SWISS SINGAPORE OVERSEAS ENTERPRISES PTE LTD v. CHINA CITIC BANK CORPORATION LTD, XIAMEN BRANCH

HCCL 11/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 11 OF 2009

____________

____________

______________

J U D G M E N T

______________

I.       INTRODUCTION

1.  This action involves a short point on the application of UCP 600 Arts. 14, 15 and 16.  The question is this: An issuing bank having accepted a presentation of documents under a letter of credit as complying, can the bank later change its mind and refuse payment on the basis that the documents presented do not comply with the letter of credit?

2.  Swiss contends that the Defendant Bank is bound by its earlier acceptance of documents.  The Bank takes the contrary position.  The Bank also argues that the action should most conveniently be tried in Xiamen and asks that I stay the matter to the Intermediate People’s Court there.  Swiss says that I should refuse a stay and instead grant Summary Judgment.

II.      BACKGROUND

3.  By a Sale Contract dated 18 July 2008 Swiss agreed to sell to Xiamen C & D (XCD) 45,000 WMTs (Wet Metric Tons) (+/-10% at seller’s option) of iron ore fines at US$183 per DMT (Dry Metric Ton) CFR FO.  Under the Sale Contract payment was to be by irrevocable letter of credit (payable at sight) issued by a Mainland or Hong Kong bank.  Swiss is a Singaporean trading company, XCD a Xiamen trading company.

4.  On 22 July 2008 the Bank’s Xiamen Branch issued an irrevocable letter of credit for US$8,235,000 in favour of Swiss as beneficiary.  The Bank sent the letter of credit to Bangkok Bank’s Singapore branch, the latter being Swiss’ nominated bank.  The letter of credit was subject to UCP 600.

5.  Between 19 and 23 July 2008 Swiss caused a cargo of 44,500 WMTs iron ore fines to be loaded on board a vessel in India and then shipped to the Mainland.  At the rate stipulated in the Sale Contract, the shipment value was US$7,185,105.43.  The cargo arrived in Fangcheng on 2 August and was discharged on 3 August 2008.

6.  On 30 July 2008 Swiss presented documents to Bangkok Bank to obtain payment under the letter of credit.  On 4 August 2008 Bangkok Bank posted the documents to the Bank.  The Bank received the documents on 6 August 2008.

7.  On 11 August 2008 at 18:00 the Bank issued SWIFT message MT752 to Bangkok Bank.  MT752 stated:-

“PLS CLAIM REIMB AT SIGHT BASIS FOR CREDIT TERMS. T/T REIM ALLOWED.  PLS ADVISE THE DRAWEE BANK OF LC NO NAME OF COMMODITY, LOADING AND UNLOADING PORT AND DAT OF SHIPMENT.”

8.  On 12 August 2008 at 10:48 the Bank countermanded MT752 by a SWIFT message MT799.  MT799 stated:-

“PLS DISREGARD OUR MT752 DD080811 AND CONSIDER THE MT752 AS NULL.  PLS DO NOT CLAIM THE REIMBURSEMENT FROM THE DRAWEE BANK OF AMERICA NEW YORK.  THANKS FOR YOUR KIND COOPERATION.”

9.  On 13 August 2008 at 07:36 by a SWIFT message MT734 the Bank identified 4 discrepancies in the presented documents.  The Bank stated that it was holding the documents at Bangkok Bank’s disposal.  The discrepancies identified were:-

“1.     SHORT DRAWN

2.      PARTIAL SHIPMENT

3.      THE TOTAL CARGO VALUE OF THE BILLS IS LESS THAN THE TOLERANCE AMOUNT OF THE L/C

4.      THE TOTAL CARGO VALUE OF THE BILLS BEFORE PRICE ADJUSTMENT, BONUS AND PENALTY IS LESS THAN THE TOLERANCE AMOUNT OF THE L/C”.

10.  The alleged first discrepancy relates to the fact that Swiss applied to draw US$7,185,105.43 under the letter of credit.  Such amount was below the +/-10% credit amount tolerance specified in the letter of credit.

11.  The alleged second and third discrepancies relate to the specification in the letter of credit that “45,000 MTS (+/- 10 percent at beneficiary’s option)” of cargo were to be delivered without partial shipment being allowed.  The Bank contends that the reference to 45,000 MTs was to 45,000 DMTs (as opposed to 45,000 WMTs).  The 44,500 WMTs shipped by Swiss are equivalent to about 40,017.50 DMTs.  40,017.50 DMTs are outside a tolerance range of +/-10% of 45,000 DMTs.

