THE TOKAI BANK LTD. v. RUKSHA JAPAN LTD. and Others

IN THE COURT OF APPEAL

1994, No. 6
(Civil)

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J U D G M E N T

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Penlington, J.A.:

1. This is the judgment of the court.

2. We heard this matter on 3rd June 1994 and at the conclusion of the hearing we dismissed the appeal of the 2nd and 3rd defendants (D2 and D3) against a judgment of Deputy Judge Yeung dated 21st December 1993 in which he refused to stay the proceedings in favour of the courts of Japan. We allowed the plaintiff's cross appeal against his order giving D2 and D3 unconditional leave to defend and gave judgment for the plaintiff in the sum of Yen 80,000,000 plus interest from the date of the writ, 20th March 1993, at one percent above prime rate, to the date of judgment.

3. We made no order in respect of a Mareva injunction obtained by the plaintiff against D2 and D3 and allowed the plaintiff the costs of the appeal and cross appeal.

4. We said we would hand down our reasons on a date to be fixed and this we now do.

Background

5. This is a claim against the 1st defendant (D1) in respect of five bills of exchange all dated 29th December 1992 for a total of US$1,488,036. Judgment has been entered against D1, a company owned and controlled by D2 and D3, by default. D2 and D3 are sued on the basis that by a contract of indemnity ("the guarantee") dated 15th April 1991 D2 and D3 jointly and severally guaranteed the performance of its obligations by D1 pursuant to its contract with the plaintiff.

6. There is no dispute that D1 purchased substantial quantities of rayon fabric from manufacturers in Japan for re-sale to purchasers in Hong Kong. These purchasers opened letters of credit drawn on various Hong Kong banks in favour of D1, payable by sight drafts to be accompanied by shipping documents as specified in the letters of credit.

7. These five sight bills of exchange were duly drawn by D1 on the Hong Kong banks nominated by the purchasers in their letters of credit and these bills were purchased by the plaintiff from D1 pursuant to a contract also dated 15th April 1991 ("the bills agreement"). However prior to doing so it had required that D2 and D3 to execute the guarantee. Both documents are written in Japanese and there is no dispute that they are to be interpreted in accordance with Japanese law.

8. The five bills were duly presented for payment under the terms of the letters of credit, together with the relevant shipping documents, by the plaintiff to the Hong Kong banks but were dishonoured because the documents were not in order.

9. The guarantee was limited to Yen 80,000,000, a sum somewhat less than US$1,488,036 owing under the five bills, and the plaintiff's claim against D2 and D3 is therefore for that sum as set out in its statement of claim.

10. By an "unless" order dated 6th August 1993 Master Cannon ordered that D2 and D3 file and serve their Defence on or before 20th August. In default the plaintiff to be at liberty to enter judgment against them, with costs. No such Defence has been filed and judgment was accordingly entered on 9th September 1993. However by a summons of 18th August 1993 D2 and D3 sought an order that the statement of claim be struck out for want of jurisdiction and by a further summons of 22nd September sought orders that the judgment against them be set aside, that an order charging property owned by them be discharged and all proceedings stayed pending hearing of their summons to strike out. That was so ordered on 24th September by Master Jennings.

11. The next step taken was that the plaintiff obtained a Mareva injunction from Ryan J. dated 27th September against D2 and D3. It was in the usual terms prohibiting D2 and D3 from removing assets from Hong Kong but allowing for the completion of the sale of a flat in Minden Row, subject to certain conditions as to the use of the proceeds. It also provided for disclosure of assets. That Mareva order was varied by a further order made by Leong J. on 29th September after an inter partes hearing.

12. There were a total of five summonses extant when the matter finally came before Deputy Judge Yeung on 21st December 1993. It was conceded that D2 and D3's summons of 18th August 1993 to strike out the statement of claim was misconceived. There was however a further summons dated 14th October 1993 seeking a stay of the action on the basis of a foreign jurisdiction clause in the agreement or alternatively on the basis of forum non conveniens. There were also summonses by the plaintiff dated respectively 28th September 1993 and 6th October 1993 seeking to continue the Mareva injunction granted by Ryan J. and seeking summary judgment.

