SINOM SHANGHAI IMPORT & EXPORT CO LTD v. EXFIN (INDIA) MINERAL ORE CO PVT LTD

HCCT 45/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 45 OF 2006

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REASONS  FOR  JUDGMENT

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The applications and the Order made

1.  By an Order dated 29 May 2006, Reyes J granted the following injunction against the defendant:-

“The Intended Defendant be restrained from dealing with or attempting to deal with the proceeds of the letter of credit and in particular be restrained from continuing to request Standard Chartered Bank to remit any of the proceeds of [the letter of credit issued by Standard Chartered Bank on 15th March 2006 Ref 333-01-001861-S] until further order.”

2.  By summons dated 30 May 2006, the plaintiff applied to continue the injunction.  By summons dated 1 June 2006, the defendant applied to discharge the injunction.  Both summons came before me on 12 June 2006.  After hearing counsel for the parties, I formed the clear view that the injunction should be discharged and not be continued.  At about 4 pm I pronounced my judgment to discharge the injunction and said that reasons for my judgment would be handed down.  Mr John Kerr, counsel for the plaintiff, applied for a stay of the discharge of the injunction pending the plaintiff’s appeal.  As I was clearly of the view that the injunction should be discharged, I declined to grant a stay of the discharge of the injunction pending appeal.  However, I was prepared to preserve the position to give the plaintiff time to apply to the Court of Appeal. 

3.  I made the following Order:-

“1. The injunction order made herein on the 29th day of May 2006 by the Honourable Mr Justice Reyes be discharged.

2. The Plaintiff and/or Messrs Sinom (Hong Kong) Limited do pay to the Defendant compensation for losses caused by the issuing of the said injunction.

3. There be an inquiry as to the amount of the losses so caused.

4. The costs of this application be paid by the Plaintiff to the Defendant forthwith, to be taxed if not agreed.

5. Notwithstanding paragraph 1, the Order of Reyes J dated 29 May 2006 be continued until 2 days after the Court shall have handed down reasons for its Judgment.”

4.  Reasons for my judgment follow.

The background

5.  The plaintiff is a Shanghai based company carrying on the business of, inter alia, iron ore trading.  The plaintiff does not carry on any business in Hong Kong and makes no allegation that it has any asset in Hong Kong.

6.  The defendant is an Indian business carrying on the business of, inter alia, trading and exporting of iron ore.  The plaintiff makes no allegation that the defendant has any presence or asset in Hong Kong.

7.  By a contract dated 4 January 2006 the defendant sold and Sinom (Hong Kong) Ltd, an associated company of the plaintiff, purchased iron ore.  There is no complaint about this transaction.

8.  By a contract dated 9 March 2006 as amended by an Addendum dated 3 April 2006, the defendant sold and the plaintiff purchased 50,000 wet metric tons +/- 10% at the defendant’s option iron ore fines at US$55.50 per dry metric ton CFR FO one main port China based on 60% Fe. 

9.  Clause 6 of the sale and purchase contract provided for payment by letter of credit, payable at sight at the counters of the negotiating bank (not the issuing bank) by negotiation of documents:-

“The buyer shall open within 4 bank working days from signing this contract, an irrevocable, freely negotiable with any bank in India, workable letter of credit payable at sight at the counters of negotiating bank, by negotiation of documents as specified in Clause 7 in favour of the seller from any prime bank for an amount in USD to cover 100% of the shipment value along with price adjustment, if any.  All banking charges after establishment of LC shall be paid by the seller.

Seller should provide the full background information of the beneficiary which should be acceptable to buyer and buyer’s bank.  Otherwise, the buyer shall bear no responsibility for LC opening.”

10.  Clause 17 is a provision on title and risk and it also confirms the parties’ contemplation of the involvement of a negotiating bank:-

“The Title with respect to each shipment shall pass from Seller to the Buyers when Seller receives the proceeds from the opening bank through the negotiating bank against the relative shipping documents as set forth in clause 7A after completion of loading on board the vessel at loading port, with effect retrospective to the time of delivery of ore.

All Risk of loss, damage or destruction with respect to the ore delivered shall pass to Buyer’s at the time of discharge of the Ore from the loading devices into the vessel.

All taxes/dues on cargo at load port for sellers account.”

