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

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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BETWEEN

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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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I. INTRODUCTION

1.  These proceedings concern a Letter of Credit (L/C). They raise 2 issues on the application of UCP 600. The L/C was subject to UCP 600.

2.  The first issue is this.

3.  New Era requested Bank of China (BOC) to issue an L/C for US$1,547,840 in favour of Flexus. The L/C was made available at First Commercial Bank (FCB) as advising, nominated and negotiating bank. FCB negotiated the L/C by accepting a draft drawn by Flexus on BOC. The negotiation was “with recourse” (that is, subject to an indemnity from Flexus) because FCB paid out the L/C amount to Flexus against an admittedly non-compliant document. The non-compliant document was referred to at trial as the 1^st Cargo Receipt.

4.  Within the validity period of the L/C, Flexus obtained 2 further versions of the 1^st Cargo Receipt. The 2^nd Cargo Receipt was equally non-compliant. But finally FCB presented a set of documents to BOC with a 3^rd Cargo Receipt.

5.  On the assumption that the 3^rd Cargo Receipt is a compliant document, the question is whether BOC as issuing bank is obliged to pay FCB under the L/C. It is the case of New Era and BOC that FCB’s presentation is not valid because it did not negotiate the L/C against the 3^rd Cargo Receipt.

6.  The second issue is this.

7.  At about the time when FCB presented documents to BOC, New Era informed BOC that the 3^rd Cargo Receipt was a forgery. New Era further alleged that, even if genuine, the 3^rd Cargo Receipt was non-compliant. New Era asked BOC not to pay out under the L/C.

8.  New Era claimed that the 3^rd Cargo Receipt was non-compliant for the following reasons:-

(1)  The 3^rd Cargo Receipt purported to be on New Era’s letterhead.  But the 3^rd Cargo Receipt’s letterhead wrongly identified New Era’s address as “Unit 05B” instead of “Unit 058”.

(2)  When opening the L/C, New Era had provided BOC with a specimen copy of its authorised signature and chop.  At the time New Era instructed BOC that the signature and chop on any Cargo Receipt used to operate the L/C had to be verified against the specimen.  The advising bank was to be (and FCB was so) advised by BOC.  The specimen gave New Era’s Chinese name in traditional Chinese characters.  The chop imprint on the 3^rd Cargo Receipt, in contrast, gave New Era’s name in simplified Chinese characters.

9.  The question is whether the 3^rd Cargo Receipt is a non-compliant document. It is FCB’s case that the alleged discrepancies are not matters of significance.

10.  There previously was an issue of fraud. But that has become immaterial for the purposes of the trial of these proceedings.

11.  New Era contended to BOC that Flexus was acting fraudulently. In particular, contrary to the 3^rd Cargo Receipt’s tenor, Flexus (New Era told BOC) had never shipped any goods (TFT Panels) to New Era. On the strength of that fraud allegation and upon BOC indicating that it was nevertheless intending to honour the L/C by reimbursing FCB, New Era obtained an interlocutory Court order enjoining BOC from paying FCB. The injunction has remained in effect until now.

12.  By a Letter of Undertaking dated 14 July 2008 Flexus admitted fraud. The Letter states that the 3^rd Cargo Receipt was false. Flexus has not contested these proceeding and New Era has obtained judgment in default against it.

13.  On the authorities (for example, Credit Agricole Indosuez v.Generale Bank [1999] 2 All ER (Comm) 1009 (at 1015c-h per Rix J)) New Era accepts that, if the 3^rd Cargo Receipt is compliant and FCB was entitled to present the same, it is irrelevant that the document is a forgery. This is because FCB had no knowledge of a possible fraud by Flexus until long after FCB had paid monies to Flexus or made its presentation to BOC.

II. DISCUSSION

A. Preliminary matter: Provenance of the 1^st, 2^nd and 3^rd Cargo Receipts

14.  Before considering the 2 issues just identified, I should explain how FCB obtained various versions of the Cargo Receipt.

15.  At all times, New Era was acting as the import agent for Ching Tai (Far East Ltd.). As such agent, New Era (acting on Ching Tai’s behalf) entered into a contract dated 30 May 2008 with Flexus for the purchase of 55,280 sets of 7” TFT Panels. This was the transaction underlying the L/C. The contract envisaged that, upon receipt of the goods in Hong Kong, New Era would provide Flexus with a Cargo Receipt. Flexus could then present this Cargo Receipt to its bank (FCB) to obtain payment.

16.  On 24 June 2008 Mr. Samson Pan of Ching Tai requested Mr. Jiang Hao of New Era to send the 1^st Cargo Receipt to FCB. Mr. Pan asked Mr. Jiang to describe the relevant goods in the 1^st Cargo Receipt as “STN” (not “TFT”). Mr. Jiang complied with the request, sending the 1^st Cargo Receipt to FCB by DHL.

