GREAT TREND LTD v. M & M FOOTWEAR LTD

DCCJ 4680/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4680 OF 2003

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JUDGMENT

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1.  The Plaintiff claims against the Defendant for payment of US$37,143.23 for goods sold and delivered.

2.  The Plaintiff is a garment products manufacturer based in Hong Kong.  The Defendant is a company based in the U.K., it has been a customer of the Plaintiff since March 2001.

3.  Under a Purchase Order No. 416/01 dated 13 December 2001 together with the Proforma Invoice dated 14 December 2001 the Plaintiff agreed to sell to the Defendant an order of 16,000 pairs of girls’ glitter canvas shoes (hereinafter referred to as “the goods”).  On 15 February 2002 the Plaintiff shipped the goods to the Plaintiff and issued a commercial invoice on the same date, the value of the goods shipped was confirmed to be US$38,345.93.

4.  It is not disputed that the Defendant did receive delivery of the goods.  There is also no dispute as to the quality of the goods delivered.

5.  It is the Defendant’s defence that payment for the goods was by way of an irrevocable letter of credit in favour of the Plaintiff.  That it is intended by both parties that payment by an irrevocable letter of credit would be regarded as absolute payment of the Plaintiff’s goods.  The Plaintiff claimed that pursuant to an agreement made between the Plaintiff, the Defendant and one City (Europe) Plc. (hereinafter referred to as “City”) a letter of credit would be issued in payment for the goods.  The Defendant claimed that the Plaintiff agreed that City would be the Applicant of the letter of credit.  By accepting the L/C Applicant to be responsible for the payment of the price of the goods by an irrevocable of letter of credit, the Defendant claimed the Plaintiff accepted this form of payment would discharge the Defendant’s obligation to pay for the goods.  The Defendant claimed therefore that as the Defendant had paid City in full for the value of the goods, it is for the Plaintiff to pursue against City for full payment.

6.  Due to certain complaints of discrepancies in the L/C raised by the Bank of China in London, not only was the payment delayed but because the L/C applicant City was placed in administration on 22^nd March 2002, the Plaintiff was unable to obtain any payments from City at all.

The Plaintiff’s Case

7.  It is not disputed that the Defendant had been a customer of the Plaintiff sometime before contract PO 416/01 was entered between them.  It is the evidence of Mr. Albert Tsui Hoi Yung (“Mr. Tsui”), a director of the Plaintiff, that he came to know Mr. Kishore Nagrani (“Mr. Nagrani”) the Managing Director of the Defendant personally and had developed a trusting relationship with Mr. Nagrani before the dispute over contract No. 416/01 (“the said agreement”).  It is not disputed that the Plaintiff and the Defendant had a series of further transactions after the said agreement was reached.

8.  It is the Plaintiff’s case that under a term of the said agreement, payment for the purchase price of the goods was to be by way of letter of credit at 90 days from shipment date.  The goods in question under the said agreement was various ‘girls’ glitter canvas shoes’ at the sale price of US$38,345.93.  Evidence of the contract between the Plaintiff and the Defendant can be found in the Revised Proforma Invoice revised by the Plaintiff on 14 December 2001 and accepted by the Defendant by fax after it was duly signed by the Defendant acknowledging the terms therein.  On 17 December 2001, the Plaintiff was advised by letter from the Bank of China (London) Ltd. that the letter of credit had been issued by the issuing bank in favour of the Plaintiff as procured by the Defendant.  Therefore the Plaintiff procured the delivery of the goods to the Defendant under bill of lading No. SIHSOU-0233002A.  On 1 March 2002 the Plaintiff presented to the issuing Bank c/o the Asia Commercial Bank Ltd. (the Plaintiff’s banker) the requisite documents for effecting the payment obligation by the issuing bank under the said letter of credit.

9.  At a later date in March 2002, the Plaintiff was informed that there were discrepancies in the documents presented by the Plaintiff reference was made to a telex issued by the issuing bank to the Plaintiff’s banker on 7 March 2002.  The discrepancies were as follows:

“	(a)	The place of origin was stated as “Cambondia” instead of “Cambodia” in the invoice and the packing list;
	(b)	Net weight was not shown in the Bill of Lading; and
	(c)	It is shown in the copy of courier AWB receipt that non-negotiable documents were not sent within 5 days after shipment date.”