11.  The letter of credit, as amended on 7 April 2006, was issued by Standard Chartered Bank on the application of the plaintiff.  The plaintiff’s case is that the letter of credit complied with the contract, in particular clause 6.  Mr Lee Siu Yung deposed in paragraph 10 of his [first] Affirmation that:-

“In compliance with the terms of the Contract, in particular Clause 6, the Intended Plaintiff arranged with Standard Chartered Bank Shanghai Branch for the issuance of a letter of credit No. 333-01-0011861-3 dated 15 March 2006 and amended on 7 April 2006 in the sum of US$2,725,000 as payment for the Cargo”.

12.  The letter of credit was sent to Bank of Baroda in India.  It was irrevocable, and:-

“:41D: available with … by …

ANY BANK

by negotiation

:42c DRAFTS AT

at sight covering  100 PCT CFR VALUE

42A: DRAWEE

scbL cnsxsha

…

:78: INSTRUCTIONS to the pay/accEP/NEG BANK

THE NEGOTIATING BANK IS TO FORWARD ALL DOCUMENTS BY COURIER TO Standard Chartered Bank … Shanghai … in one lot”

13.  Article 3 a of The Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No. 500 provides that:-

“Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit.  Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.”

14.  Article 4 provides that:-

“In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.”

15.  Article 9 a iv provides that:-

“An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with … if the Credit provides for negotiation – to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or documents presented under the Credit.”

16.  Article 10 b i & ii provide that:-

“i Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the ‘Nominated Bank’) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate.  In a freely negotiable Credit, any bank is a Nominated Bank.

Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.

ii Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate.  Mere examination of the documents without giving of value does not constitute a negotiation.”

17.  Article 10 d provides that:-

“By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.”

18.  The plaintiff’s case is that Bank of Baroda is the negotiating bank.  Standard Chartered Bank accepted that Bank of Baroda is the negotiating bank.  Mr Lee Siu Yung deposed in paragraph 21 of his [first] Affirmation that:-

“I refer to two emails from Ms. Freda Shen of Standard Chartered Bank to Ms. Jessica Leung, an accounts staff of the Intended Plaintiff on 23 and 24 May 2005 wherein the negotiating bank in India had been chasing Standard Chartered Bank who in turn chased the Intended Plaintiff.”

In the email which appeared to be dated 24 May, Ms Freda Shen wrote:-

“Now we receive the daily tracer from the negotiating bank, below please see the incoming message received today.  Please give your help.”

19.  In proceedings issued in England by Bank of Baroda against Standard Chartered Bank PLC, Bank of Baroda claimed that documents required by the letter of credit were presented by the defendant to Bank of Baroda on about 19 April 2006; that Bank of Baroda negotiated the same documents by presenting them at the Standard Chartered Bank’s Shanghai branch to obtain payment by Standard Chartered Bank of the sum of US$2,338,138.62; and that the documents thus presented and negotiated included a bill of exchange for an amount of U$2,338,138.62 dated 19 April 2006 drawn by the defendant on Standard Chartered Bank in favour of Bank of Baroda.

20.  The plaintiff’s case is that “the Cargo was laden on board the vessel MV Uttarkashi at Haldia and Vizag, India on or around 13 April 2006 as evidenced by a bill of lading dated 13 April 2006, see paragraph 11 of Mr Lee Siu Yung’s [first] Affirmation.

21.  By a fax dated 25 April 2006, Standard Chartered Bank informed the plaintiff that a set of documents drawn under the letter of credit had been received and that the set of documents were available for inspection at Standard Chartered Bank’s office and asked for instructions as per the bank’s Document Instruction form.

22.  By 29 April 2006, the parties came to know about an order made by the Dalian Maritime Court in China on the application of one Red Horse Resources (H.K.) Ltd attaching 17,000 metric tons iron ore fines on board M/V Uttarkashi and owned by the defendant and ordering the defendant to provide security in the sum of US$1,084,800.

23.  On about 29 April 2006, the defendant sent the following email:-

“We have discussed with our lawyer at Hongkong in detail.  He had informed us that if the ownership of the cargo is not of Exfin, they can do nothing and Sinom will have full right on cargo and get the delivery.  For this Sinom has to declare that they have made payments to Exfin.  The Cargo belongs to them.  This they can discuss with their legal department, and further also from our lawyers at Hongkong, Mr. H.W. Dunlop …

As sson (sic) as you do this you will get the release of the cargo.  Please go as fast as possible and inform us so that we inform our lawyers and he will depute his counter part at Dalian Court for smooth release of cargo to Sinom.

