, Jialing successfully applied to the plaintiff to issue a credit in favour of its Malaysian log supplier, Shin Yang Trading, a credit which was advised through Standard Chartered Bank, Malaysia, and which was issued two days later on 29 October 1999.

74. The 'master L/C' as issued by the defendant was specifically expressed to be a negotiation credit, and in what would be the usually accepted course of negotiation the plaintiff bank would have purchased the documents under that credit, and thereafter would have credited Jialing's account with the negotiated amount, which would have been the face value of the credit less a discount for accelerated payment to reflect the fact that Jialing was getting its money under the credit sooner than the 85 day tenor of the bill drawn thereunder. Having thus been paid, Jialing would have dropped out of the picture, and at this stage the plaintiff, having thus negotiated the credit, would be standing firmly in Jialing's shoes qua principal, and thus would have assumed the risk of inability to recover under the 'backing credit' whilst remaining under the obligation to pay out, upon compliant presentation, under the credit it had itself issued. This risk upon a negotiating bank finding itself in the middle of such a back-to-back credit 'chain' has been the subject of textbook commentary : see, for example, Jack, Documentary Credits (2001), at para.2.31, Gutteridge & Megrah (8th Ed.), at para.5-23.

75. It is common ground that this sequence of events did not take place in the instant case. On 9 November 1999 the plaintiff received a 'Collection Order' from Jialing, together with drafts and documents to be presented to the defendant bank under the terms of the 'master credit', the reference being to the defendant's L/C No.9101152 in the amount of USD1,401,495.42. The 'Further Instructions' on the face of this document state :

"Please negotiate the above bill and pay our import bill under your ref. IBP90588 L/C No. ILC90512 favouring Shin Yan Trading Sdb. Bhd. for USD1,316,404.63"

By means of an 'x' in a box immediately thereunder, the proceeds are requested to be credited to Jialing's current account No.4609150111.

76. The evidence is that the documents presented under the credit issued by the plaintiff in favour of Shin Yang Trading had been received from Standard Chartered Bank in Malaysia (that bank itself having negotiated these documents, and having paid Shin Yang Trading a discounted amount thereunder) and were checked by the plaintiff's Trade Services Department against the terms of the credit issued by the plaintiff and found to be compliant. Accordingly, on 19 November 1999 the plaintiff acted on Jialing's instructions in the Collection Order and transferred US$1,316,404.63 via Swift. At this stage on the same day a Debit Advice and a corresponding Credit Advice was sent by the plaintiff to Jialing. These documents have been subject to some scrutiny, and their text has been reproduced earlier in this judgment.

77. Against this background, Mr Shieh argued that this clearly was not a case in which Jialing was credited with a negotiated sum under the 'master credit', with its account thereafter being correspondingly debited with the lesser sum required to be paid out under the back-to-back credit, thus producing a surplus in favour of Jialing representing Jialing's profit in the underlying transaction.

78. That which here was happening, he noted, was that the only way in which the running debit balance, represented by the Debit Note of 19 November 1999, was to be offset (at least in terms of these L/C transactions) was by crediting Jialing's account with the proceeds of the sum collected by the plaintiff under the credit issued by the defendant, and in fact the 'Collection Order' specifically appeared to envisage the payment of such proceeds into Jialing's account. But this, Mr Shieh emphasized, was no more than a 'collection' scenario, and if and in so far as the defendant did not pay under the master credit (as had occurred) the plaintiff still retained a claim in debt against Jialing; thus, if Jialing could not pay because (as also had occurred) Jialing is insolvent, this represented the natural consequence of the risk taken by the plaintiff bank as the bank in the middle of the credit chain. As for the payment of the US$1.316 million to Standard Chartered, as the negotiating bank under the credit issued by the plaintiff, Mr Shieh submitted that this was no more than a payment in fulfilment of the plaintiff's pre-existing obligation under this back-to-back L/C.

79. In response Mr Bunting stoutly maintained that the plaintiff indeed had negotiated the documents under the defendant's credit, albeit he accepted that this was not negotiation in the 'usual' fashion, wherein Jialing would be placed immediately in funds representing the product of that negotiation and thereafter having deducted therefrom the sum required to make payment under the plaintiff's L/C. What had happened here, he argued, was a variant on the theme, but nonetheless a negotiation. Mr Bunting submitted that there was no doubt that the plaintiff, as negotiating bank, had "given value" within the meaning of negotiation as defined within Article 10(b)(ii) of the UCP 500, and that it mattered not whether such 'value' was to be regarded as the plaintiff's undertaking to pay on the credit pursuant to the provisions of Article 9 of the UCP 500, or in making the payment of US$1.316 million under the plaintiff's credit, or in the discharge, by such payment, of the debt originally owed by Jialing to Shin Yang Trading - albeit on the negotiation of this credit by Standard Chartered, it was the latter bank which stood in Shin Yang's shoes and was thus repaid.