17.  Although he did not know then whether Ching Tai had actually received any goods from Flexus, Mr. Jiang realised that the 1^st Cargo Receipt was non-compliant (since the goods were there wrongly described as “STN” rather than “TFT”). He rightly believed that Flexus would not be able to obtain payment under the L/C through presentation of the 1^st Cargo Receipt. All parties accept that the 1^st Cargo Receipt was non-compliant precisely for the reason which Mr. Jiang identified.

18.  FCB received the 1^st Cargo Receipt on 25 June 2008. On the same date, Ching Tai requested New Era to send the 2^nd Cargo Receipt. This time Ching Tai asked that the goods be described as “7” STN”. Mr. Jiang complied, again fully appreciating that Flexus could not obtain payment under the L/C using the 2^nd Cargo Receipt. He sent the 2^nd Cargo Receipt to FCB by DHL. All parties also accept that the 2^nd Cargo Receipt was non-compliant.

19.  FCB received the 2^nd Cargo Receipt on 26 June 2008. But by the time of receipt FCB had had already paid Flexus, albeit subject to an indemnity.

20.  Mr. Jiang never sent (and was never requested by Ching Tai to send) the 3^rd Cargo Receipt. Instead, FCB mysteriously received the 3^rd Cargo Receipt by DHL on 1 July 2008. It appears that the 3^rd Cargo Receipt was handed to DHL by someone in Hong Kong on 30 June 2008.

21.  FCB sought reimbursement from BOC by presenting documents (including the 3^rd Cargo Receipt) on 2 July 2008.

22.  The 1^st and 2^nd Cargo Receipts correctly state New Era’s address as “Unit 058”. The signature chops on both those documents bear New Era’s name in traditional characters. The DHL documents evidencing the delivery of the 1^st and 2^nd Cargo Receipts to FCB all bear New Era’s DHL account number. The DHL documentation for the 3^rd Cargo Receipt does not have New Era’s DHL account number.

23.  BOC and FCB faintly suggest that New Era is estopped from denying the genuineness of the 3^rd Cargo Receipt. This is said to be because New Era sent the 3^rd Cargo Receipt to FCB. However, there is simply no evidence of this.

24.  What evidence there is (essentially, Flexus’ Letter of Undertaking, the absence of New Era’s account number on the DHL documentation for the 3^rd Cargo Receipt, and Mr. Jiang’s denial of having sent the 3^rd Cargo Receipt to FCB) suggests the contrary. In any event, as I have indicated, for the purposes of this Judgment, the genuineness of otherwise of the 3^rd Cargo Receipt is not a relevant issue. New Era is not pressing the issue of forgery before me.

25.  As Mr. Jat Sew Tong SC (appearing for New Era) submits, the provenance of the 3^rd Cargo Receipt is now an immaterial issue. If FCB’s presentation of the 3^rd Cargo Receipt is valid and if the 3^rd Cargo Receipt is compliant on its face, it is irrelevant that the 3^rd Cargo Receipt is also a forgery. If the 3^rd Cargo Receipt is not compliant on its face, it is irrelevant whether it emanated from New Era or from some other party.

B. 1^st Issue: Was FCB’s presentation of the 3^rd Cargo Receipt valid?

26.  I do not think that FCB’s presentation was valid.

27.  UCP Art. 7(c) provides that:-

“An issuing bank [here, BOC] undertakes to reimburse a nominated bank [here, FCB] that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank ....”

28.  Among other things, UCP Art. 2 defines “honour” of an L/C as “to pay at sight if the credit is available by sight payment”. The same article defines “negotiation” as “the purchase by the nominated bank of ... documents under a complying presentation”. By “presentation” is meant “either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered”.

29.  It follows from the foregoing that under Art. 7(c) BOC (as issuing bank) is bound to reimburse FCB (as nominated bank) where:-

(1)  FCB honoured or negotiated a complying presentation by Flexus (as beneficiary); and,

(2)  FCB has forwarded the documents thereby purchased or obtained from Flexus’ complying presentation to BOC.

30.  That is not what FCB did.

31.  Instead, FCB paid Flexus on the basis of a non-complying presentation (since the 1^st Cargo Receipt was discrepant). Thus, FCB purchased (negotiated) documents under a non-complying presentation. Had FCB presented the documents so obtained (including the 1^st Cargo Receipt), the documents would rightly have been rejected as non-complying.

32.  Flexus argues that it could, despite the discrepancy in the 1^st Cargo Receipt, pay Flexus under the L/C with recourse. FCB says that it could then wait until it somehow obtained a full set of compliant documents. Once it had such a compliant set of documents and provided that the L/C had not yet expired, it could present the now complying set to BOC and claim reimbursement under Art. 7(c).