Pl get back asap.”

24.  On 1 May 2006, the defendant sent another email:-

“This in reference to our vessel MC Uttarkashi, we have to bring to your notice the following.

1. This contract on M.V. Uttarkashi is between Exfin (India) Mineral Ore Company Pvt. Ltd. (shipper) and Sinom Import and Export Co. Ltd. (as receivers/buyers)

2. So, the contract is very clear with the obligation of Exfin Mineral to supply iron ore to Sinom or CFR basis which has been done.

3. The vessel M.V. Uttarkashi is already discharging the cargo and awaiting original B/L from Sinom (buyer/receivers) and you are requested to kindly take the custodian of this cargo as per contract.

4. Any other obligatory issues between Exfin Minerals (as shippers) and any other party (other than SINOM) will be dealt with separately.  Hence SINOM need not have to worry about any claim, which is coming from any other third party.

5. In case SINOM is receiving any notice of claim from any other buyer or third party in respect of issues/problems caused by Exfin Minerals will be dealt directly here by Exfin Mineral.  Therefore it is very clear that SINOM need not be perturbed by any claim.  In case of any court notice, it is expected out of SINOM that they approach the court and on the basis of the contract, irrevocable L/C issued by SINOM, tell the court that the cargo belongs to SINOM and not EXFIN.  Whatever claims against EXFIN they are already pending for arbitration at Hong Kong.  Therefore the cargo should be handed over to SINOM.

6. In case there is any delay in taking delivery of cargo by the receivers due TO this reason, all the delay, cost, time will be purely on Sinom (as receivers) account.

Request you to take the matter very seriously and act.”

25.  Mr Lee Siu Yung stated in paragraph 3 of his [first] Affirmation that the plaintiff was applying for an injunction prohibiting the defendant from “drawing down funds against” the letter of credit.

26.  Mr Lee Siu Yung deposed in paragraph 7 of his second Affirmation that:-

“I understand from my discussions … that if the Intended Plaintiff cannot produce a Court Order or equivalent to the effect that the Intended Defendant are prohibited from attempting to draw down on the L/C or in the alternative the Intended Defendant are ordered to take back the L/C documents already presented to the negotiating bank or Standard Chartered Bank for payment under the L/C, then it is probable that Standard Chartered Bank would be obliged to effect payment under the L/C without further delay and hence the urgency of the present application.”

27.  Various other matters had been raised in the plaintiff’s affirmations.  There is a suggestion that the documents do not comply with the documentary credit.  If that suggestion is correct and if Standard Chartered Bank pays, the plaintiff will have its remedies against Standard Charter Bank.  The plaintiff does not question Standard Chartered Bank’s financial ability to satisfy any judgment which may be awarded against it in connection with the letter of credit.

Hearing bundles

28.  Copy documents produced by the deponents in their affirmations were put together in one exhibit for each affirmation, without separate identification of any document and without a list or index.  Solicitors’ convenience means that I had to spend much time trying to locate or search for a particular document.  My task was eased to some extent by Mr Clifford Smith SC who helpfully submitted a Chronology with page references.

29.  There are 2 copies of the letter of credit in the hearing bundle.  They look different.  They also seem incomplete.  I asked for but did not get a better and complete copy of the letter of credit.

30.  I asked for but did not get a copy of ICC Publication No. 500.  I had to consult leading textbooks on documentary credit.

31.  I asked for but did not get a copy of the draft or bill of exchange under the letter of credit.

The fraud point

32.  Mr John Kerr alleged and argued fraud against the defendant at the hearing before Reyes J.  He told me that the learned judge was of the view that fraud had not been established.  I would have thought that that should be the end of the matter so far as fraud was concerned.  However, Mr John Kerr raised fraud at the hearing before me.  He contended that as the defendant was represented, I might be satisfied that the plaintiff had a good arguable case of fraud against the defendant.  I have no hesitation in rejecting this contention.  The defendant has no case to answer on fraud and the plaintiff’s position cannot and is not improved by any alleged failure of the defendant to exonerate itself on a charge on which the learned judge held that the defendant had no case to answer.  There are other reasons why the plaintiff must fail on the fraud point and I shall come back to them below.