80. I am unconvinced that any of these suggestions meets the analytical case in terms of establishing a 'negotiation' of the documents presented under the defendant's credit. In my view it is unarguable that the payment by the plaintiff under its own credit was simply payment in fulfilment of a pre-existing contractual obligation, in this case to the negotiating bank, Standard Chartered, and I fail to see how the contractual engagement to honour payment under its credit, which came into effect on the date of issue of the plaintiff's credit, namely 29 October 1999, moves the plaintiff any further forward in the present argument.

81. Nor do I understand how the pleaded date of negotiation, namely 12 November 1999, stands up either. That was the date on which the plaintiff bank wrote to the defendant, presenting the documents and the draft under the defendant's credit, informing the defendant that the documents were compliant and that "We have today negotiated the above bill and endorsed the amount on the reverse of the original credit", and instructed the defendant that upon maturity (the tenor of the draft for US$1.401 million being at 85 days sight) to remit the proceeds to the Rabobank account at the Bank of New York. In light of the assignment of the rights under the credit given by Jialing in favour of the plaintiff, an assignment of which the defendant was notified, the plaintiff was no doubt in a position to act as it did, but reliance upon its own statement that it had 'negotiated' the bill is neither probative nor to the point if in fact it had not done so.

82. After some reflection I have concluded that the case on negotiation by the plaintiff bank has not been established. Notwithstanding liberal use of the term 'negotiate' within various documents put forward by the plaintiff, such 'negotiation' as is asserted to have taken place does not appear to have been negotiation in the true sense - the essence of which is the purchase of the documents and their presentation under the credit in the purchaser's own right - and is fundamentally inconsistent with the contemporary documents, in particular the Collection Order of 9 November 1999 issued by Jialing to the plaintiff, and the Debit Advice dated 19 November 1999 issued to Jialing by the plaintiff upon the payment made to Standard Chartered under the plaintiff's letter of credit.

83. In substance, that which appears to have happened is that upon the security of the defendant's credit issued in favour of Jialing the plaintiff was prepared, upon Jialing's application, to issue its own credit in favour of Shin Yang Trading, and upon making payment thereunder to debit the relevant sum, that is US$1.316 million, to Jialing's account at an interest rate of 7.625% for the period 19 November 1999 to 3 December 1999 pending the successful collection, by the plaintiff, of the sum of US$1.401 million under the credit issued by the defendant. Clearly it was envisaged that upon a successful collection, the funds thus collected would be deposited into Jialing's account with the plaintiff, thereby extinguishing the debit balance therein and leaving a credit margin, after deduction of interest and bank charges, accruing to Jialing.

84. What did not happen, in my view, is a true negotiation for value by the plaintiff of the documents presented by Jialing under the 'master credit', with Jialing being put in funds in terms of a discounted sum and the plaintiff thereby assuming the personal risk of non-payment by the defendant absent recourse, in such eventuality, to Jialing. In other words, the plaintiff lent to Jialing against the security of the defendant's credit without stepping into Jialing's shoes as beneficiary thereunder, and I do not construe this as "the giving of value" within the meaning of Article 10(b)(ii) of the UCP 500, although as a matter of commercial reality prospective collection under the defendant's credit doubtless provided comfort to the plaintiff in advancing monies to Jialing to issue its own credit in favour of Shin Yang Trading. I note that in an 'Approval of Risk Allocation' document submitted by the plaintiff to its Head Office - a document which was drawn to my attention at the conclusion of submissions - the type of transaction for which approval is therein sought is described as "Back to back L/C and L/C discount after acceptance by issuing bank", which on its face lends support to the view that at no stage did the plaintiff truly 'negotiate' under the credit, notwithstanding that its role may thus have been described.

85. On the basis of the foregoing, therefore, in my judgment the defendant's 'root and branch' attack on the plaintiff's locus is made out, and it follows that this claim stands to be dismissed on this basis alone.

(iv) The 'abuse of process point'.

86. This point is taken by the defendant as an adjunct to the 'negotiation issue'. Mr Shieh SC says that whatever conclusion the court may have come to as to whether the plaintiff truly is a 'negotiating bank', in any event it remained an abuse of process for the plaintiff to launch the present claim, qua negotiating bank, in circumstances wherein the PRC court already had decided that it was not a negotiating bank. Mr Shieh submitted that the plaintiff "chose to litigate this very issue" before the Chinese court, and failed, and failed again upon a review of that decision, so that for the plaintiff now to seek to relitigate the same matter before this court, and thereby mount a collateral attack upon the decisions of the PRC courts, is abusive.

87. I do not find this an attractive submission, and I reject it and the implicit attempt to extend to the circumstances of this case the doctrine in Hunter v. Chief Constable of the West Midlands [1982] AC 529. I have little sympathy with Mr Shieh's suggestion that the plaintiff's conduct in this case is "far more closely comparable" to the facts in Hunter than the plaintiff is willing to concede.