13. The matters were all heard together by Deputy Judge Yeung on 21st December 1993 and on 24th January 1994 he refused the defendants' summons for a stay, granted the defendants unconditional leave to defend the action and ordered that the Mareva injunction should remain in force until the trial of the action or further order.

Forum non conveniens

14. It is the case for D2 and D3 that the bills agreement between D1 and the plaintiff and the guarantee were both entered into in Japan and are in the Japanese language. The plaintiff is a Japanese bank with its head office in Japan. D1 is a Japanese registered company and the proper law for the construction of the bills agreement and the guarantee between D2 and D3 and the plaintiff is Japanese. As a consequence the plaintiff has filed an affidavit from a Japanese lawyer, Mr. Taniguchi, and D2 and D3 one from another Japanese lawyer, Mr. Nakano. These experts differ as to the consequences of the alleged failure of the plaintiff to ascertain that the shipping documents presented by D1 were in conformity with the requirements set out in the letters of credit before making payment to D1 under the bills.

15. Deputy Judge Yeung cited the decision, relied on by D2 and D3, Muduroglu Ltd. v. T.C. Ziraat Bankasi [1986] QB 1225. There Mustill L.J. said that the trial of any issue involving foreign law must be more complicated and expensive in an English court than in the one to which the law belongs. Moreover the question of what is the relevant foreign law is treated as a finding of fact which makes it difficult to correct a wrong decision on appeal.

16. It was moreover argued by Mr. Clifford Smith, counsel for D2 and D3 here and below, that the fact that the ultimate buyers of the goods were Hong Kong companies, which was a factor considered by the judge, is irrelevant as the bills agreement and the underlying sales contracts are autonomous transactions. UCM v. Barclays Bank (1983) 1 AC 168.

17. The bills agreement and the guarantee contained clauses that in the event of dispute "the law court shall be the jurisdiction court which have jurisdiction in your [the plaintiff's] Bank's Head Office or Branch". Another clause provided that "the court having jurisdiction in the location in which the head office or ... branch office of your Bank is situated shall be the competent court." The space provided for filling in the location of the branch was not filled in. Mr. Taniguchi said that these clauses are for the benefit of the plaintiff to enable it to have an option to bring suit either where its head office is situated or where the branch is that did the particulars business. The provisions do not mandate jurisdiction in Japan but do give Japanese courts non-exclusive jurisdiction. That was not challenged by Mr. Nakano.

18. We were satisfied that both the courts of Japan and of Hong Kong had jurisdiction to hear this matter. The question is therefore which is the more appropriate forum.

19. The relevant principles in respect of forum conveniens are set out fully in Spiliada Maritime Corporation v. Consulex Ltd. [1987] AC 460 and to succeed in obtaining a stay of proceedings commenced in Hong Kong D2 and D3 must show that in order to best decide the issues for the interests of all the parties and for the ends of justice the courts of Japan would be clearly or distinctly more appropriate than Hong Kong.

"The plea can never be sustained unless the court is satisfied that there is some other tribunal, having competent jurisdiction, in which the case may be tried more suitably for the interest of all the parties." That was the classic statement by Lord Kinnear in Sim v. Rainbow (1892) 19 R 665, approved in Spiliada by Lord Goff at 474.

20. The case for the plaintiff as regards forum conveniens was that D1, although registered in Japan, is entirely owned and controlled by D2 and D3, Hong Kong residents with assets here, who have guaranteed D1's performance of a contract with the plaintiff. While the sales contracts with Hong Kong firms are different from the bills agreement and the guarantee it is the failure by the Hong Kong banks to honour the letters of credit drawn on them by the purchasers of the goods which form the basis of the plaintiff's claim. The plaintiff, while having its head office in Japan, carries on business worldwide and has an office in Hong Kong. It is willing to litigate in Hong Kong. While it is agreed that the litigation is to be governed by Japanese law, the law relating to letters of credit, and bills of exchange are very much part of the universal law merchant and are very similar in all countries carrying out international trade, such as Japan and Hong Kong. The courts of Hong Kong have often in the past applied foreign law and there is no reason, especially in the context of the undisputed facts here, why this matter could not be conveniently dealt with in Hong Kong.