Jurisdiction

33.  By clause 16 of the sale and purchase contract, the parties agreed to settle disputes or differences by friendly negotiations, failing which by arbitration at the Hong Kong International Arbitration Centre by applying English law.  Counsel agreed that for the purpose of the hearing before me, I should assume (without deciding) that the Court has jurisdiction to grant an injunction against the defendant.  Both parties reserved their position on the jurisdiction point.

Scope of order sought by plaintiff

34.  It was not clear to me from the terms of the Order whether Standard Chartered Bank would be in breach of the Order if it should pay in accordance with the letter of credit.  I asked Mr John Kerr whether he was seeking to prevent Standard Chartered Bank from paying.  I hope I am not doing him an injustice when I say that he did not give me an unequivocal answer.  If the plaintiff was seeking to prevent Standard Chartered Bank from paying, it should be forthcoming and say so expressly by seeking an order in terms which make it clear what Standard Chartered Bank must not do.  Banks have an international reputation to protect, and unless they are enjoined by a clear and precise court order, they should not be put at risk of losing their credibility in the banking and commercial communities.

Seller’s assured right to be paid under documentary credit and the fraud point

35.  United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] AC 168 is a case which raised a question of law which is of general importance to all those engaged in the conduct and financing of international trade for it challenges the basic principle of documentary credit operations that banks that are parties to them deal in documents only, not in the goods to which those documents purport to relate, per Lord Diplock at p. 180.

36.  The whole commercial purpose for which the system of confirmed (Mr John Kerr did not argue that there is any difference for negotiable) irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.  Lord Diplock stated the governing principles and commercial purpose at pp. 182 – 183:-

“My Lords, for the proposition upon the documentary credit point, both in the broad form for which counsel for the confirming bank have strenuously argued at all stages of this appeal and in the narrower form or “halfway house” that commended itself to the Court of Appeal, there is no direct authority to be found either in English or Privy Council cases or among the numerous decisions of courts in the United States of America to which reference is made in the judgments of the Court of Appeal in the instant case. 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 seller; (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.

Again, it is trite law that in contract (4), with which alone the instant appeal is directly concerned, the parties to it, the seller and the confirming bank, “deal in documents and not in goods,” as article 8 of the Uniform Customs puts it. If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.”

37.  Fraud is the established exception.  The relevant time is the presentation by the beneficiary to the confirming bank, or the negotiating bank in this case.  To come within this exception, bank documents must contain, expressly or by implication, material representations of fact that are to the knowledge of the beneficiary untrue.  The following is another oft-cited passage by Lord Diplock (at pp. 183 – 184):-

“To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or “landmark” case is Sztejn v. J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] Q.B. 159, though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all.” The courts will not allow their process to be used by a dishonest person to carry out a fraud.”

38.  In Group Jose Re v Walbrook Insurance Co. [1996] 1 WLR 1152 at pp. 1160 – 1162, Staughton LJ cited United City Merchants and held that knowledge acquired subsequent to the presentation of documents was irrelevant and that applications to restrain the beneficiary from asking for payment should fail:-

“As the decision in that case shows, it is nothing to the point that at the time of trial the beneficiary knows, and the bank knows, that the documents presented under the letter of credit were not truthful in a material respect.  It is the time of presentation that is critical.

…

However, it is argued by Mr.  Bartlett for the reinsurers that the case is altogether different, and the rule which I have been discussing does not apply, when an injunction is sought not against the bank but against the beneficiary of a letter of credit.  In my opinion that cannot be right. The effect on the lifeblood of commerce will be precisely the same whether the bank is restrained from paying or the beneficiary is restrained from asking for payment.  That was the view of Sir John Donaldson M.R. in Bolivinter Oil S.A. v. Chase Manhattan Bank N.A.  (Practice Note) [1984] 1 Lloyd's Rep.  251, 254, of Donaldson L.J.  in Intraco Ltd. v. Notis Shipping Corporation [1981] 2 Lloyd's Rep.  256, of Lloyd L.J. in the Dong Jin Metal case, 13 July 1993, and of both Clarke and Phillips JJ. in the present case.”

39.  There is simply no evidence that the defendant knew at the time of the presentation of the documents to Bank of Baroda that the bill of lading, or any other document presented, contained, whether expressly or by implication, any material representation of fact which was untrue.  I decline to speculate on when the defendant might have acquired knowledge that Red Horse was seeking to attach part of the cargo.

