CHINA NEW ERA INTERNATIONAL LTD v. BANK OF CHINA (HONG KONG) LTD AND ANOTHER

CACV 8/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 8 of 2010

(ON APPEAL FROM HCA NO. 1290 OF 2008 AND HCCL NO.24 OF 2008)

HCA 1290/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1290 OF 2008

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(Consolidated pursuant to the Order of the Honourable Mr Justice Reyes dated 22 July 2009)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal by the First Commercial Bank, Ltd (“the appellant”) from an order dated 14 December 2009 of Reyes J made in a consolidated action.  The appellant was the ‘intended intervener’ in HCA No. 1290 of 2008 and the ‘plaintiff’ in HCCL No. 24 of 2008.  At the conclusion of the hearing judgment was reserved which we now give.

2.  The sole issue is whether the appellant is entitled to be reimbursed by the Bank of China (“the respondent”) under a letter of credit issued by the respondent.  It arose in the following circumstances.

Background

3.  On 23 June 2008, the respondent issued a letter of credit on the application of China New Era International Ltd (“New Era”), the beneficiary named being Flexus Computer Technology Inc. (“Flexus”).

4.  In pertinent part, the letter of credit read:

“WE HEREBY ISSUE IN FAVOUR OF THE ABOVE MENTIONED BENEFICIARY THIS IRREVOCABLE DOCUMENTARY CREDIT, WHICH IS AVAILABLE WITH ANY BANK BY NEGOTIATION OF BENEFICIARIES DRAFT(S) SIGHT FOR FULL INVOICE VALUE QUOTING NO. AND DATE OF THIS LC AND NAME OF LC ISSUING BANK DRAWN ON BANK OF CHINA (HONG KONG) LIMITED AND AGAINST PRESENTATION OF THE DOCUMENTS DETAILED HEREIN…

…

INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK:

1.  …

2.  UPON RECEIPT OF COMPLIANT DOCUMENTS AT OUR COUNTER, WE SHALL ACCEPT THE RELEVANT PRESENTATION AND EFFECT PAYMENT IN ACCORDANCE WITH THE PRESENTER’S INSTRUCTIONS.

3.  …

THE CREDIT IS SUBJECT TO THE VERSION OF THE ICC UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS, INTERNATIONAL CHAMBER OF COMMERCE, PARIS, FRANCE, WHICH IS IN EFFECT ON THE DATE OF ISSUE. [“UCP 600”]”

5.  The appellant was the advising, nominated and negotiation bank.

6.  Flexus submitted an ‘export negotiation/bill discounting’ application to the appellant on 25 June 2008 and requested the appellant to negotiate/discount the drafts drawn by Flexus on the respondent to the order of the appellant and ‘relative documents even if they bear discrepancy(ies)’ against an indemnity.

7.  On or about 26 June 2008, the appellant made payment under the letter of credit to Flexus with recourse.  As at that date, one of the stipulated documents (the cargo receipt) supplied to the appellant was discrepant.

8.  It is unclear whether, when payment was made, the discrepant document was the second cargo receipt which was delivered to the appellant at about 9.52 am on 26 June 2008 or the first cargo receipt.  It matters not as, in any event, the evidence was that upon discovering the discrepancy in the second cargo receipt, the appellant informed Flexus and requested re-presentation of the original cargo receipt.  On 1 July 2008, what has been referred to in the judgment as “the third cargo receipt” was received by the appellant.

9.  There is a written notice from the appellant to the respondent informing the latter that the appellant had negotiated drafts drawn by Flexus on the respondent under the letter of credit.  The appellant requested reimbursement, instructing the respondent to remit the proceeds to the appellant’s head office account with Wachovia Bank, N.A.  It also certified that all the terms and conditions of the credit had been complied with.

10.  While the written notice is dated 26 June 2008, it is not disputed that it was not dispatched until 2 July 2008.  The reason for the delay was that the appellant did not receive the third cargo receipt until 1 July 2008.  After that had been vetted and determined by the appellant to be compliant, the third cargo receipt was forwarded to Wachovia Bank later the same day.  Wachovia Bank, acting on behalf of the appellant, then dispatched the notice together with attachments, viz. the sight drafts and the other documents stipulated in the letter of credit on 2 July 2008 to the respondent who received them the following day, namely, 3 July 2008.

