NEDCOR ASIA LTD. v. THE INDUSTRIAL AND COMMERCIAL BANK OF CHINA

HCCL304/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.304 OF 1998

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J U D G M E N T

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1. This is a commercial dispute between two banks. It is also a dispute which in my view ought never to have seen the light of day, far less have been driven to court. The question at issue is whether the defendant, ICBC, should be required to reimburse the plaintiff, Nedcor, consequent upon the negotiation and payment by Nedcor of a draft drawn on ICBC under a letter of credit issued by a branch of ICBC in Shantou, China.

2. No dispute of primary fact arises, and somewhat unusually this was a trial conducted solely upon agreed papers, with no witness evidence, whether factual or expert, being called by either side.

3. How, then, did this dispute arise?

The facts

4. On 21 April 1997 ICBC Shantou issued an irrevocable letter of credit expressly subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), ICC Publication 500 ("UCP 500"). The credit was in the sum of HK$10,318,750, and was advised by tested telex to Nedcor through the Belgian Bank on that date. The stipulated expiry date was 30 April 1997 in Hong Kong. The applicant was named as China Haian Enterprise Group Corp. of Shantou, China, and the beneficiary named as one Sino Fortune Communications Ltd of Java Road, Hong Kong. The credit provided, inter alia, as follows :-

"WE HEREBY ISSUE IN YOUR FAVOUR THIS IRREVOCABLE DOCUMENTARY CREDIT WHICH IS AVAILABLE WITH ANY BANK BY NEGOTIATION AGAINST PRESENTATION OF THE DOCUMENTS DETAILED HEREIN AND OF BENEFICIARY'S DRAFT(S) AT 90 DAYS SIGHT FOR 100 PERCENT OF INVOICE VALUE ON US MARKED AS DRAWN UNDER THIS CREDIT. LIST OF DOCUMENTS TO BE PRESENTED ..."

5. Although this court is in no sense concerned with the underlying transaction, the documents thereafter listed as necessary for presentation under the credit appear to have evidenced shipment of a quantity of computer equipment which, no doubt, was being sold to the applicant in China. In any event, the Special Instructions within the credit stipulated, inter alia :-

"...

(2) DOCUMENTS MUST BE PRESENTED FOR NEGOTIATION WITHIN 15 DAYS AFTER THE ISSUANCE OF TRANSPORT DOCUMENTS BUT WITHIN THE CREDIT VALIDITY.

...

(4) ALL DOCUMENTS TO BE FORWARDED IN ONE COVER, UNLESS OTHERWISE STATED. ..."

and, under 'Bank to Bank Information', the instruction as to forwarding was thus :-

"(4) ALL DOCUMENTS SHOULD BE FORWARDED TO OUR OFFICE (ADDRESS: ICBC BUILDING, YINGBIN ROAD EAST, SHANTOU, GUANGDONG, CHINA) BY REGISTERED AIRMAIL."

6. Thereafter the Credit concluded thus :-

"WE HEREBY ENGAGE WITH DRAWERS AND/OR BONA FIDE HOLDERS THAT DRAFT(S) DRAWN AND NEGOTIATED IN CONFORMITY WITH THE TERMS OF THE CREDIT WILL BE HONOURED UPON PRESENTATION AND THAT DRAFT(S) ACCEPTED WITHIN THE TERMS OF THIS CREDIT WILL BE DULY HONOURED AT MATURITY.

THIS IS AN OPERATIVE INSTRUMENT AND NO CONFIRMATION WILL FOLLOW.

THIS CREDIT IS SUBJECT TO UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION) ICC PUBLICATION NO.500.

PLS ADVISE THE BENEFICIARY.

KINDLY ACKNOWLEDGE RECEIPT.

BEST REGARDS

ICBC SHANTOU BR."

7. I have set out parts of this document at some length because the point in this case, as Mr Yuen for ICBC suggested, is purely one of the interpretation of this credit itself.

8. On 24 April 1997 the beneficiary under the credit, Sino Fortune, duly presented the required documents, including its draft, to Nedcor for negotiation and payment. The draft was dated 22 April 1997, and was at the required tenor, namely at 90 days sight, and was in the correct sum, namely HK$10,318,750. The draft was further marked on its face thus :-

"DRAWN UNDER L/C NO.LC47297110TC ISSUED BY THE INDUSTRIAL AND COMMERCIAL BANK OF CHINA.