10.  The Plaintiff did not consider the discrepancies to be material so far as the contract between the Plaintiff and the Defendant was concerned.  The quality and the quantity of the goods were unaffected.  The Plaintiff is of the view that:-

(a)	The wrong spelling of the place of origin “Cambodia” as “Cambondia” in the invoice and the packing lists can be clarified in the certificate of origin which stated the place of origin as “Cambodia” which had been delivered to the issuing bank;
(b)	Though the net weight was not shown in the bill of lading, it was shown in the packing lists which were part of the requisite documents supplied to the issuing bank.  In any event, gross weight was shown in the packing lists which also appeared in the bill of lading;
(c)	The timing of the dispatch of the non-negotiable documents being after the shipment date is immaterial so far as the quality and the quantity of the goods was concerned.

11.  As the Defendant did not raise any dispute as to the quality and the quantity of the goods dispatched and delivered to the Defendant in the U.K., it is not a matter in issue.

12.  On 21 March 2002, the Plaintiff received a reminder telex issued by the issuing bank to the Plaintiff’s banker referring to the following:

“The above mentioned item still remains unaccepted due to the discrepant documents as already been notified to you by our telex dated 07/03/2002 …….. pending Applicant’s acceptance of the discrepancies”.

Mr. Tsui therefore sent two e-mail messages on 21 and 22 March 2002 requesting the Defendant to accept the discrepancies appearing in the requisite documents presented for effecting payment under the letter of credit.

13.  The Plaintiff received a reply e-mail from Mr. Nagrani on 23 March 2002 which stated

“Have given instructions to the bank today accepting the documents”.

Thereafter the Plaintiff sent reminder e-mail messages to Mr. Nagrani on 2, 4 and 20 April 2002 respectively.  However, the requisite documents intended for effecting payment under the letter of credit were not accepted by the issuing bank.  The Plaintiff informed the Defendant on 4 and 6 May 2002 by e-mail messages that payment under the letter of credit was formally rejected by the issuing bank.

14.  Mr. Tsui then negotiated with Mr. Nagrani, he was given to understand that Mr. Nagrani had procured to have the letter of credit issued by an issuing bank care of an agent which was then in the course of being wound up.  It is Mr. Tsui’s evidence that on 21 May 2002 he reached a consensus with Mr. Nagrani over the telephone whereby the Defendant agreed to settle the price of the goods by telegraphic transfer payment (T/T) and the Plaintiff would withdraw its claim for payment by the issuing bank under the said letter of credit.

15.  It was on this basis that Mr. Tsui agreed with Mr. Nagrani over the telephone that Mr. Nagrani would procure to have the goods released to the Defendant through the forwarding agent called Ultrafast Trading Co. Ltd. which was named in the bill of lading in the absence of security and in substitution of the rejected letter of credit.  As Mr. Tsui understood Mr. Nagrani is also the managing director and beneficial owner of the Ultrafast Trading Co. Ltd. he could procure the release of the goods to the Defendant without provision of documents initially required for the release of the goods contemplated under the payment arrangement by way of letter of credit.  In any event, the Plaintiff was not required to sign any further documents to assist the Defendant in procuring the release of the goods through the forwarding agent.

16.  Under these circumstances, the Plaintiff informed its banker that the Plaintiff would accept rejection of the documents presented for the payment obligation by the issuing bank under the said letter of credit.  The Plaintiff had also by e-mail message to the Defendant on 22 May 2002 informed the Defendant accordingly and requested the Defendant to confirm the aforesaid oral consensus reached with Mr. Nagrani over the phone on 21 May 2002 that the Defendant would settle the outstanding price of the goods by way of T/T payment of US$38,345.  By an e-mail message dated 23 May 2002 the Defendant informed the Plaintiff that it was in financial difficulties as a result of City’s being placed in administration.  The Defendant then proposed to meet its obligation to settle the outstanding price of the goods to the Plaintiff by way of payment by instalments.

17.  It is the Plaintiff’s case that the Defendant had repeatedly over e-mail messages and telephone conversations confirmed its outstanding liability for the payment for the goods of US$38,345.  The only obstacle was the Defendant’s financial difficulties caused by City being placed in administration.  The Plaintiff alleged that payment was delayed because the Defendant asked the Plaintiff for its understanding in the light of its financial difficulties during the period.  At a later stage, the Defendant proposed the settlement of the outstanding liability be paid by way of the mechanism of overpricing the Defendant’s subsequent purchase orders.  It was under this mechanism of overpricing of subsequent goods ordered that the Plaintiff was paid the sums of US$897.75 and US$304.95 (in total US$1,202.70) on 12 April 2003 and 14 May 2003 respectively.