11.  It is common ground that the documents thus presented to the respondent on 3 July 2008 were compliant and within the period of validity of the letter of credit.  The respondent did not serve any notice under article 16 of UCP 600 and, in fact, the respondent did determine that the appellant’s presentation was compliant.

12.  When the respondent notified New Era on 9 July 2008 of its intention to effect payment on 10 July 2008, New Era obtained an ex parte injunction on 9 July 2008 restraining the respondent from releasing the proceeds under the letter of credit to the appellant.

13.  The judge held that the respondent had no obligation to reimburse the appellant under article 7c. of UCP 600.  At §§ 33 of his judgment, he opined that to obtain reimbursement under that provision

“… the documents presented by a nominated bank have to be the complying set of documents which the beneficiary actually presented to the nominated bank and against which the nominated bank actually released payment to the beneficiary.”

The appeal

14.  The substantive appeal concerns the proper construction of article 7c. of UCP 600.  In pertinent part, article 7c. reads:

“    ARTICLE 7

Issuing Bank Undertaking

…

c.  An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank…”

15.  The question for determination is the meaning of ‘negotiated’ for the purposes of article 7c.  Article 2 defines ‘negotiation’ as meaning

“the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”

16.  The rival contentions may be summarised as follows.  Mr Leong SC (who appeared for the appellant) submitted that, for the purposes of UCP 600, ‘payment’ has to be distinguished from ‘negotiation’ because they are not synonymous and mean different things.  He submitted that the concept of ‘negotiation’ entails a process whereby the nominated bank decides to take up the relevant documents in its own right after a determination that the presentation is compliant.  Whether payment to the beneficiary is effected in advance of the receipt of the relevant documents and the determination by the nominated bank that there is a complying presentation is immaterial so long as it is made or there is an agreement to do so prior to the nominated bank’ s claim for reimbursement from the issuing bank.

17.  Mr Yuen SC (who appeared for the respondent) took a different view.  He submitted that to all intents and purposes, ‘payment’ (as contemplated by UCP 600) is synonymous with or equivalent to ‘negotiation’ in that the process of negotiation ends with the act of payment.  On Mr Yuen’s interpretation of ‘negotiation’, a nominated bank can ‘negotiate’ only when it has before it all the complying documents and payment then is made on the basis of such documents.  Since the appellant did not have the third cargo receipt when it effected payment, it had not ‘negotiated’ as required by article 7c.

18.  Counsel have not been able to find any relevant case law on the subject.  Sir Thomas Bingham MR has proferred a possible explanation for the paucity of decided cases in this area in Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 at 148, where he also remarked that

“When courts are asked to rule on questions [involving the construction of UCP provisions] they seek to give effect to the international consequences underlying the UCP.”

19.  As a preliminary observation, it is as well to state what the UCP is, namely a collection of rules reflecting or encapsulating international standard banking practice and customs for documentary credits, such credits being a recognised means of settlement in international trade.  It has been said that those rules “do not constitute a statutory code”.  (per Mustill LJ (as he then was) in Royal Bank of Scotland PLC v Cassa di Risparmio delle Provincie Lombarde, The Financial Times, 21 January 1992, Lexis transcript, p. 6)  As UCP 600 does not originate from English law but from international banking practice, when construing its provisions, a more purposive and liberal approach would appear to be warranted.

20.  I start by analyzing the concept of negotiating a documentary credit and what it entails.  A party who successfully negotiates becomes the contracting party to the letter of credit.  The purchaser does so by acquiring documents or a sufficient interest in them that would enable the purchaser to present them, in its own right, to the issuing bank for payment as principal and to sue if the undertaking to pay contained in the credit is not honoured.  Thus, the essence of negotiation is accurately summarized as “the purchase of documents and their presentation under the credit in the purchaser’s own right.”  See per Stone J in Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Bank of China [2004] 3 HKLRD 477 at § 82.