12.  The alleged fourth discrepancy concerns adjustments to the value of the cargo based on the iron content of the same.  The Bank says that, even if relevant adjustments are made, the cargo shipped remains outside the +/-10% tolerance.

13.  On 14 August 2008 Bangkok Bank on Swiss’ behalf objected to the Bank’s refusal to pay.

14.  Throughout all this time the price of iron ore was falling.

15.  There were negotiations between Swiss and XCD against this background of the collapse of the iron ore market.  Finally, on 22 September 2008, Swiss agreed to reduce the price of the cargo from US$183 per DMT to US$128 per DMT CFR FO.  The value of the cargo shipped accordingly dropped to US$5,122,240.  An addendum to the Sale Contract was executed to record this price reduction.  Swiss issued final invoices reflecting the revised price.  Those invoices were endorsed by Swiss with the words “in mitigation and without prejudice to Swiss Singapore Enterprises Pte Ltd. rights”.

16.  On 22 September 2008 Bangkok Bank on behalf of Swiss sent the following SWIFT message to the Bank:-

“THE VALUE OF THE BILL HAS BEEN REDUCED TO USD5,122,240.00 INSTEAD OF USD7,185,105.43.  KINDLY RELEASE THE DOCUMENTS TO THE APPLICANT M/S XIAMEN C AND D INC. UPON RECEIPT OF USD5,122,240.00 ONLY.”

17.  On 25 September 2008 the Bank paid US$5,122,240 to Swiss.

18.  Swiss says that, in light of MT752, the Bank was bound to pay the full amount which Swiss had claimed under the letter of credit.  Swiss denies that the Bank was entitled under UCP 600 to resile from the Bank’s original acceptance of the presented documents as complying.  Swiss submits that the Bank’s later messages (MT799 and MT734) were of no effect.  Swiss claims the difference between the full amount originally claimed under the letter of credit and what Swiss eventually received.  That difference is agreed by the parties to be $2,062,865.43.

19.  UCP 600 provides:-

III.     DISCUSSION

A.      Can the Bank go back on its initial acceptance of documents?

20.  Mr. Charles Sussex SC (appearing for Swiss) notes that the precise nature of the Bank’s obligation under the letter of credit is ambiguous.

21.  On the one hand, line 42C of the letter of credit states “Drafts at ... 90 DAYS AFTER SIGHT FOR 100PCT OF INVOICE VALUE”.

22.  Line 47A-20 of the letter of credit further stipulates:-

“UPON RECEIPT OF COMPLYING PRESENTATION THE ISSUING BANK WILL SEND REIMBURSEMENT AUTHORIZATION TO BANK OF AMERICA, NEW YORK AND AUTHORIZE THE NEGOTIATING BANK TO CLAIM REIMBURSEMENT FROM BANK OF AMERICA, NEW YORK”.

23.  Thus, on the basis of lines 42C and 47A-20, the letter of credit appears to be an acceptance credit (that is, a credit which will be honoured through Bank of America’s acceptance at 90 days’ sight of a bill of exchange drawn by the beneficiary).

24.  On the other hand, some provisions of the letter of credit suggest that it was intended to be payable by the Bank at sight.  This would have been in conformity with the Sale Contract which required XCD to open a documentary credit which was payable at sight.

25.  Nevertheless, Mr. Sussex submits (and I agree) that it is not necessary for the purposes of these proceedings to determine the precise nature of the letter of credit, that is, whether it was a sight or an acceptance credit.  Nor is it necessary (Mr. Sussex says and again I agree) to determine whether the discrepancies alleged by the Bank were valid.  Mr. Sussex’ contention is that, even if it is assumed that the discrepancies asserted were valid, in light of MT752 the Bank was obliged to honour the letter of credit either by paying at sight or authorising Bank of America to accept bills of exchange drawn on it by the beneficiary.

26.  Mr. Sussex argues that, once the Bank (as issuing bank) determined that the presentation was complying and said so by MT752, it became bound by UCP 600 Article 15a to honour.