18.  The Plaintiff therefore claims against the Defendant for the balance of the purchase price for the goods in the sum of US$37,143.23 (US$38,345.93 – US$1,202.70).

The Defendant’s case

19.  It is the evidence of Mr. Nagrani, managing director of the Defendant, that ever since the Defendant started trading with the Plaintiff in early September 2001 the Defendant would place purchase orders with the Plaintiff and the Plaintiff would request payments to be made by way of irrevocable letters of credit.  For contract PO 416/01 of 13 December 2001 for ‘girls’ glitter canvas shoes’ at US$38,345.93, the Plaintiff agreed the payment for the purchase price to be by way of an irrevocable letter of credit at 90 days from shipping date.

20.  Mr. Nagrani’s evidence was that owing to the Defendant’s own banking facility limit being used up at the time, it was not able to apply for an L/C to the Plaintiff.  Mr. Nagrani claimed that he had informed Mr. Tsui by telephone that City would issue an irrevocable letter of credit to the Plaintiff directly and that the Plaintiff would deliver the goods to the order and to the beneficiary of City.  He also claimed that he had informed Mr. Tsui that City had a facility agreement with the Defendant and consequently, the Plaintiff’s goods would be delivered to City in the U.K. and the Defendant would purchase the goods from City.  He also claimed that Mr. Tsui expressed no objection to such an arrangement and was comfortable with the arrangement.

21.  It is Mr. Nagrani’s evidence that City assisted new start-ups and small companies in the U.K. with transactions based finance whereby they would import against confirmed orders from credit worthy customers.  Once the order from the customer was given, City would evaluate the transaction.  If the order was accepted, City would proceed with the opening of the L/C to purchase customer’s specified goods from the relevant overseas seller directly.  Upon arrival of the goods from overseas, City would invoice the customer and the customer would have an option either to pay immediately and collect the original shipping/banking documents from City or obtain credit from City.  The Defendant exhibited an agreement between City and Defendant dated 9 December 1999 under which City offered the credit facilities to the Defendant.

22.  Under the agreement with City, the Defendant was able to procure City to issue an irrevocable letter of credit to purchase the goods from the Plaintiff.  It is the Defendant’s case that the Plaintiff accepted the terms of the irrevocable letter of credit offered by City.  The goods were therefore shipped on 15 February 2002 by the Plaintiff to the order and beneficiary of City as evidence in the bill of lading No. SIHSOU-0233002A.  The Defendant therefore claimed that City became the owner of the goods when the goods arrived in the U.K.

23.  It is also the Defendant’s case that on or about 13 March 2002, the Defendant paid City the balance of the outstanding price of the goods charged by City.  Mr. Nagrani alleged that he was informed by City that City had given a bank guarantee for the sum equivalent to the price of the goods in favour of the shipping company APL Shipping Line Ltd. as security to clear the shipment and obtain possession of the goods.  After clearing the shipment, City delivered the goods to the Defendant on or about 19 March 2002.  The week after the Defendant received the goods, Mr. Nagrani learned that there was an administration order against City issued on 22 March 2002.

24.  Mr. Nagrani admitted that between 21 March 2002 to 6 May 2002, the Plaintiff repeatedly requested the Defendant to get the L/C Applicant to accept the discrepancies on the L/C.  Mr. Nagrani admitted that he passed the Plaintiff’s request on to the administrator of City but they failed to respond to the Plaintiff.  Therefore, it is the Defendant’s case that the Plaintiff should pursue this claim against City or the administrators of City rather than the Defendant.

25.  It is the Defendant’s case that the irrevocable letter of credit issued by the Bank of China London in favour of the Plaintiff constituted a contract between the Bank of China and the Plaintiff.  The Defendant considered that the bank should pay the price of the goods to the Plaintiff if the Plaintiff could comply with the term of irrevocable letter of credit.  He claimed further that it was the Plaintiff that failed to obtain the Bank of China London’s acceptance of the discrepancies in the document.  It was the Plaintiff who breached the terms of the irrevocable letter of credit that caused the Bank of China London to refuse to release the money to the Plaintiff.

26.  It is the Defendant’s case that it did not buy the goods directly from the Plaintiff and it had paid City for the goods and City sold the goods to the Defendant on 19 March 2002.  Mr. Nagrani further denied that there was any oral agreement on or about 21 May 2002 for the release of the goods through the forwarding agent Ultrafast Trading Co. Ltd. in the absence of any security and in substitution of the rejected letter of credit.  He further denied there was any agreement between him and Mr. Tsui on 21 May 2002 to pay the price of the goods by telegraphic transfer as alleged.  Since the Defendant had already paid the price of the goods to City, the Defendant claimed it is not liable to pay the price to the Plaintiff.