21. We were satisfied that no case has been made out for reversing the decision of the judge that the application for a stay of proceedings in favour of Japan be refused. There are undoubtedly factors which favour the Japanese jurisdiction which were fully argued before the judge. It was a matter of discretion and there is no suggestion that he has not applied the correct principles, as set out in Spiliada, which he cited. On all the evidence here he was also not plainly wrong to come to the decision he did and we consider he was, on the contrary, correct in holding that Hong Kong is the most convenient forum in the interests of the parties and for the ends of justice.

Summary judgment

22. The second matter arising is the plaintiff's cross appeal seeking to reverse the judge's order giving D2 and D3 unconditional leave to defend and for summary judgment for Yen 80,000,000. The judge, having come to the view that he should grant unconditional leave did not go into the merits of the claim in depth but simply said that he could not say that the point on Japanese law raised by D2 and D3 was unarguable in the light of the different opinion of the Japanese lawyers.

23. To obtain leave to defend D2 and D3 have to show the probability of having a real and bona fide defence. National Westminister Bank Plc v. Daniel [1993] 1 WLR 1453. The plaintiff's claim here is based on two documents, the bills agreement and the guarantee. Clause 5 of the bills agreement reads as follows:

"Article 5. (Genuineness of Bills and the Documents, etc.)

I/We do hereby warrant that the Bills and the Documents which I/We submit to your Bank are accurate, genuine and valid and that the Bills and the Documents, if the Bills are drawn under letters of credit, comply with the terms and conditions of the letters of credit. Should any damage be caused as a result of your Bank's handling the relevant transaction in reliance upon the foregoing warranty, I/We shall be responsible for any such damage."

24. Clause 15, so far as is relevant, is as follows:

"Article 15 (Repurchasing Obligations)

In case any one of the following events occurs after I/we have had the Bills Purchased by your Bank, I/we shall assume as a matter of course the Repurchasing Obligations in respect of the Bills referred to the relevant items in the amount of such Bills without any notice, demand, etc. from your Bank and I/we shall pay such amount forthwith. The foregoing provision shall also apply to the bills of which your Bank is nominated as the as the acceptor or drawee under the terms and conditions of letters of credit;

(1) ...

(2) ...

(3) When payment or acceptance of or confirmation of the debt under the Bills is rejected by the party Obligated to Pay the same: Said Bills."

25. There is no dispute that, if D1 is liable to repurchase the bills of exchange pursuant to that agreement and has failed to do so, D2 and D3 are, under the terms of the guarantee, liable to the plaintiff as guarantors up to a limit of Yen 80,000,000. It is however the case for D2 and D3 that because the plaintiff has been negligent in allowing D1 (acting at all times entirely through D2, its managing director and principal shareholder) to present documents to it which did not comply with the requirements laid down by the Hong Kong banks in the letters of credit the plaintiff is liable to D1 for the consequences of that negligence. They rely on the opinion of Mr. Nakano that such would be the position under Japanese law.

26. Mr Nakano cites a decision in the Tokyo District Court of 27th May 1987, 1161 Kinyu Homn Jigo 16 where it was held that "the ICC rules should be applied to cases where the parties have agreed to be bound by the ICC rules" (The ICC rules are those issued by the International Chamber of Commerce for the Uniform Customs and Practice for documentary credits). He states that "the court held that under article 7 of the ICC rules, the banks, which include the purchasing bank, have a legal obligation to ascertain with reasonable care that there are no discrepancies in an L/C and the documents stipulated in the L/C as to their form and on their face." Mr. Nakano goes on to say:

"In the present action, the Plaintiff and the First Defendant have agreed under Article 21 of the Bank Transaction Agreement that the LC in question would be regulated in accordance with the ICC Rules. From the documents I have examined, I am of the opinion that the Plaintiff has been negligent in failing to discharge its obligation to exercise reasonable care with respect to the discrepancies referred to in paragraph 4 hereinabove. Accordingly, the Plaintiff is liable for any damage suffered by the First Defendant as a result of the Plaintiff's negligence. In these circumstances, the First Defendant is entitled to set off any such damage against the amount of the Plaintiff's claims in this action."