27.  The Bank (Mr. Sussex continues) cannot rely on its later notices (MT799 and MT734) because by Article 16c the bank can only give “a single notice” of its refusal to honour.  Here the Bank gave a total of 3 notices.  Indeed, MT799 (whereby the Bank purported to reverse its earlier acceptance in MT752) is by itself insufficient notice of a refusal to honour because it fails to comply with Article 16c(i)-(iii) which require the single notice to state certain matters.

28.  Given a failure to honour in accordance with Articles 15a or 16c, it follows (Mr. Sussex concludes) from Article 16f that the Bank is “precluded from claiming that the documents do not constitute a complying presentation”.

29.  Mr. Sussex’ submissions appear to me to be right.  I do not think that Mr. Clifford Smith SC (appearing for the Bank) has any answer to them.

30.  First, Mr. Smith suggests that MT734 (sent on 12 August) was the single notice required by Article 16c.  That notice (Mr. Smith stresses) was sent within the 5 banking days’ period afforded to the Bank by Article 14b for the purpose of deciding whether or not the presentation was compliant.

31.  I do not agree with this submission.

32.  MT734 cannot be taken out of context and read in isolation.  For example, on its face, MT734 is contradictory to MT752.  It is necessary to read the whole continuum of the Bank’s 3 messages together to make any sense of MT752, MT799 and MT734.  MT799 makes it clear that the Bank was attempting to countermand MT752, while MT734 gives the reasons (which MT799 failed to give) for the purported countermanding.

33.  Letters of credit (it is often said) are the lifeblood of commerce.  An obvious corollary to such proposition is that, at any given time, persons engaged in commerce should be certain where they stand in relation to a bank’s commitment under a letter of credit.  It would be conducive to uncertainty if, after having given notice that it approved a presentation of documents, an bank could then turn around and reject the very same documents.

34.  Under UCP 600, an issuing bank has 5 days in which to decide whether a presentation is compliant.  If before those 5 days are up, the bank represents that it will honour, then it is bound by Article 15a to honour.  Objectively, the notice to a beneficiary that the bank will honour constitutes a binding outward manifestation by the bank that it has determined a presentation to be compliant.  The bank cannot afterwards change its mind, possibly even vacillating many times between honour and refusal, on the ground that the 5 days period has not yet expired.  If the issuing bank can blow hot or cold, commercial persons will never know where they stand in relation to a presentation until the expiry of the entire 5 day period.  There is nothing to suggest that this result, which would have the effect of diminishing the reliability of documentary credits, is what the framers of UCP 600 had in mind.

35.  Second, Mr. Smith suggests that Swiss has no locus to sue the Bank.

36.  I am unable to accept this submission.  The letter of credit constituted at law a contract between the Bank (as issuing bank) and Swiss (as beneficiary).  By that contract the Bank agreed to honour a complying presentation.

37.  Third, Mr. Smith suggests that any contract between Swiss and the Bank was varied by agreement between them.  In essence, Mr. Smith argues that Swiss agreed (following negotiation with XCD) to accept from the Bank a lesser amount than that for which it had applied.

38.  There was (Mr. Smith says) consideration moving from the Bank to Swiss in support of this agreement to accept a lesser amount.  That consideration consisted in the Bank paying the lesser amount to Swiss even though 90 days had not yet elapsed from Swiss’ original presentation of the documents.

39.  Mr. Smith further submits that, by saying that it would accept a lesser amount and ordering the Bank to release the documents to XCD, Swiss effectively represented that it would forbear from enforcing its original rights against the Bank.  For this Mr. Smith relies on the statement in Bangkok Bank’s SWIFT message of 22 September 2008 that the “bill” had been reduced.  The reference to “bill” (Mr. Smith submits) was patently to the bill of exchange which Swiss had originally presented when it first sought to operate the letter of credit.  The Bank was thereby led to believe that the amount being claimed by Swiss from the Bank under the letter of credit had likewise been reduced.

40.  Had the Bank known (Mr. Smith says) that Swiss was going to sue for the difference between the lesser amount and the amount originally claimed under the letter of credit, the Bank would not have released the documents to XCD.  By so releasing the documents to XCD at Swiss’ instruction, the Bank gave up whatever security interest it had against XCD in respect of the underlying goods.