Findings

Quality of the witnesses’ evidence

27.  The Plaintiff’s director Mr. Tsui gave evidence on behalf of the Plaintiff.  He was cross-examined extensively on this transaction PO 416/01, the e-mail exchanges between the Plaintiff and the Defendant Mr. Nagrani and the telephone conversations between them.

28.  The Defendant’s evidence came from Mr. Nagrani who gave evidence via video-link because Mr. Nagrani was unable to come to Hong Kong to give evidence personally.  The Plaintiff criticized the evidence given via video-link to be substantially inferior to viva voce evidence given under the solemnity of the courtroom.  Mr. Chang, counsel for the Plaintiff submitted a number of authorities on video-link evidence.  Mr. Chang referred to the judgment of Conti J. approving the judgment of Spender J. in an earlier case in the case of Moyette Pty Ltd. v. Foundation Healthcare Ltd. at the Federal Court of Australia dated 27/2/2003.  Conti J. cited the passage in the judgment of Spender J. as follows:

“Notwithstanding observations in those cases that there is essentially no real difference between evidence by video-link and viva voce evidence.  I disagree and I think it right to recognize that there are deficiencies when evidence is taken by video-link when compared with evidence given viva voce.”

29.  Mr. Chang also referred to the case Re Chow Kam Fai [2004] 1 HKLRD 161 at 175 D-F where Deputy Judge To made the following observations:

“On the other hand, witnesses are obliged by law, the solemnity of the court atmosphere and the threat of immediate sanction to give evidence on oath or under affirmation and to tell the truth.  They are subject to the sanction of the court if they should refuse to answer questions on oath or disobey an order of the court or otherwise behave disrespectfully.  Likewise, the judge can watch the witnesses giving evidence under the solemnity of the court atmosphere.”

30.  Rogers V.P. held in the Hong Kong Court of Appeal in the case of Re Chow Kam Fai [2004] 2 HKLRD 260 at 268D:

“… I have no doubt that the atmosphere of a court is highly important as regards the taking of evidence.  The solemnity of the court proceedings and its atmosphere is something which, I have no doubt, plays an important role in the way justice is administered.”

31.  The case of Chow Kam Fai involved an application to cross-examine the judgment debtor and the Applicant Chow Kam Fai applied to be cross-examined by video-link communication.  There is obviously a difference between giving evidence in a civil trial on the facts as a witness and the judgment debtor being cross-examined on his financial state or a director being cross-examined on the company’s liabilities.  I also recognize that there are deficiencies when evidence is taken by video-link telephone calls compared to viva voce evidence given in court.  There is no doubt that in court one can observe a witness’s demeanour giving viva voce evidence.  Evidence given via video-link has its obvious limitations in that the witness is not placed inside the solemnity of the courtroom.  In my assessment of Mr. Nagrani’s evidence given via video-link communication, I have taken into consideration the limitations of this form of evidence taking and I have also taken into consideration the time difference between the U.K. and Hong Kong at the time the evidence was heard.  It was in the middle of night U.K. time (GMT) when Mr. Nagrani gave his evidence.  I made a ruling on video link evidence shortly before Mr. Nagrani gave evidence which I shall not repeat here save that evidence adduced by the Defendant via video-link is a matter that goes to the weight of the evidence, and I have taken all these factors into account when I assess the credibility of the witnesses in this case.

32.  In my assessment of the evidence in support of the Plaintiff’s case and the evidence in support of the Defendant’s case, I looked not only at the oral evidence given in court by Mr Tsui and Mr. Nagrani via video link but also as to whether they were supported or unsupported by documentary evidence.  I find that Mr. Albert Tsui’s evidence was fully supported by the e-mail messages he sent to the Defendant.  While Mr. Nagrani’s evidence given on behalf of the Defendant was mainly unsupported by the e-mail messages produced.  Taking all the evidence in totality, I reached my conclusion based on the quality of the evidence so given.

33.  It is the Defendant’s pleaded case that the parties intended to settle payment by an irrevocable letter of credit.  This irrevocable letter of credit was therefore regarded as an absolute payment for the goods.  The Defendant therefore claimed that by accepting the irrevocable letter of credit the Plaintiff accepted payment in this form and since the Defendant paid City for the goods, and City had applied for a letter of credit, the Defendant had discharged its obligation to the Plaintiff.  It is the Defendant’s argument that the burden of payment have shifted to the Applicant of the L/C i.e. City or the issuing bank of the irrevocable letter of credit, the Bank of China London.