TO THE INDUSTRIAL AND COMMERCIAL BANK OF CHINA."

and was signed with the chop and authorised signature of Sino Fortune.

9. I pause to observe that there was no mention on the draft of the Shantou branch of ICBC, an omission which provides the focus of this case.

10. In any event, upon presentation of the documents by Sino Fortune, Nedcor itself discovered certain discrepancies in the name of the purchaser on the bill of lading and in the description of an article shown on the invoice, and duly canvassed these discrepancies with ICBC. In a tested telex of 28 April 1997, ICBC Shantou advised thus :-

"THE APPLICANT ACCEPT THE MENTIONED DISCREPANCIES IN YR DOCS. YOU MAY NEGOTIATE THE DOCS IF OTHERWISE IN ORDER."

11. On the basis of this authorisation on 30 April 1997, Nedcor duly negotiated the documents and discounted the draft, crediting Sino Fortune's account with the sum of HK$10,028,808.72, this being the netted down amount after deduction of interest and relevant charges. Thereafter, Nedcor endorsed the draft to the order of the Industrial and Commercial Bank of China and remitted the documents to ICBC at its Shantou branch by courier under cover of its remittance advice dated 30 April 1997, asking for advice of maturity date and payment details and requesting that the full proceeds upon maturity of the bill be remitted to a specified HSBC account. This letter and its enclosures were received at ICBC Shantou on 5 May 1997.

12. What happened next constitutes the genesis of this dispute. An internal document discovered by ICBC under the letterhead of "The Industrial and Commercial Bank of China Shantou City Han Jiang Sub-branch", dated 8 May, reads thus :-

"After verification, there are discrepancies as follow:-

1. The endorsement at the back of the beneficiary's remittance note does not have the words 'Shantou Branch'.

2. The Contract No. of Packing Lists / Weight Memo does not comply with the invoice."

13. Six days later, on 14 May 1997, ICBC sent a document entitled 'Notice of Discrepancies in the Import Bills' to one Coast Industrial Company, which Mr Yuen tells me, is in fact a free translation of the name of the applicant for the credit, China Haian Enterprise. In any event, this Notice to the client identified the 'discrepancies' said to have been found, and asked whether they were accepted, at the same time requesting submission of "your opinion to our bank" within two days. In reply, Coast Industrial Company appears to have endorsed its non-acceptance of "the aforesaid discrepancies" by handwritten legend endorsed on the same faxed Notice dated 14 May 1997, and accompanied by the relevant company seal. Somewhat curiously, this Notice of Discrepancies as sent to the client makes no reference to the "endorsement" on the back of the draft, as per the previous internal memo, but simply refers to the omission of "Shantou Branch" within the beneficiary's draft(s).

14. In any event, on the evening of 14 May, at 18:03 hours, Nedcor, which had of course discounted the draft in favour of Sino Fortune and had paid over the money, but to date had heard nothing from ICBC, sent a 'tracer' to ICBC at its Shantou City branch enquiring as to the maturity date and status of the bill and its due date for payment, and it appears that relatively shortly afterwards, on that same evening, ICBC Shantou branch responded by tested telex No.581 to Nedcor at the Belgian Bank. This tested telex acknowledged receipt of the documents drawn under the letter of credit :-

"... which remain unpaid due to the following discrepancies :

1) In Beneficiary's Draft(s) The Issuing Bank Missed 'Shantou Branch'

2) In Packing Lists/Weight memo The Contract No. is Different From That In Your Invoice."

and concluded that :-

"We are now holding the documents at our counter at your disposal pending your instructions."

The receipt of this incoming tested telex is recorded at 18:32:45 hours and is recorded complete at 18:36 hours on 14 May 1997.

15. For all practical purposes, this last tested telex advising non-payment due to the discrepancies stipulated represents the last communication of direct relevance to the issues in this case, although Mr Kat for the plaintiff has drawn my attention to correspondence from the Beijing office of ICBC to Nedcor of January 1999 wherein one Mr Gao Ming, Senior Manager of the International Department, is on record as stating that "we are now submitting this case to the ICC for their Opinion". In this connection my attention has also been drawn to an ICC Opinion within the papers which is adverse to ICBC, although Mr Yuen for the defendant suggests that this was not obtained by his client. Suffice to say that in arriving at my conclusion in this case I have paid no regard to this document. In the course of time it became clear that there was to be no agreement between the parties on this issue, and the Writ, backed with Points of Claim, was issued on 23 December 1998, this litigation thereafter assuming its inexorable course.