21.  Turning to article 7c., the issuing bank’s undertaking to reimburse is conditioned on the nominated bank having (a) “honoured or negotiated a complying presentation” and (b) forwarded the documents to the issuing bank.  For the purposes of this appeal, we are concerned solely with (a).  The question is whether, on the facts, the appellant has “negotiated a complying presentation”.

22.  Article 2 contains definitions of “negotiation” and “complying presentation”.  Taking “negotiation” first, it will be seen that it engages the notion of “purchase”.  Prof. James E. Byrne, in his monograph The Comparision of UCP 600 and UCP 500 (published (2007) by The Institute of International Banking Law & Practice), notes (at p. 35) that ‘purchase’ itself is not defined but that it

“connotes the acquisition of an interest in the drafts and/or documents by the purchaser as opposed to not having any interest in them by merely forwarding them.”

He went on to explain that while the purchaser does not enjoy all the attributes of ownership of the documents in the sense that it could exercise the discretion not to present them and to deal with the goods that they represent directly for its own account without having first presented them,

“there is an element of ownership which can be exercised where the presentation is refused.”

23.  Also, it is to be noted that ‘purchase’ is conditioned on the purchaser (the negotiating bank) having either advanced funds or agreed to do so by a date set at or before the anticipated reimbursement date.  That such advance or agreement to do so is an integral part of the meaning of “negotiation” is apparent from the wording of the definition.

24.  While the definition (of ‘negotiation’) appears to tie the notion of ‘negotiation’ to the notion of ‘complying presentation’, two matters may be noted.  First, as Prof. Byrne points out (at p. 36), “there is no necessary relationship” between the two notions:

“While it may be expected that the documents that are the subject of the negotiation would be complying documents, whether or not they comply has no bearing on whether or not there is negotiation.  If the issue or confirmer that undertakes to negotiate fails to note a discrepancy, the negotiating bank will still have negotiated.  In that situation, the issuer and any confirmer are precluded from asserting the discrepancy and required to reimburse nominated bank that has negotiated under the preclusion rule of UCP600 Article 16(f) (Discrepant Documents, Notice and Waiver) even in the event of beneficiary LC fraud.”

I respectfully agree with that reasoning and with his observation that the linkage is “unfortunate”.

25.  The example given is particularly pertinent in that, in the present case, the respondent accepts that there is a complying presentation and, in any event, it is precluded from contending otherwise by reason of article 16(f).  Article 16 requires an issuing bank to whom a presentation is made to give notice to the presenter (in the present case the appellant) specifying each discrepancy and how the documents are to be dealt with within 5 banking days after the date of presentation if it decides to refuse to honour.  Article 16(f) provides that:

“f.  If an issuing bank … fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.”

26.  The consequence of preclusion is that it is not open to the issuing bank to contend other than that the presentation is a ‘complying presentation’ and, as night follows day, it then must honour the credit.  Otherwise, there would be no point in having article 16(f).

27.  The second matter of significance is that no time frame is expressed in the definition of ‘negotiation’.  It is clear from article 16 that the ‘complying presentation’ is to be viewed from the perspective of the issuing bank at the time the presentation is made to the issuing bank.  On the interpretation advanced by the respondent, even if preclusion is triggered, it can have no effect because, for the purposes of article 7c., whether or not there is a ‘complying presentation’ is to be ascertained at the time the negotiation bank makes the advance or agrees to make such an advance.

28.  There are conceptual difficulties with Mr Yuen’s interpretation.  Neither article 7c. nor the definition of ‘negotiation’ mentions, expressly, any time line.  As earlier noted, from the perspective of the issuing bank, the material time has to be the time of presentation for payment as that is when the obligation to pay is triggered.  From the perspective of the negotiation bank, when it ‘negotiates’, it is acquiring documents that, ultimately, will entitle it to make a presentation to the issuing bank.  If one of the documents happens to be discrepant or is missing at the time of the advance, the negotiation bank would run the risk of eventually not being in a position to make a presentation to the issuing bank, or, if such presentation purportedly is made, of obtaining no reimbursement.  But it has a choice whether or not it is willing to negotiate.  However, I can discern no reason (much less a valid reason) why, if the missing or discrepant document is subsequently supplied or is made compliant before the negotiation bank actually makes the presentation, the presentation would not be a ‘complying presentation’.  Logically, a ‘complying presentation’ has to have the same meaning for articles 7(c) and 16.