34.  Mr. Chang disagreed and relied on the case of W.J. Alan & Co. Ltd. v. El Nasr Export and Import Co. [1972] 2 QB 189 at 212B, where Lord Denning M.R. held that:

“in the ordinary way when the contract of sale stipulates for payment to be made by L/C, then when the L/C was issued and accepted by the seller, it only operates as conditional but not absolute payment, unless the seller stipulates, expressly or impliedly, that it should be so, e.g. where the seller stipulates for the credit to be issued by a particular banker such that he shall look to that particular banker to the exclusion of the buyer for payment of the goods.”

35.  In the case of E D and F Man Ltd. v. Nigerian Sweets and Confectionery Co. Ltd. [1977] 2 Lloyd’s Rep. 50 where the buyers opened an irrevocable L/C in London with payment by 90-day drafts.  The buyers received the goods and they paid the bank.  The bank later became insolvent.  Ackner J held that the buyers were liable to pay the sellers, and rejected the argument put forward by the buyers that the L/C constituted absolute payment.

36.  Lord Diplock observed in the case of United City Merchants (Investments) Ltd. v. Royal Bank of Canada [1983] 1 AC 168 that:

“……So the point falls to be decided by reference to first principles as to the legal nature of the contractual obligations assumed by the various parties to a transaction consisting of an international sale of goods to be financed by means of a confirmed irrevocable documentary credit.  It is trite law that there are four autonomous though interconnected contractual relationships involved.  (1) The underlying contract for the sale of goods to which the only parties are the buyer and the sellers: (2) the contract between the buyer and the issuing bank under which the latter agrees to issue the credit and either itself or through a confirming bank to notify the credit to the seller and to make payments to or to the order of the seller (or to pay, accept or negotiate bills of exchange drawn by the seller) against presentation of stipulated documents; and the buyer agrees to reimburse the issuing bank for payments made under the credit.  For such reimbursement the stipulated documents, if they include a document of title such as a bill of lading, constitute a security available to the issuing bank; (3) if payment is to be made through a confirming bank the contract between the issuing bank and the confirming bank authorising and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit; (4) the contract between the confirming bank and the seller under which the confirming bank undertakes to pay to the seller (or to accept or negotiate without recourse to drawer bills of exchange drawn by him) up to the amount of the credit against presentation of the stipulated documents.”

Clearly, such a position described by Lord Diplock took place in the present case.

37.  Mr. Yeung, counsel for the Defendant, argued that by accepting the letter of credit the Plaintiff accepted the buyer to be substituted by City, therefore, the obligation to pay for the goods shifted to City.

38.  Mr. Yeung relied on to Raymond Jack’s Documentary Credits 3^rd Edition 2001 Chapter 11 on the Bank’s Security, para. 11.3 at p. 326 on the Security Provided by the Documents – Pledge:

“A pledge may be described as the transfer of the possession of goods by way of security whereby the ownership of the goods remains in the pledgor and the pledgee obtains a right to possession only.  He has a ‘special interest’ in the goods, which includes a right to sell.”

39.  I note that under para. 11.5 p. 327, the author has this to say:

“……Passage of property is ultimately determined by the objectively construed intentions of the parties.  There will often be an inference that the seller intends to retain title in the goods until payment, an inference which is not displaced merely because payment is to be by letter of credit.  On acceptance of the documents against payment by the bank, property passes to the buyer, but, so long as the bank retains the bills of lading, subject to the bank’s pledge interest.  If the buyer refuses to take up the documents on the ground that they do not comply with the credit, either himself or by declining to authorise the issuing bank to take them up from the errant confirming bank, then he can not retain the property in the goods.”

40.  It is clear to me that in this case the nominated bank of the Applicant i.e. the Bank of China London refused to accept the letter of credit because of the discrepancies, therefore, payment was not confirmed.  In spite of the Plaintiff’s requests to Mr. Nagrani to make good the discrepancies and instruct City the Applicant of the L/C to do so, this was not done.  As a result of City’s refusal to accept the letter of credit, the Bank of China London never received the instructions from City to release payment to the Plaintiff.  Based on the analysis of Raymond Jack’s Documentary Credits para. 11.5 on page 327, due to the non-acceptance of the documents against payment by the bank the property failed to pass to the buyer.  City, therefore, did not have the right to the goods and the seller retained the title in the goods.  Unfortunately, City passed the goods to the Defendant although it had no title to the goods to pass because it failed to approve payment to the Plaintiff for the goods.