The issues

16. The broad issue presented by this case is whether the documents presented by Nedcor to ICBC complied with the terms of the credit, there being no dispute that there existed a contractual engagement on the part of ICBC to reimburse Nedcor as negotiating bank on the basis of the terms of the credit, provided, of course, that the documents submitted were not discrepant.

17. Prior to the commencement of this case it had, I think, been anticipated that this litigation would focus upon both of the alleged discrepancies as reflected in the inter-bank correspondence. Mr Yuen, however, who conducted a difficult case with calm good sense, helpfully indicated at the outset of this hearing that the 'packing list point', if I may so term it, was no longer a live issue, and that he did not intend to make any submissions in that respect. Accordingly, the case devolved solely upon the omission of reference in the draft to the Shantou branch, although Mr Kat sought to argue in addition that, with particular reference to Articles 13(b) and 14(d) of the UCP 500, ICBC was in any event out of the time for the rejection it had purported to make. It is clear, however, that this latter point constituted no more than belt and braces, and that the thrust of the argument was upon the one surviving 'discrepancy'. To this I now turn.

Did the failure to specify 'Shantou Branch' in the draft constitute a valid discrepancy entitling the defendant to decline payment under the credit?

18. As earlier noted, it is accepted that pursuant to the provisions of the UCP 500, if the draft was compliant then ICBC was bound by the credit to honour the draft, take up the documents and to reimburse Nedcor. The debate, therefore, dwelt solely upon the validity of this 'discrepancy', which, as I have noted, apparently had its genesis on 8 May 1997 after an examination by a Mr Weng Aibing and a Mr Li Chu Yi, the verifiers indicated on the face of the internal ICBC memo entitled 'Bills Verification Record', which appeared under the letterhead of the 'Han Jiang Sub-branch' of the ICBC, Shantou City.

19. I do not consider that this point requires extensive discussion. It is a poor point, one which in my judgment is manifestly without merit, and I regret to say that its taking ineluctably smacks of scraping the barrel in an attempt to discern some basis for declining to honour a contractual engagement with a negotiating bank. I have been told by counsel from the bar that the relevance of the internal memo emanating from the Han Jiang Sub-branch was because the Shantou branch had issued the credit on behalf of the Han Jiang branch, and I have no desire to speculate about that which occurred between the bank and its client, if anything, to provoke such a radical change of direction between 28 April 1997, the date when the original discrepancies discovered by Nedcor were waived by the applicant for the credit, and 14 May 1997, when the applicant responded to ICBC's fax (without, I note, a specific branch being designated thereon) declining to accept the two additional 'discrepancies'. Nor for that matter, given the unexceptional manner in which the draft was drawn, is it apparent why ICBC should have thought it 'discrepant' in the first place. Be that as it may. Whatever the reason for the view that was taken, the task of this court is solely to pronounce upon the legitimacy or otherwise of the discrepancy now alleged. And in this regard, I have no hesitation in holding that the omission of the two words 'Shantou Branch' on the draft did not and does not constitute a valid discrepancy entitling ICBC to reject the documents and to refuse to reimburse Nedcor in terms of the face-value of the draft.

20. The relevant term of this ICBC credit specifies that the irrevocable credit was :-

"... available with any bank by negotiation against presentation of the documents detailed herein and of beneficiary's draft(s) at 90 days sight for 100 percent of invoice value on us marked as drawn under this credit ..." (emphasis added)

and to suggest that the phrase "on us" is to be restrictively construed so that the draft, drawn as it was on 'The Industrial and Commercial Bank of China', is discrepant absent the additional words 'Shantou branch' is both ambitious and, in my view, a risible proposition. This was an ICBC credit, no more nor less - in fact, the Industrial and Commercial Bank of China was precisely the entity to whom the application had been made by China Haian Enterprise on 4 April 1997 - and the draft as drawn complied with the terms of the credit mandate. The fact that the credit in fact appeared to be issued out of the Shantou branch of ICBC (as opposed, for example, to the Han Jiang branch, or a Shanghai branch, or a Beijing branch), in my view is nothing to the point, there being no allegation that either "The Industrial and Commercial Bank of China, Shantou" (from whom the credit is stated as having been sent to the Belgian Bank) or "ICBC Shantou Br" (the designation used to sign off at the conclusion of the credit) is a separate legal entity from ICBC. In his address, Mr Kat made the point that the terms of the UCP 500 do not provide separately for the status of branches of the issuing bank save for the exceptional case of overseas branches in Article 2, which provides a purely contractual exception to the unitary principle and which clearly has no application on the facts of the present case. The reason for this approach appears tolerably clear. In law, all branches of a bank are only emanations or "local arms" of that one bank, one legal entity, which bears the obligations incurred by that bank including its branches. As Schmithoff, the Law and Practice of International Trade, 9th Ed., points out (at page 318), the debts of the branch are those of the head office of the bank, and it follows therefore that the obligation to pay on a draft under a credit remains that of the issuing bank.