41.  I am not persuaded by Mr. Smith’s argument.

42.  To begin with, as far as the Bank was concerned, there was no deferred 90-day payment obligation.  The letter of credit required the Bank either to pay Swiss at sight or to instruct Bank of America to honour a bill of exchange drawn by Swiss. In the latter situation, upon acceptance of such bill of exchange or draft, Bank of America (not the Bank) would have 90 days in which to pay.  By paying the lesser amount without waiting for the expiry of 90 days from presentation, it is not apparent that the Bank was doing something that it was not otherwise obliged to do.

43.  In any event, the reality is that the Bank paid the lesser amount to Swiss as a result of Swiss agreeing (in mitigation of its loss) to accept a lower rate of payment from XCD.  I am unable to see how the bank paying this lower amount (presumably having obtained XCD’s approval to do so beforehand) could amount to a variation of the contract between the Bank and Swiss evidenced by the letter of credit.

44.  Nor, for that matter, am I able to read the SWIFT message of 22 September 2008 as some sort of representation that Swiss would not later sue the Bank for failure to comply with its obligation under the letter of credit and UCP 600.  I am unable to read the 22 September message as such a representation whether one reads “bill” as referring to the original bill of exchange presented by Swiss (as Mr. Smith argues) or simply as a reference to the “invoice bill for the cargo” (as Mr. Sussex argues).

45.  By MT734, the Bank stated that it was holding the documents to Swiss’ order.  Nothing at that stage prevented Swiss from re-selling the cargo to some third party and delivering the documents to that third party in mitigation of Swiss’ loss.  Swiss could thereafter sue the Bank under the letter of credit for any resultant difference.  In such situation, the Bank would not be able to claim a security interest in the documents capable of being asserted against XCD in support of a claim by the Bank for reimbursement from XCD of any damages paid to Swiss.  The Bank would have been bound at Swiss’ instruction to release the documents to any third party to whom Swiss had resold the goods.

46.  I do not see why, simply because here (rather than re-selling to a third party) Swiss agreed a lower price with XCD in mitigation of loss, the Bank should be able to claim a security interest in the documents as against XCD for the reimbursement of damages paid to Swiss by reason of the breach of the Bank’s own contractual obligations to Swiss.  In handing the documents to XCD as instructed by Swiss, the Bank did not give up anything to which it was entitled.

47.  In summary, the Bank has no arguable defence to Swiss’ claim.

B.      Should there be a stay to Xiamen?

48.  It follows from Section III.A that a stay would serve no useful purpose.  There is no arguable defence or triable issue between the parties.  There is no reason why the matter cannot most conveniently be dealt with in Hong Kong and I have just done so.

49.  The Bank is registered in Hong Kong under Part XI of the Companies Ordinance.  Proceedings against it were commenced here by Swiss as of right.  The burden is on the Bank to establish that Xiamen is a more appropriate forum than Hong Kong.

50.  Mr. Smith suggests that the following elements point to Xiamen as the more appropriate forum for the trial of this action:-

(1)     Swiss’ claim solely concerns the Bank’s Xiamen branch.

(2)     All negotiations took place between Swiss’ Shanghai office and XCD based in Xiamen.

(3)     The Sale Contract concerned the delivery of iron ore fines from India to the Mainland with nothing transpiring in Hong Kong.

(4)     The letter of credit required presentation of documents in Xiamen.

(5)     Negotiations following the dishonour of the letter of credit took place in Xiamen.

(6)     Almost all potential witnesses are based in Xiamen or Shanghai.

51.  I do not accept that the 6 factors just listed point to Xiamen as the more appropriate forum for the trial of this action.

52.  There is no real dispute over the material facts.  Oral evidence from witnesses would not have a significant role in resolving the parties’ dispute.  The dispute is essentially a short question concerning the true construction of Articles 14, 15 and 16 of UCP 600.  If the SWIFT message of 22 September 2008 has to be construed, a Court can simply read it.  The Court could then decide whether the message might be treated as some sort of representation and (if so) with what legal effect.  This Court is well-accustomed to dealing with such questions in a quick and efficient manner.

IV.     CONCLUSION

53.  A stay to Xiamen is refused.

54.  There will be judgment for Swiss in the amount of US$2,062,865.43.  Interest will run on that amount at 1% over US$ prime from 9 November 2008 (that is, 90 days following the original presentation of the documents to the Bank) until today, thereafter interest will run at the judgment rate.

55.  I will hear the parties on costs and consequential orders.