41.  What is the position of the Defendant then when it took delivery of the goods?  According to the Plaintiff, the contract for the purchase of the goods was entered between the Defendant and the Plaintiff.  There is privity of contract between the Defendant and the Plaintiff.  The opening of the L/C by a third party on behalf of the Defendant, so far as the Plaintiff is concerned is merely a mechanism employed by the Defendant to effect payment to the Plaintiff.  There was no privity of contract between the Plaintiff and City.  The Plaintiff had never contracted with City for the sale of the goods.  There was no contractual relationship between the two, City was involved for the sole purpose of facilitating payment by L/C on the Defendant’s behalf.  No doubt, the Plaintiff merely regarded City as a paying agent and a receiving agent for the goods on the Defendant’s behalf.

42.  Para. 34 – 477 on page 471 of the Chitty on Contracts 29^th ed. Vol. 2 the author has this to say:

“Seller’s rights where documents are faulty.  What is the seller’s position if the bank has lawfully rejected documents tendered under the documentary credit as it found them to contain discrepancies?  It seems obvious that, if despite the bank’s rejection of the documents, the buyer accepts the goods, he is bound to pay the price.  The buyer cannot possibly retain the goods but claim that the bank’s right to reject the documents discharges him from his duty to settle the price.  The position is more difficult if the buyer uses the bank’s rejection of the documents as a ground for the rejection of the goods.  In shamsher Jute Mills v Sethia (London) Bingham J. held that as the seller’s inability to obtain the amount of the documentary credit was occasioned by his failure to tender a proper set of documents, he was unable to enforce the contract for sale.  His Lordship, thus, treated the seller’s failure to bring himself within the terms of the documentary credit as a breach of his duties under the contract of sale.  But as the contract of sale and the documentary are deemed to be autonomous of, and unqualified by, each other, it is perhaps arguable that the seller’s inability to recover under the documentary credit, due to a formality concerning the regularity of the documents, need not necessarily bar him from seeking a remedy under the contract of sale.  The buyer’s breach could, for instance, be seen in his refusal to instruct the bank to accept the documents despite the discrepancies.  This argument, which would appear not to have been raised in the instant case, derives support from the fact that the opening of the documentary credit does not, in itself, constitute an unconditional discharge of the buyer’s duty to pay the price.”

43.  Lord Denning M.R. in the case of W.J. Alan & Co. v. El Nasr Export (C.A.) held in his judgment at page 212:

“Conclusion as to payment

As a result of this analysis, I am of the opinion that in the ordinary way, when the contract of sale stipulates for payment to be made by confirmed irrevocable letter of credit, then, when the letter of credit is issued and accepted by the seller, it operates as conditional payment of the price.  It does not operate as absolute payment.

It is analogous to the case where, under a contract of sale, the buyer gives a bill of exchange or a cheque for the price.  It is presumed to be given, not as absolute payment, nor as collateral security, but as conditional payment.  If the letter of credit is honoured by the bank when the documents are presented to it, the debt is discharged.  If it is not honoured the debt is not discharged: and the seller has a remedy in damages against both banker and buyer.”

44.  It is clear from the authorities relied on by Mr. Chang and Mr. Yeung that the opening of the documentary credit does not in itself constituted an unconditional discharge of the buyer.  In Lord Denning’s own words “when the letter of credit is issued and accepted by the seller it operates as conditional payment of the price.  It does not operate as absolute payment.”  The letter of credit was clearly only a conditional payment in the present case.  I accept Mr. Chang’s argument that the obligation to pay for the goods did not shift from the Defendant to City.  In particular, when the Defendant took delivery of the goods, the Defendant became immediately liable to pay for the goods.

45.  The Defendant argued that the Plaintiff should go after City for payment of the goods for there was a novation of the sale of goods contract.  Mr. Yeung argued that the Plaintiff by accepting the L/C applied for by City to pay for the goods on the Defendant’s behalf, the Plaintiff has accepted City as the buyer.  I do not find a contractual relationship between City and the Plaintiff existed.  There was no privity of contract between the two of them.  The only contract City had in this transaction was with the Defendant for payment arrangements in the Defendant’s business.  The fact that the Defendant signed an agreement with City for an arrangement of payment by letters of credit of its purchasing transactions, does not mean that whoever the Defendant purchased from would automatically have a contractual relationship with City.  There was no consideration for the Plaintiff to accept City as its buyer whatsoever.  So far as the Plaintiff is concerned, it was the Defendant who requested the Plaintiff to accept payment by a letter of credit opened by a third party, it was merely a payment arrangement.  I can see no basis for the Defendant’s claim that there was a novation of the sale of goods contract at all.  In any event, this was not pleaded in the Defence of the Defendant.