21. Article 10(d) of the UCP 500 defines and underpins the relationship between the issuing bank and the "nominated" bank thus :-

"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."

and there is no doubt that the plaintiff herein, Nedcor, having accepted Sino Fortune's draft and negotiated its documents under the credit, is entitled to reimbursement from the defendant as issuing bank. The draft complied with the clear terms of the credit and in my judgment there was no legitimate basis for ICBC to decline to honour its clear obligation in this case.

22. As the foregoing makes clear, I have taken the view that there is no room on the facts for the argument now made by the defendant. I would add further that if and in so far as there could be thought to be any lack of clarity in the credit in question (which is not the view I have taken), the law is that the banker is not in default if he acts upon a reasonable meaning of an ambiguous or unclear term - see, for example, the recent case of Credit Agricole v. Muslim Bank, [2000] 1 Lloyds LR 275 - so that, if relevant, this line of argument would have enured against the defendant also.

23. It provides pause for salutary reflection that this entire action has been underpinned by the allegation of a 'discrepancy' of this nature, and that the plaintiff has been forced to litigate to judgment, doubtless at considerable cost, in order to establish its entitlement to the monies paid to Sino Fortune pursuant to its discounting of the draft. The law recognizes that the commercial obligations inherent in letters of credit transactions are serious and weighty obligations, not lightly to be disregarded. In this connection, I note that the Chartered Instituted of Bankers itself has observed, in its Handbook on Documentary Credit Transactions, (1998), that :-

"... documentary credit specialists should note that documents must not be examined with the sole aim of finding grounds for non-payment because such an aim demeans the value and the use of credits as a method of international payment."

24. I hold, therefore, that the defendant's objection to the plaintiff's claim on the basis of discrepant documents fails in limine, and in the circumstances there ought to be no further delay in this plaintiff being placed in funds.

25. In light of this conclusion, there is strictly no necessity to go on to consider Mr Kat's further arguments, which were put forward solely upon an alternative basis should his primary submission fail. However, lest this matter go further, I should perhaps deal shortly with his other line of argument.

Time limits and delay

26. Mr Kat relied on the provisions in Articles 13(b) and 14(d) and (e) of the UCP 500. It may assist to set them out. Article 13(b) provides :-

"(b) The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly."

Whilst Articles 14(d) and (e) state :-

"(d) (i) If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.

(e) If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to, the presenter, the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit."

27. Mr Kat stressed that the period of seven banking days represented a maximum period only, citing the observations of Tuckey J in Seaconsar Far East Ltd v. Bank Markazi Jomhonri Island Iran, [1997] 2 QB 89 at 95 about whether in that case the decision taken to refuse the documents was taken within a reasonable time and/or whether notice was given to that effect without delay :-

" I think it is artificial to consider the two questions in isolation. Although as a matter of language 'reasonable time' cannot be equated with 'without delay' what the beneficiary is interested in is the time between the bank's receipt of the documents and his receipt of notice that they have been rejected. 'Without delay' means what it says: promptly, but I think the longer it has taken to make the decision to reject, the less time the bank will have to give notice if it is to avoid being criticized for delay. ...

By using the words 'reasonable time' the UCP did not intend to fix time limits. What is a reasonable time limit must depend on the facts of each case, judged as necessary by contemporary banking practice. I do not think that it is for the Courts to say any more than this. The danger is that a flexible (reasonable) standard would be converted into something more rigid if the Courts attempted to pontificate in any general way about what is or is not a reasonable time. The need for flexibility is obvious: transactions vary widely in their size, complexity and sensitivity; banks vary considerably in size and so the availability of staff to process transactions of this kind in one bank may be very different from those available to do so in another.