29.  On the appellant’s interpretation, effect can be given to both those provisions within a cohesive framework.  On the respondent’s interpretation, article 16 would be emasculated.  Further, it is difficult to see how that construction would facilitate international trade finance.  It is likely to have the opposite effect in that negotiation banks would be wary of negotiating documentary credits.

30.  I should add that apart from Prof. Byrne’s book, I have also consulted the ICC’s Commentary on UCP 600, Article–by-Article Analysis by the UCP Drafting Group (2007) but found nothing there that specifically addresses the issue under consideration.

31.  For the reasons stated, I am of opinion that the appellant is entitled to be reimbursed by the issuing bank and I so hold.

The express provision

32.  The second of the three express ‘instructions’ in the concluding part of the letter of credit is an express provision relating to reimbursement. Mr Leong’s primary position is that it does no more than reflect the position obtaining under UCP 600.  But on the hypothesis that my interpretation of UCP 600 were held to be wrong, the express provision would become material.

33.  For convenience, the ‘express provision’ is reproduced below:

“2. UPON RECEIPT OF COMPLIANT DOCUMENTS AT OUR COUNTER, WE SHALL ACCEPT THE RELEVANT PRESENTATION AND EFFECT PAYMENT IN ACCORDANCE WITH THE PRESENTER’S INSTRUCTIONS.”

34.  Prima facie, the situation envisaged in the express provision has arisen, entitling the appellant to reimbursement.  The question that arises is whether, if the express provision is wider than article 7c., it can be given effect.

35.  It is common ground that the UCP 600 applies to the letter of credit.  Article 1 of UCP 600 states its effect:

“[The rules] are binding on all parties thereto unless expressly modified or excluded by the credit.”

Therefore, the issue is whether, as a matter of construction of the letter of credit, the express provision had the effect of expressly modifying article 7c.

36.  The correct approach to the question of construction appears in the following passage from the judgment of Mustill LJ in the Royal Bank of Scotland (Lexis transcript, p. 6) case:

“…the obvious place to start, when searching for a contractual term material to a particular obligation, is the express agreement between the parties.  If it is found that the parties have explicitly agreed to such a term, then the search meet go no further, since any contrary provision in UCP must yield to the parties’ expressed intention.  If on the other hand the agreement is silent in the material respect, then recourse must be had to UCP, and if a relevant term is found there, that term will govern the case.”

37.  Adopting that approach, it is clear that the express provision applies and, in the event that my interpretation article 7c. were wrong, the appellant remains entitled to be reimbursed under the express provision.

38.  I would allow this appeal and set aside the order below.

Costs

39.  Costs should follow the event and the appellant should have the costs, both here and below.  I propose that there be an order nisi to that effect.

40.  There are, two other discrete costs issues.  They relate to outstanding costs incurred at the interlocutory stage in HCA 1290 of 2008 and HCCL 24 of 2008.  When those actions were consolidated in July 2009, these costs were reserved but the order made after trial did not address them.

HCA 1290/2008

41.  The outstanding costs are the costs of the appellant’s application, made on 17 July 2009, for the discharge of the interlocutory injunction obtained by New Era restraining the respondent from making payment to the appellant under the letter of credit.  The appellant seeks an order that the respondent pay those costs to the appellant.

42.  The difficulty with the order sought is that it was New Era rather than the respondent that had obtained the injunction.  I can see no basis for ordering that the respondent pay those costs.  While there might have been a case for contending that New Era should bear the costs, that is entirely academic because of the terms of the consent order made shortly prior to the hearing of this appeal that dispensed with the attendance of New Era.  In my view, there should be no order as to those costs.

HCCL 24/2008

43.  The appellant commenced those proceedings in November 2008 and took out a summons for summary judgment on 17 July 2009.  The actions were consolidated on 22 July 2009.  The appellant now seeks the costs of that application as well as all costs reserved.

44.  Where leave to defend is given in a summary judgment application, the normal order would be that costs be in the cause.  In substance, that is what has occurred in the present case.  As the appellant has succeeded, it should have the costs it seeks.