Agreement to pay by telegraphic transfer

46.  It is the Plaintiff’s case that over a telephone conversation, Mr. Nagrani had agreed with Mr. Tsui to settle the payment for the goods of US$38,345 by T/T payment in place of payment by letter of credit.  This arrangement was reached after the Plaintiff’s many failed attempts to obtain payment on the letter of credit.  The Plaintiff exhibited a number of e-mails, one of which is dated 4 May 2002 from Mr. Tsui to Mr. Nagrani where Mr. Tsui referred to the payment for the goods:

“Your bank had already rejected the L/C.  Please advise how you want to settle the payment on the second L/C.” 

The following e-mail from Mr. Tsui’s wife Helen on 6 May 2002 again referred to the payment:

“Since your bank rejected your L/C and our bank keep asking for the solution of the matter.  Please kindly inform us of the further instructions.”

Then in the e-mail dated 22 May 2002 Mrs. Helen Tsui wrote in the third paragraph of the e-mail:

“Please kindly reply with a short note, stating that your company will settle the payment of US$38,345.00 by T/T payment.  Thank you for very much in advance.”

47.  On the next day, by e-mail dated 23 May 2002 on page 57 of the bundle, Mr. Nagrani replied:

“Dear Helen,

I am pleased you understand our situation.  Unfortunately, my company has to sustain a very large loss as a result of the liquidation of The City (Europe) Plc.  The Administrators tried their very best to sell this financial institution to another bank but failed and finally it has decided to close it down.

I am still unsure as to what the final payout will be as it is still long way off.  Meanwhile, I am trying my best to meet my obligations.  I can confirm that the sum of US$38,345.00 will be paid to you at some stage but at this moment of time I cannot give you a definite date as I am still working on my company’s budgets and cash flow.  As soon as I have a clearer picture I will inform you.

Meanwhile, I think we should continue with some development work for Spring/Summer 2003 for which I already have orders.  Perhaps we can try and trade our way out by paying off the amount outstanding in stages against each order.  This would help us immensely.  Please let us have your comments.

With kind regards,

Kishore Nagrani”

48.  On the same day Mrs. Tsui sent an e-mail reply to Mr. Nagrani:

“Dear Kishore,

Thank you very much for your prompt reply.

I am sorry if I made you feeling stressful.  Actually, I didn’t mean to rush you for the payment, as I have been knowing you so far, you are a very trustful person, so take your time.  It is nothing urgent.  What we need is a formal notice from you, stating that the L/C has been cancelled, and the payment would change to T/T.  It is not necessary to put the date on it, because we need it only for our accounts department to keep a record.  That’s it.”

To which Mr. Nagrani replied on 29 May 2002

“Dear Helen,

Sorry for this late reply but I was out of town.  I will fax you the required letter tomorrow.

Thank you for your understanding.”

49.  The e-mails exchanged referred to above are cogent evidence in support of the Plaintiff’s case that the Defendant had agreed to pay for the goods by T/T.  Mr. Nagrani was asking for the Plaintiff’s understanding because the Defendant was experiencing financial difficulties after City was placed in administration; as a result, the Plaintiff did not press the Defendant for payment of the goods immediately.  On the other hand, the Plaintiff required a note to confirm that the Defendant had agreed to pay by T/T for the goods for its accounting purposes.  This arrangement was accepted by the Defendant’s Mr. Nagrani in his e-mail reply dated 29 May 2002 at page 60 of the bundle.

Overpricing arrangement

50.  It is clear that from the e-mails exchanged the Defendant failed to pay for the goods by T/T.  The Defendant then proposed another form of payment arrangement, one of increasing the prices in future orders.  This suggestion was mentioned in his 23 May 2002 e-mail on page 57 of the bundle where he said in the last paragraph of his e-mail:

“Perhaps we can try and trade our way out by paying off the amount outstanding in stages against each order.  This would help us immensely.  Please let us have your comment.”