88. In this instance the plaintiff bank was confronted with a situation wherein payment under the defendant's credit was enjoined by order of the Wuhu City Intermediate Court, which order was handed down in an entirely separate case which had nothing whatever to do with the present credit or the underlying transaction, save for the fact that Jialing, the alleged fraudster in the other case, was also the beneficiary under the instant credit. As I understand the situation, the plaintiff bank, as third party immediately thus affected by the order of the Chinese court, made representations to that court as to why payment under the defendant's credit should be released, and in the course of such representations asserted that it was a negotiating bank, a submission which was rejected.

89. I fail to understand why this understandable and justifiable reaction by the plaintiff to that which had occurred should be regarded as preclusionary of the present litigation, or in some way should permit characterization of the present claim as 'abusive', and I reject this submission as firmly as I may.

(v) The 'illegality point'

90. This argument is also intrinsically bound up with the orders made by the Chinese courts restraining payment under the defendant's credit. In this instance, however, it seems to me that the point is considerably more persuasive.

91. It is this. The defendant says that, as a matter of PRC law, the defendant has been prohibited from making payment on the credit as from 23 November 1999, and that by paying on the L/C the defendant would subject itself to criminal liability under mainland law. There is no factual dispute about this. The expert report of Professor Wang Guigo was entirely unchallenged.

92. Accordingly, it was the defendant's submission that the defendant was not obliged to make payment under the credit since PRC law is the proper law of the contract and/or the law of the place of performance, it being established that at common law a contract, including an L/C, will not be enforced if either its performance is illegal by the governing law of the contract or it necessarily involves performance which is unlawful according to the law of the place of performance : see Jack, op cit, at paras.13.43, 13.46-13.49, Dicey and Morris on Conflict of Laws, 13th ed., paras 32-141 to 150.

93. For the plaintiff it was submitted that, to the contrary, whether the benchmark was the proper law or the law of the place of performance, in either instance Hong Kong law fell to be applied, and accordingly that illegality under Chinese law was nothing to the point. An amendment to the plaintiff's pleaded Reply further invoked the law of New York as the law of the place of performance on the basis of the plaintiff bank's instruction to the defendant's Zhejiang branch that remittance be made to the plaintiff's US dollar bank account in New York, but I do not consider that in reality this is a viable alternative. The place of payment must designate the place where, as a matter of contract, a party is bound to perform, and in this instance the defendant's obligation under the credit was to make payment in Zhejiang. It is difficult to see how a random payment instruction can or should unilaterally alter the applicable law to be discerned from the place of primary contractual obligation, and in this connection I am reminded that in European Bank v. Punjab Bank [1981] 2 Lloyd's Rep.651, at 657, Goff J (as he then was) appears to have taken the view that the mere fact that reimbursement was to be made to a New York bank did not mean that the governing law of the particular credit was New York law.

94. So in real terms the relevant debate in this instance is between Hong Kong law and Chinese law. For the plaintiff Mr Bunting accepted that if the defendant could establish that Chinese law was the applicable system of law under either head then the defendant would get home on the illegality argument.

95. The plaintiff argued strongly that a key element in this factual matrix was that Hong Kong was the place at which documents were presented, although this was an argument mounted in the context of the assertion - which ultimately has not found favour with this court - that such presentation had been made to the plaintiff as 'negotiating' bank. To this Mr Shieh submitted that even if the plaintiff indeed had 'negotiated' the documents in the true sense of the word, that with which the court should be concerned was not the presentation giving rise to payment by the negotiating bank, but the presentation giving rise to the payment obligation of the defendant qua issuing bank, and in such instance a negotiating bank stood in the shoes of the beneficiary which had been paid and which had dropped out of the picture. In this context Mr Shieh referred to Jack, op cit, at para.13.34, wherein the author observes that a negotiating bank is in the same position as the beneficiary himself, "whom it has effectively become", and thus the same governing law must apply between the negotiation bank and the issuing bank, and that "it will be the law of the place where the bank is situated to which presentation of documents is to be made by the negotiating bank." The position, it seems to me, must be a fortiori in the context of presentation by a collecting bank.

96. In the course of argument Mr Bunting SC laid stress on the importance of the provision at field 31D of the credit, namely that the stipulated place of expiry was Hong Kong, which submission was met by Mr Shieh with the argument that, to the contrary, it was field 78 of the credit which was crucial: this specified, under the heading 'Instructions to the Paying/Accepting/Negotiating Bank', that all documents must be sent in one lot to the Zhejiang branch of the defendant bank, which expressly undertook that all drafts drawn under and in compliance with the terms of the L/C "will be duly accepted on presentation at this office and paid at maturity".