40.  Fraud should never have been raised again in this case. 

41.  Even if fraud was established, that is not the end of the matter.  Balance of convenience has to be considered.  To quote the words of Ma J (as he then was) in Prime Deal (HK) Enterprises Limited v The Hongkong and Shanghai Banking Corporation Limited and another, unreported, HCA 2142/2002, 15 July 2002, at paragraph 14 (8) and (9):-

“(8)   The balance of convenience of course does not end with just proving the fraud.  Here, the court will also have to examine other factors to see whether the balance of convenience is or is not in favour of stopping payment.  In United Trading Corporation, the English Court of Appeal considered this question by examining not just the position of the applicant and the beneficiary but also, perhaps most important of all in this context, the position of the bank.  Reference was made by Ackner LJ to the dicta of Kerr J in R.D. Harbottle (Mercantile) Limited v. The National Westminster Bank Limited [1978] QB 146, at 155.  Owing to the strict mandate under which banks operate as far as their customers are concerned and also to the reputation and integrity so essential to the operation of banks, the consequences to the bank of stopping payment must be considered by the court.

(9)     There is another aspect of the balance of convenience to which I ought to allude.  In Guangdong Transport Limited, the Court of Appeal considered the question whether, even if the applicant were correct in its contentions on fraud, damages would provide an adequate remedy : see the judgment at 931F.  This question must of course be considered for both the bank and the beneficiary.  If damages were to be an adequate remedy, this would be a significant factor in refusing an interlocutory injunction.”

42.  The letter of credit was freely negotiable.  The inherent probabilities are that a freely negotiable letter of credit would have been negotiated before shipment.  The plaintiff’s evidence was that Bank of Baroda was the negotiating bank.  That points to Bank of Baroda having given value and being entitled under the credit to be reimbursed by Standard Chartered Bank.  Even if fraud had been established, I would still have declined to grant an injunction.  I am appalled by the possible ramifications of the granting of an injunction in the circumstances of this case on the innocent third parties, i.e. Standard Chartered Bank and Bank of Baroda.   The plaintiff cannot possibly be entitled to obtain the advantage of an order restraining payment at the expense of the business rights of innocent third parties, merely by proffering him an indemnity in whatever form, cf Galaxia Maritime S.A. v Mineralimportexport [1982] 1 WLR 539.

43.  On the second aspect, there is no allegation and no evidence of any inability on the part of the defendant to pay damages.

44.  For reasons given above and my reasons below for rejecting the plaintiff’s contention, that part of the Order which restrained the defendant from continuing to request Standard Chartered Bank to remit any of the proceeds of the letter of credit must be discharged. 

Plaintiff’s contention

45.  I hope I have not misunderstood Mr John Kerr by summarising his contention as follows:-

(a) the letter of credit is payable at the branch of the issuing bank in Shanghai and nowhere else;

(b) once the issuing bank decides to pay, the money becomes the defendant’s money, and

(c) as the money in the issuing bank’s hands becomes the defendant’s, the court can restrain the defendant from dealing with it.

46.  I reject his contention for the following reasons.

47.  No authority is cited in support of his contention.  The Bhoja Trader case is against it, see paragraphs 54 and 55 below.

48.  His contention seems to me to be an attempt to circumvent the documentary credit point.  

49.  Payment under the letter of credit is by sight drafts drawn on Standard Chartered Bank.  I do not have a copy of the draft and do not know if it was drawn by the defendant and payable to Bank of Baroda, as alleged by Bank of Baroda.  I interpose to state that it is incumbent on the plaintiff to satisfy me that an injunction should be granted.  What Mr John Kerr is contending is that once the drawee of the draft, i.e. Standard Chartered Bank, decides to pay, the amount payable under the draft becomes the defendant’s money:-

(a) if the defendant is the drawer;

(b) if the defendant is the payee; and

(c) if the defendant is not a party to the draft.

50.  The proposition that once the drawee of a draft decides to pay, the funds payable under the draft becomes the drawer’s money is intrinsically wrong.

51.  Propositions (b) and (c) are quite novel to me and I reject them in the absence of any compelling or persuasive authority.

Restraining defendant from dealing with the proceeds of the letter of credit

52.  Next, I have to consider whether an order should be made restricting or restraining the beneficiary from dealing with the proceeds of the letter of credit.