51.  The e-mail from the Plaintiff to the Defendant on page 61 of the bundle referred to the overpricing arrangement:

“Dear Kishore,

Regarding the doodle, as you mentioned before, you would like to increase the price, in order to cover the last payment.

The price is confirmed at US$1.58, and the total quantity (up to this moment) is around 27,000 pairs.

Meanwhile we are preparing the P/I for you.  What is the price you would like us to put into the P/I?  Albert suggests to put a minimum of US$2.08 as the price of each pair of shoes.  Therefore US$13,500 (US$0.5 x 27,000 pairs) out of the total amount serves as the payment for the last order.  Please kindly advise a.s.a.p., thank you very much in advance.

Best regards,

Helen”

52.  Mr. Nagrani’s reply can be seen in the next page, page 62 of the bundle, replying to Mrs. Tsui’s e-mail of 2November:

“Dear Helen,

It is our intention to repay a substantial sum – at lease US$12 – 15000 against this seasons orders but we would like to amortize it over a greater pairage – say 50,000 pairs which we are certain we will place with you by end of November.

If we reduced US50 cents per pair there would be no profit in any of the doodle orders and our bank may object to it.

We are working on the cost structure on each of the order already placed with you and will advice you the possible price increase per order.

Once again I would like to thank you for all the support you have given me and I will do my very best to repay the outstanding amount feasibly possible.

Regards to Albert and self.

Kishore”

53.  By 22 April 2003 it can be seen that the business relationship between the Plaintiff and the Defendant have become rather strained. Pages 67 – 73 are the e-mails sent by Mr. Tsui to Mr. Nagrani and Mr. Nagrani’s reply.  In Mr. Tsui’s 22 April 2003 e-mail, he specifically referred to the US$38,000.00 debt in paragraph 4, on page 67 he said:

“(4)  You still owe me US$38,000 from last year.  You told me that we can increase the L/C amount to cover US$10,000 in all orders from this season.  As a matter of fact, we can only increase US$900 from one of the L/C and that’s it. ……”

On page 70, Mr. Nagrani replied:

“Outstanding amount – During our meeting in Hongkong and GDS I had specifically asked you to overdraw US$10,000 against PO490/02 and 499/02.  Why was this not done??  I had asked Helen during dinner at Hilton and she said the overdrawn amount has been taken into consideration.  Please understand we were trying to pay off the debt through profits on some of the transactions.”

54.  It is obvious that in April and May 2003 the relationship between Mr. Tsui and Mr. Nagrani had turned sour.  In spite of that, up to this stage Mr. Nagrani still acknowledged that he had agreed to pay the outstanding debt of US$38,000.  By his e-mail replies, he acknowledged that the arrangement to be one of overpricing later orders.  Unfortunately, according to Mr. Nagrani’s evidence, the later orders were unsatisfactory in quality so their business relationship broke off.  It is obvious from the evidence of these e-mails that the Defendant had agreed and acknowledged the debt.  Mr. Nagrani in his evidence via video-link informed me that it was a goodwill gesture on his part at the time to pay the Plaintiff by an arrangement of overpricing the later orders.  However this gesture of goodwill was never mentioned in the e-mails until a later stage after the parties’ business relationship turned sour.  This suggestion of a goodwill gesture is inconsistent with the e-mail Mr. Nagrani sent to Helen on page 62 where he said:

“Once again I would like to thank you for all the support you have given me and I will do very best to repay the outstanding amount feasibly possible.”

It seems to me that the payment arrangement by T/T and the later overpricing of future orders were ways that the Defendant hoped to fulfil its obligation to pay for the goods of which the Defendant had taken delivery.

Conclusion

55.  Based on the documentary evidence and the evidence given at the hearing, I am convinced that the Defendant fully intended to pay for the goods after payment by letter of credit failed.  This acknowledgement of the debt was confirmed by the e-mails between the parties, at first T/T payment was agreed to and later on to be substituted by an arrangement of overpricing future orders.  Since the Plaintiff failed to obtain satisfactory payment for the goods, the Plaintiff is entitled to be paid by the Defendant in full.  I am satisfied on a balance of probability that the Defendant is liable to the Plaintiff and I grant judgment in the sum of US$37,143.23. (US$38,345.93 – US$1,202.70) to the Plaintiff.

56.  Interest for the said judgment sum at half judgment rate from the date of writ to the date of judgment, thereafter at full judgment rate.

Costs

57.  Costs nisi – costs to follow the event.  Therefore costs to the Plaintiff to be borne by the Defendant to be taxed if not agreed with certificate for counsel.