97. A number of authorities were cited in the context of the 'illegality' argument. They deal with widely differing fact situations, and in this context I bear in mind Mr Shieh's observation that differing contractual relationships may arise consequent upon the issuing of a single letter of credit, for example, that of issuing bank/beneficiary, confirming bank/beneficiary, negotiating bank/issuing bank, and that the various cases which discuss the proper law of the particular credit at issue must be considered in light of the particular relationship then in question.

98. Of the divers authorities which were placed before the court, the one upon which the defendant placed the greatest reliance was the decision of the Singapore Court of Appeal in Sinotani Pacific Pte Ltd v. Agricultural Bank of China [1999] 4 SLR 34, a case with not dissimilar facts to that of the present.

99. The shape of the action in Sinotani was thus. The respondent bank had issued an irrevocable credit in favour of the appellant, which had presented documents to a bank in Singapore and had asked that bank to purchase those documents subject to acceptance by the issuing bank. The latter stated that it accepted the documents and confirmed that the money payable under the credit would be remitted to the Singapore bank upon the maturity date of the relevant bill of exchange. In reliance, the Singapore bank discounted the bill and paid the appellant the amount due less bank charges, commission and interest. Subsequently a Chinese court ordered the issuing bank, the Agricultural Bank of China, to stop payment under the letter of credit due to an action brought against the beneficiary in that country. When the Chinese bank failed to honour the bill of exchange at the maturity date, the Singapore bank demanded repayment of the sum from the appellant, and the appellant in turn sought an indemnity from the respondent bank. At the trial, the respondent bank conceded that the sole reason for its failure to honour its payment undertaking in the credit was the 'stop-payment order' of the Chinese court. The trial judge found that Chinese law was the proper law of the credit, and on this basis he held that effect should be given to the order of the Chinese court, and therefore dismissed the appellant's claim against the respondent bank.

100. The Singapore Court of Appeal reviewed the facts in detail and held, inter alia, that the place of payment against documents under this credit was to be China, and that accordingly the proper law of the contract between the appellant and the respondent under the credit was Chinese law as the system of law with which the contract had the closest and most real connection. Accordingly the appeal was dismissed, and the decision was upheld to give effect to the order of the Chinese court.

101. There are, of course, factual distinctions between Sinotani, op cit, and the instant case: in the Singaporean action, for example, there was no dispute as to the role of the bank, namely the Singapore branch of Kredietbank, which in fact presented the documents for payment to the Agricultural Bank, and the court construed the credit in that case as an unconfirmed straight credit, and not as a negotiation credit.

102. Nevertheless, I do not consider that these distinctions are of great significance, and I agree with the approach adopted by the Singaporean Court; moreover, even if I am wrong in my view as to the role of the plaintiff in the present case, and that there was 'negotiation' of the documents in the true sense, I do not consider that this would affect the conclusion to which I have come on this issue, namely that the place of performance under this credit is Zhejiang, China, and thus that the lex loci solutionis is Chinese law.

103. If this be correct, it follows that the defence of illegality under the law of the place of performance must succeed, given that the defendant has to establish illegality under one of the two heads in order to get home on this defence.

104. In fact I find that the proper law of this credit, that is, the law with which this credit has its closest and most real connection, is Chinese law also. In this connection it is difficult to see why the asserted place of negotiation, that is Hong Kong, upon which great reliance was placed by the plaintiff, should be accorded greater weight as a 'connecting factor' than the place of issue of the credit, which was Zhejiang. Moreover, it is significant in my view that this credit was not confirmed in Hong Kong, and that under the terms of the credit there need not have been any negotiation in Hong Kong, the credit merely providing, at field 48D, that the credit is "available with ... by ... any bank by negotiation". It strikes me as highly significant that no obligation under the credit was owed in Hong Kong, in contrast to Zhejiang, wherein by virtue of the location of the issuing bank, a payment obligation was owed at the outset, and wherein under any circumstances presentation of documents would occur, which is the factor underpinning the finding of this court that the place of performance under this credit was Zhejiang.

105. If this be correct, therefore, the defence of illegality under the proper law of the credit likewise is successful.

Summary

106. It follows from the foregoing that of the issues raised in this case, the plaintiff has succeeded in terms of the dispute which gave rise to the documentary rejection, namely the discrepancy point, together with the correlative (but in the event unnecessary) argument as to the validity of the notice of rejection.

107. For its part, the defendant has succeeded upon the 'negotiation' and 'illegality' issues, although it was unsuccessful upon the collateral argument as to abuse of process.

108. The end result, therefore, is that this claim must fail.

Order

109. The plaintiff's action herein is dismissed.

110. I make an order nisi that the defendant is to have the costs of this action to be paid by the plaintiff, such costs to be taxed if not agreed. If such be necessary, I order further that this case be certified as fit for two counsel.