Conclusion

45.  Accordingly, I propose that there be an order nisi that the appellant be entitled to costs here and below, such costs to include the costs of its application for summary judgment as well as all costs reserved in HCCL 24 of 2008 and, as between the appellant and the respondent, that there be no order as to the costs of the appellant’s application to discharge the injunction in HCA 1290 of 2008.

Hon Kwan JA:

46.  I agree with both the judgments of Le Pichon JA and Stone J, and the costs orders proposed by Le Pichon JA.

Hon Stone J:

47.  I have had the advantage of reading in draft, and respectfully agree with, the judgment of Le Pichon JA.

48.  At bottom, the argument mounted by Mr Yuen SC for the respondent, BOC, amounted to the bald proposition that a nominated bank is unable validly to make payment under a credit which it has accepted for negotiation until the stage at which all requisite documents compliant with the terms of that credit have been presented to it.

49.  If correct, this would lead to the equally surprising proposition that although – as in the instant case – there is no issue but that the documents as forwarded to BOC as issuing bank indeed were compliant, under the UCP 600 the issuing bank is under no obligation to reimburse the negotiating bank unless – to use the words of the learned judge at paragraph 33 of his extemporary judgment (quoted in full by Le Pichon JA at paragraph 13 above) – payment was “actually released” to the beneficiary against such complying set of documents.

50.  With respect, I am unable to construe Article 7c. in this restrictive manner.

51.  The short point, it seems to me, is that as a matter of interpretation there is within Article 7c. no stipulation to the effect that payment cannot be made to the beneficiary by the negotiating bank until there is a fully compliant presentation, and not before.

52.  The precise manner of negotiation of the documents must be a matter for the negotiating bank; hence if it wishes to make payment under the credit in anticipation (as in the instant case) of submission of a compliant document in lieu of one that is not compliant (vide the two initially discrepant cargo receipts) it does so at its own commercial risk, such risk often being covered by a beneficiary’s indemnity that if ultimately a “complying presentation” cannot be achieved, then such payment as made will be returned to the paying bank.

53.  However, such discrete commercial arrangement – to which of course the issuing bank is not privy – does not affect the cardinal principal that, under Article 7c., the issuing bank undertakes to reimburse the nominated bank that has honoured or negotiated a “complying presentation”, and thereafter has forwarded the documents constituting such compliant presentation to the issuing bank.

54.  Thus, if the documents as forwarded are found not to be compliant, there will be no obligation so to reimburse; conversely, if such documents are accepted as compliant, the unequivocal obligation arises upon the issuing bank to make reimbursement to the negotiating bank of the payment as earlier made to the beneficiary (or assignee thereof) by that bank.

55.  In my judgment there is, and can be, no remit for the argument - which is precisely that advanced in the present appeal by BOC - that qua issuing bank its reimbursement obligation is therefore effectively dependent upon not one but two distinct factors: first, the fact of a “complying presentation”, with the documents comprising such presentation being forwarded by the bank which has taken up the documents and has effected payment under the credit, plus a second factor, namely that the issuing bank is entitled to decline reimbursement, notwithstanding full documentary compliance with the terms of the credit, because at the time of payment by the nominated bank, such a “complying presentation” had not been effected.

56.  If this interpretation of Article 7c.were correct, which clearly it is not, the surprising (and wholly unintended) result would enure that prior to effecting reimbursement, in addition to ensuring that the documents as forwarded to it indeed constituted a “complying presentation”, the obligation of the issuing bank so to reimburse will not crystallize until it also be established that such payment as was effected by the nominated bank did not antedate an ultimately compliant presentation.

57.  In my view, the argument that the issuing bank therefore is entitled to ‘vet’ or oversee the manner of negotiation by the bank which has made payment under the credit, and thereafter to justify its refusal to reimburse in face of a compliant presentation, possesses neither merit nor commercial justification, and I suspect that this is the very reason that leading counsel on either side apparently have been unable to locate any authority on the point.

58.  For my part I agree that this appeal must be allowed, and that the orders as proposed by Le Pichon JA should issue.

Hon Le Pichon JA:

59.  There will accordingly be an order in terms of §§ 38 and 45.