53.  To quote Ma J again (at paragraph 14(10) & (11)):-

“(10) Where, for whatever reason, the court does not grant an interlocutory injunction restraining payment, the next question that arises is whether an order should be made restricting or restraining the beneficiary from dealing with the proceeds of the letter of credit.  This is the 2nd issue I have earlier identified.  This situation is expressly referred to in the authorities : see Bolivinter at 393E-F; the Bhoja Trader [1981] 2 Lloyd’s Rep. 256; Gee : Mareva Injunctions and Anton Piller Relief (4th Edition) at 37.

(11) Here, the application for an injunction is akin to that of (if not actually) a Mareva injunction.  In other words, an injunction would only be granted preventing the beneficiary from dealing with the proceeds of a letter of credit if there is a risk that he will dissipate the proceeds and thereby thwart any judgment that the plaintiff may obtain against him.  It is important to bear in mind that such an injunction is not dependent on fraud being shown (or even alleged).  Like all Mareva injunctions, all that is needed to be demonstrated is a good arguable case, usually a breach of contract (or any other cause of action), the risk of dissipation and the balance of convenience.”

54.  In Intraco Ltd. v Notis Shipping Corporation (the ‘Bhoja Trader’) [1981] 2 Lloyd’s Rep 256, at pp. 257 – 258, Donaldson DJ, delivering the judgment of the Court of Appeal, stated:-

“Irrevocable letters of credit and bank guarantees given in circumstances such that they are the equivalent of an irrevocable letter of credit have been said to be the life blood of commerce.  Thrombosis will occur if, unless fraud is involved, the Courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being the equivalent of cash in hand.

The learned Judge went on to say that this did not prevent the Court, in an appropriate case, from imposing a Mareva injunction upon the fruits of the letter of credit or guarantee.  Again we agree.  It is the natural corollary of the proposition that a letter of credit or bank guarantee is to be treated as cash that when the bank pays and cash is received by the beneficiary, it should be subject to the same restraints as any other of his cash assets.  Enjoining the beneficiary from removing the cash asset from the jurisdiction is not the same as taking action, whether by injunction or an order staying execution, which will prevent him obtaining the cash (see Montecchi v Shimco (U.K.) Ltd., [1980] 1 Lloyd’s Rep. 50; [1979] 1 WLR 1180).”

55.  It is noteworthy that Donaldson LJ was referring to the stage of cash being “received” by the beneficiary, not the earlier stage of the issuing bank deciding to pay.  Donaldson LJ was contrasting that with an injunction preventing the beneficiary from obtaining the cash which is what the plaintiff is seeking under the second part of the Order.  

56.  No attempt has been made by Mr John Kerr to identify the proceeds of the letter of credit or the cash in the defendant’s hands.  Nevertheless, it is clear that the proceeds of the letter of credit are assets outside Hong Kong’s jurisdiction.

57.  In Bank of India v Bhagwandas Kewalram Murjani and others [1989] 2 HKLR 318, the Court of Appeal considered the circumstances in which a Mareva injunction restraining the disposition of assets outside the jurisdiction and gave the following guidance at pp. 319 – 320.

“That the relief operates in personam as regards a defendant but, in effect, ad rem as against third parties and does not amount to a pre-trial attachment of assets was common ground. In our opinion a Mareva injunction affecting assets outside the jurisdiction may be granted when there is a good arguable case that the plaintiff will recover judgment, reason to think both that the defendant, properly before the court, has such assets available to satisfy it but insufficient assets within the jurisdiction for the purpose and the Court is satisfied that there is a real risk that the defendant may take steps designed so to dispose of or conceal such foreign assets as to render the judgment nugatory by the time that it is given. Further, the defendant may be ordered to make discovery as to his assets in a proper case and the jurisdiction in that regard is not limited to tracing actions. Thus, subject to provisos and undertakings apt to allow the defendant to carry on his business and private life in the ordinary way and to limit the effect of the order on third parties outside the jurisdiction, the principles applicable to the grant of an injunction inhibiting the disposition of assets within the jurisdiction are, as Barnett, J. held, equally applicable to the grant of such an injunction directed to assets outside it. We so conclude in the light of the several persuasive authorities decided between June and December 1988 during which the practice in the English Court of Appeal was developed and clarified and, in particular, of Derby & Co. Ltd. v. Weldon (Nos. 3 & 4) [1989] 2 WLR 412.”