33.  But that is not what Art. 7(c) says. To obtain reimbursement under Art. 7(c), 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.

34.  I do not accept the submission of Mr. Alan Leong SC (appearing for FCB) that Art. 7(c) does not link the beneficiary’s presentation to the nominated bank with the presentation of the nominated bank to the issuing bank. According to Mr. Leong, so long as the presentation by the nominated bank to the issuing bank is compliant, it does not matter that the nominated bank released payment to a beneficiary against non-compliant documents.

35.  In my view, that reading is untenable in light of the actual wording of Art. 7(c). When Art. 7(c) refers to the nominated bank having “forwarded the documents” to the issuing bank, it plainly means having “forwarded the documents which the nominated bank purchased upon a beneficiary’s complying presentation”.

36.  It follows that FCB’s presentation was invalid. BOC had no obligation to reimburse FCB under Art. 7(c).

C. 2^nd Issue: Was the 3^rd Cargo Receipt a compliant document?

37.  In light of my conclusion on the 1^st Issue, it is unnecessary for me to decide this 2^nd Issue. But in deference to counsel’s submissions, I briefly set out my views.

38.  I do not think that the 3^rd Cargo Receipt was compliant.

39.  As to the error in New Era’s letterhead, I am not persuaded that the reference to “Unit 05B” is a material irregularity.

40.  UCP Art. 14(j) states:-

“When the addresses of the ... applicant [here, New Era] appear in any stipulated document [here, a Cargo Receipt], they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit.  Contact details (telefax, telephone, email and the like) stated as part of the ... applicant’s address will be disregarded ....”

41.  UCP Art. 14(j) suggests that, in the circumstances here, the minor discrepancy in New Era’s Unit is a detail which may be disregarded.

42.  In contrast, I think that the discrepancy in the chop is a material one.

43.  UCP Art. 1 stipulates that the UCP is binding “unless expressly modified or excluded by the credit”. Here the L/C was subject to New Era’s express instruction that the signature and chop on any Cargo Receipt presented were to be verified against the specimen provided.

44.  The chop in the 3^rd Cargo Receipt did not conform to the specimen provided to BOC and FCB. Self-evidently, since the former was in simplified characters, the imprint was that of a different chop from the specimen. It follows that the 3^rd Cargo Receipt was non-conforming.

45.  Therefore, even if FCB was entitled to present the 3^rd Cargo Receipt, that Receipt was a non-compliant document. Under the L/C, FCB was not entitled to payment by BOC on such a presentation.

D. Subsidiary matters

46.  In this section, I comment on 2 subsidiary issues which the parties raised in the course of submission.

47.  First, Mr. Rimsky Yuen SC (appearing for BOC) submits that, if the Court finds that BOC is liable to reimburse FCB, BOC is entitled to claim an indemnity against New Era. For this, Mr. Yuen relies on certain clauses of the L/C. These essentially were provisions whereby New Era undertook to indemnify BOC “irrespective of any alleged discrepancies in the presented documents and/or any fraud that may be alleged at any time”.

48.  In light of my conclusions on the 1^st and 2^nd Issues, this submission does not need to be decided. I only record my doubt as to whether, on their true construction, the clauses relied on have the effect for which Mr. Yuen contends.

49.  Second, relying on UCP Art. 16, Mr. Leong submits that BOC is precluded from alleging discrepancies in the 3^rd Cargo Receipt. Mr. Leong says that BOC never served any notice on FCB rejecting the 3^rd Cargo Receipt as discrepant. The result (Mr. Leong contends) is that by Art. 16(f) BOC is precluded from alleging that the 3^rd Cargo Receipt is non-compliant.

50.  Given my decision on the 1^st Issue, this argument is moot. I simply state here that I doubt that Art.16 is applicable in the manner suggested by Mr. Leong.

51.  The commercial reality is that BOC was precluded from paying out to FCB (despite BOC’s announced intention of doing so) by the injunction obtained by New Era. BOC informed FCB of the injunction. New Era’s reasons for contending that the 3^rd Cargo Receipt was non-compliant should have been apparent to FCB by around then. It would have been obvious to FCB that, if New Era was right, BOC would in turn be raising the same grounds for rejecting FCB’s tender.

III. CONCLUSION

52.  FCB’s presentation of the 3^rd Cargo Receipt was invalid. In any event, the 3^rd Cargo Receipt was not a compliant document under the terms of the L/C. BOC is not obliged to reimburse FCB.

53.  New Era’s claim against BOC succeeds. FCB’s claim against BOC for reimbursement is dismissed. BOC’s Counterclaim against New Era is dismissed.

54.  I shall hear the parties on costs and consequential orders.