27. This would seem to mean, according to Mr. Nakano, that D1 having presented deficient shipping documents to the plaintiff in order to obtain payment on the letters of credit has a cause of action against the plaintiff for the plaintiff's negligence in allowing that to happen. It can set off against the amount of the plaintiff's claim the damage it has suffered.

28. It is however the opinion of Mr. Taniguchi that the contractual terms of the agreement between D1 and the plaintiff are clear and do not depend on an interpretation of the ICC rules. Under clauses 5 and 15 of the bills agreement D1 warrants that the bills of exchange and the attached documents will be in conformity with the terms of the letters of credit and if payment is made on the basis of documents which do not so conform, D1 will repurchase the bills from the plaintiff.

29. For the plaintiff its leading counsel Mr. Geoffrey Ma, Q.C., submitted that there was no dispute between the parties as to the underlying facts. D1 had clearly contracted in the bills agreement that, having discounted the bills and received the money for them from the plaintiff, he would repurchase those bills in the event that they were dishonoured. That it had failed to do. However, D1 is now in effect saying "We admit we obtained your money on the basis of bad documents which prevent you from recovering that money from the Hong Kong banks. However you have been negligent in allowing that to happen and therefore you are barred from seeking to recover it." Mr. Ma says such a proposition is so totally absurd and unjust that no legal system could possibly allow it to succeed. It could not possibly be right to allow D1 to so profit from its own wrong despite the clear contractual terms of the agreement it had entered into.

30. We were satisfied that the terms of the bills agreement expressly provide that the ICC rules shall only apply to matters not provided in the agreement. The dispute between D1 and the plaintiff is governed by the express terms of the bills agreement. The Tokyo District Court decision of May 27th 1987, a copy of which has not been produced, referred to by Mr. Nakano is not relevant to the claim by the plaintiff against D1. Even if it was, according to Mr. Nakano, it does not afford a defence to the plaintiff's claim but only gives a right of set-off. There is, however, no evidence here of any damage suffered by D1 which it could set-off against the plaintiff's claim.

31. We were satisfied that even accepting Mr. Nakano's opinion as being correct, there is no defence by D1 to the plaintiff's claim and consequently to D2 and D3's liability under the guarantee. The plaintiff is therefore entitled to summary judgment against them for Yen 80,000,000.

The Mareva injunction

32. Having entered judgment for the plaintiff the only question that remained in respect of the continuation of the plaintiff's Mareva injunction was whether there is a risk of dissipation of assets.

33. It was the case for D2 and D3 that in ordering that the injunction should continue in place the judge had taken into account irrelevant matters viz that D2 and D3 had sold assets in order to pay existing debts. A Mareva injunction should not operate so as to afford a creditor a form of priority. Ninemia (1993) 1 WLR 1412 at 1422.

34. Mr. Ma contended that there was evidence of risk of dissipation in order to deprive the plaintiff of its judgment. He pointed out that for seven months after the issue of the writ D2 and D3 did not raise any defence to the plaintiff's claim or seek a change of venue. It was only on 14th October 1993 that the defence under Japanese law was raised by which time a flat at Minden Row, Kowloon, owned by them had been sold and the proceeds paid to other creditors. Extensions of time for filing a defence had been granted but no defence had ever been filed. From the proceeds of the sale of the flat some $77,000 had been applied in part payment of the legal costs of the "Vinamito Trading House" an associate of D2 and $400,000 had been paid to the Bank of Pakistan in respect of a company called Sharp Zone Ltd. which is controlled by D2. Sharp Zone Ltd. owned property which was also sold on 13th October 1993. D3 is a shareholder in Sharp Zone Ltd. and in another company, Richina Ltd., but failed to disclose that although ordered by Ryan J. in terms of the Mareva injunction.

35. Having considered the evidence as to the disposal of the proceeds of the sale of the two properties and the conduct of D2 and D3 in relation to this claim we took the view that the Mareva injunction should continue in force and accordingly made no order in respect of it.