58.  A “good arguable case” is no doubt the minimum which the plaintiff must show in order to cross the threshold for the exercise of the jurisdiction, but at the end of the day the court must consider the evidence as a whole in deciding whether or not to exercise this jurisdiction, see Ninemia Maritime Corp. v Trave GmbH [1983] 1 WLR 1412 at p. 1417.  The ultimate test is (at p. 1426):-

“The ultimate test for the exercise of the jurisdiction is whether, in all the circumstances, the case is one in which it appears to the court “to be just and convenient” to grant the injunction: see section 37 of the Supreme Court Act 1981 which we have already set out. Thus, the conduct of the plaintiffs may be material, and the rights of any third parties who may be affected by the grant of an injunction may often also have to be borne in mind: see Galaxia Maritime S.A. v. Mineralimportexport [1982] 1 W.L.R. 539 Further, it must always be remembered that if, or to the extent that, the grant of a Mareva injunction inflicts hardship on the defendants, their legitimate interests must prevail over those of the plaintiffs, who seek to obtain security for a claim which may appear to be well-founded but which still remains to be established at the trial. These is no need to repeat here what was said in that connection in Z Ltd. v. A-Z and AA-LL [1982] Q.B. 558, 585, 586, If the plaintiffs are in a position to contend that their claim is not open to doubt, then they must satisfy the requirements of an application for summary judgment under R.S.C., Ord. 14. But if they apply for a Mareva injunction on the ground that they have “a good arguable case,” then the balance should be weighed as we have indicated above.”

59.  I have to be satisfied on the materials before me that it is just and equitable to grant an injunction restraining dealings with assets outside the jurisdiction on the application of a plaintiff which has no presence or assets in Hong Kong against a defendant which has no presence or assets in Hong Kong in the absence of any evidence that the defendant does not have the financial means to satisfy any monetary award.

60.  Unless the Court is satisfied that there is a real risk that the defendant may take steps designed so to dispose of or conceal foreign assets as to render the judgment nugatory by the time that it is given, an injunction restraining the defendant from dealing with the proceeds of the letter of credit may not be granted.

61.  Plainly, there is no evidence of dissipation of assets.  Mr John Kerr argued that there were 2 aspects of dishonesty or commercial immorality:-

(a) the defendant demanded payment under the letter of credit when it knew that it could not deliver all the cargo and did not have title to all the cargo; and

(b) by the emails referred to in paragraphs 23 and 24 above, the defendant exhibited such an unacceptably low standard of commercial morality in its dealings with the plaintiff.

62.  On the first point, the parties to the documentary credit dealt with documents, not goods and the defendant had an assured right to be paid before he parted with control of the goods.  The defendant has presented a set of documents to Bank of Baroda.  If they are conforming documents, the defendant has an assured right to be paid.  If they are not and if Standard Chartered Bank pays, the plaintiff will have its recourse against Standard Chartered Bank.  Just as there is nothing dishonest or commercially immoral for a holder of a cheque to prosecute a claim on a dishonoured cheque to final judgment and to enforce payment, notwithstanding and despite any dispute in respect of the underlying contract, there is no dishonesty or commercial immorality for the defendant to obtain its assured right under the documentary credit.  A beneficiary under a documentary credit is entitled to press for payment under the credit for cargo lost in transit.  Unless an insurance document forms part of the documents under a credit, the presence or absence of any insurance contract is irrelevant under the credit.  

63.  On a fair construction of the email referred to in paragraph 23 above, the defendant was passing on what its then lawyers said.  That the defendant was not devious is clear from the fact that the defendant said that the recipient could discuss with its own legal department and with the defendant’s then lawyers.  I see nothing devious in the email referred to in paragraph 24.  This case is quite different from Honsaico Trading Ltd v Hong Yiah Seng Co. Ltd. [1990] 1 HKLR 235, and does not come near unacceptably low standard.  

64.  For the reasons given above, the plaintiff has not made out a case for restricting or restraining the defendant from dealing with the proceeds of the letter of credit and that part of the Order restraining the defendant from dealing with or attempting to deal with the proceeds of the letter of credit must be discharged.

Conclusion

65.  The Order must be discharged.