The danger is illustrated by the decision in Bankers Trust Co. v. State Bank of India, [1991] 1 Lloyd's Rep.587 (Mr. Justice Hirst) and [1991] 2 Lloyd's Rep.443 (C.A.). It appears that since that decision a view has emerged that a reasonable time to examine documents and decide whether or not to reject them is three working days. I do not read that decision as deciding any such thing. The Court held in the circumstances of that case that eight days was too long. At p.600, col.1 Mr. Justice Hirst made it clear that he was not laying down what was the appropriate time limit. ..."

28. Given the requirements in these articles, the plaintiff maintains that ICBC did not handle the matter of the documents presented with reasonable promptness. In this connection, Mr Kat maintains that after 6:00 pm on the seventh banking day cannot possibly be a reasonable time for ICBC to respond when faced with no more than a three page letter of credit and a maximum six pages of documents, and that in fact neither the 'reasonable time' element, nor, for that matter the 'without delay' criteria, are satisfied on the objectively available chronology in this case.

29. In responding to this submission Mr Yuen was, I think, in some difficulty. His application to read into evidence parts of his expert report containing factual information based upon data supplied by officers of ICBC was refused in the face of vigorous objection to such hearsay, Mr Kat pointing out that this was apparently to be in lieu of calling any witness of fact, notwithstanding the existence of witness statements, in particular from one of the document verifiers, Mr Li Chu Yi. In the event, no factual witness was called, so that although the court is aware that these documents apparently went from the Shantou branch to the Han Jiang Sub-branch (as is otherwise apparent on the 'Bills Verification Record'), no further information is available which might have assisted Mr Yuen in terms of the "reasonable time" argument, save to observe that the resources available, whether in Shantou or Han Jiang, are hardly likely to rival those of a commercial bank in say, Beijing, Shanghai or Hong Kong.

30. Even taking this into consideration, however, in this regard I am minded to agree with the submission of Mr Kat. Assuming that after 6:00 pm falls within the ambit of banking day - I do not here need to decide this point, and do not do so, albeit I am inclined to think that it probably does - with so little documentary material to scrutinize in my judgment it cannot fairly be said that the time taken was indeed a "reasonable time" within the meaning of Article 13(b), so that I am in favour of the plaintiff on this alternative point also, and hold that the preclusion within Article 14(e) in any event operated against the defendant.

31. The result of the foregoing, therefore, is that there is to be judgment for the plaintiff against the defendant in the sum of HK$10,318,750.

32. I will now hear counsel on the issues of interest and costs.

[Submissions from counsel]

33. This has occasioned a vigorous debate. So far as interest is concerned, the extent of the difference between the parties seem to be thus : Mr Kat asks for six month HIBOR plus one percent, the six month period to run from 24 November 1997, which is 180 days after the date of the bill. For his part Mr Yuen asks the court to opt for a lower rate - a three month HIBOR flat basis with no margin. Those acting for the plaintiff have helpfully provided the court with a number of computer-generated schedules which perform the interest calculation depending on which basis this court ultimately decides is appropriate.

34. After reflecting on the arguments, I have concluded that the plaintiff should have interest on the principal sum at the rate of three month HIBOR plus one percent from the stipulated date of 24 November 1997 to the judgment date, that is today, 8 September, and thereafter at the judgment rate prevailing from time to time until payment. On the basis of the computer-generated record that has been placed before me (which I note, gives credit for a sum in interest that has been paid by Sino Fortune to the plaintiff), this amounts to HK$2,141,560.92. Doubtless if there is any dispute, this figure can be re-checked, but for the purposes of the order I adopt the formula as stated.

35. This leaves the question of costs. Mr Kat asked for costs, and trailed his coat for a costs order on a higher basis than is usual; in this regard, he became noticeably more enthusiastic as the argument went on. Mr Yuen, not unnaturally in the circumstances, did not resist costs, but said that such should be upon the normal party-and-party basis.

36. Within the costs argument, there is a subplot which involves a dispute between the parties as to whether in any event there should be a higher rate ordered in terms of the costs incurred by the expert evidence. I understand that the requirement for expert evidence, which in the event was not called by either side, was dealt with originally by Consent Order, and after hearing both counsel on the point I am unwilling to carve out expert evidence as an independent sub-head of costs.

37. After considering the arguments of counsel and in light of that which, in my judgment, the broad justice of the case requires, I am of the view, and so order, that the plaintiff is to have its costs of this action, such costs to be taxed and paid on a common fund basis.

38. I thank counsel for their assistance.