NANYANG COMMERCIAL BANK LTD v. MAN SAM KWAN AND OTHERS

HCMP 403/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 403 OF 1999

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J U D G M E N T

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1.  This is the plaintiff’s claim for payment by the 1st, 2nd and 3rd defendants of money due from the 3rd defendant.  The plaintiff’s case is that it had previously paid money to the 3rd defendant upon its negotiation of a letter of credit of which the 3rd defendant was the beneficiary.  The 1st and 2nd defendants are sued because they have mortgaged two real properties to the plaintiff to secure the 3rd defendant’s indebtedness to the plaintiff.  The plaintiff is also seeking delivery-up of vacant possession of the mortgaged properties.

Background

2.  This matter arose out of a back-to-back letter of credit transaction.  The 1st and 3rd defendants are represented at the trial but the 2nd defendant was absent.  All three defendants have filed the same re-amended defence and counterclaim.  When I refer to the defendants in this judgment, I mean the 1st and 3rd defendants.

3.  The 1st and 2nd defendants are husband and wife.  They have executed a mortgage dated 29 March 1989 over a residential flat in favour of the plaintiff to secure general banking facilities granted by and to be granted by the plaintiff to the 3rd defendant.  The 1st and 2nd defendants are the only shareholders and directors of the 3rd defendant.  By this mortgage, the 1st, 2nd and 3rd defendants covenanted to pay the plaintiff any outstanding money due from the 3rd defendant to the plaintiff in respect of any account between them.

4.  The 1st defendant on 28 October 1991 executed another mortgage over an office unit in favour of the plaintiff for the same purpose as in the last mortgage.  In this second mortgage, the defendants entered into the same covenant to pay the plaintiff any outstanding sum due from the 3rd defendant. 

5.  On 9 October 1992, the plaintiff and the 3rd defendant entered into a general commercial agreement.  By this agreement, the plaintiff agreed to provide credit or other banking facilities to the 3rd defendant which included the opening or establishing of letters of credit and the collecting, purchasing, negotiating or otherwise discounting bills of exchange.  The 3rd defendant undertook in this agreement to indemnify the plaintiff for all losses, costs, damages and expenses incurred by reason of or in connection with any credit.

A Sino-foreign joint venture wanted to purchase machinery from Taiwan

6.  The 1st defendant was acquainted with one Chu Wai-sun (“Chu”).  Chu was the majority shareholder and a director of one Sun Win Industrial Limited (新勝實業有限公司) (“Sun Win”).  Sun Win was a party to a Sino-foreign joint venture.  The joint venture operated in Jiangxi province in the name of Jiangxi Xinwei Building Material Industry Company Limited (江西星偉建材工業有限公司) (“Xinwei”).  Xinwei was desirous of purchasing from one Taiwan Kuang Chiang Machinery Company Limited (台灣坤奇昆岐機械股份有限公司) (“Kuang Chiang”) some machinery for making building materials.

Payment by a letter of credit issued by the Agricultural Bank

7.  The purchase contract was dated 23 October 1992 and was made by Sun Win as the buyer and Kuang Chiang as the seller.  A deposit had been paid under this contract.  Xinwei then procured an irrevocable and transferable letter of credit in favour of Sun Win to pay the balance of the purchase price.  The letter of credit was issued by the Jiangxi branch of the Agricultural Bank of China (“the AG Bank”) upon the application of Xinwei. 

8.  The amount of the LC issued by the AG Bank (“the AG Bank LC”) was for US$899,250 which was divided into two portions of US$764,362.50 and US$134,887.50.  The first portion was payable against presentation of documents and the second portion was payable upon presentation of a certificate by Xinwei certifying the installation and debugging of the machinery.  It was available with any bank by negotiation against delivery of BNP’s signed draft drawn on the AG Bank.

9.  Sun Win intended to use the AG Bank LC in a back-to-back arrangement to procure an LC in favour of Kuang Chiang.  However, it did not have enough banking facilities for this purpose.  Chu therefore approached the 1st defendant for assistance.  The 1st defendant then approached the plaintiff with a view to procure the issue of a back-to-back letter of credit in favour of Kuang Chiang by using the AG Bank LC in the arrangement.

The back to back LC issued by the plaintiff

10.  Sometime in January 1993, the 1st defendant had a meeting with one Tang Yiu-tsung (“Tang”) at the plaintiff’s Yau Ma Tei branch office.  Tang was the plaintiff’s then deputy manager of that branch.  There was a dispute on whether Chu was present.  I do not think it a material fact as nothing turned on Chu’s presence or otherwise.  If Chu was indeed present, I think Tang had simply forgotten about him as his presence had no significance to the matters that developed from this meeting.

11.  At the meeting, the 1st defendant asked Tang whether the AG Bank LC was “clean,” meaning whether the terms were not complicated or difficult to comply with.  If payment was dependent on documentation to be issued by the buyer and the buyer could control payment, the 1st defendant would not deal with it.  Tang then read this LC and replied that it was clean and it should not be difficult to get payment under it. 

12.  It was common ground that the plaintiff through Tang and the 3rd defendant through the 1st defendant had agreed in the meeting that:

(1)     Sun Win would transfer the AG Bank LC to the 3rd defendant;

(2)     the plaintiff would increase the banking facilities to the 3rd defendant by adding a HK$5.5 million back-to-back LC facility;

(3)     the plaintiff would, on the application of the 3rd defendant and on the strength of the AG Bank LC, issue a back-to-back LC in favour of Kuang Chiang (“Kuang Chiang LC”) to pay the balance of the price for the machinery;

(4)     the machinery would be transhipped in Hong Kong;

(5)     the transportation of the machinery from Hong Kong to Nanchang, Jiangxi would be undertaken by Nan Song Travel Services Limited, a subsidiary of the plaintiff;

(6)     the plaintiff would present the AG Bank LC and the necessary documents to the AG Bank for payment and to apply the payment to settle any sum due under the Kuang Chiang LC;

(7)     any surplus after settling the Kuang Chiang LC would be credited to the 3rd defendant’s account with the plaintiff.

13.  There are, however, two disputes between the parties.  The first is whether the 3rd defendant would be liable to the plaintiff for the money paid under the Kuang Chiang LC in the event where the AG Bank should fail or refuse to pay the plaintiff under the AG Bank LC. 

14.  The second dispute is over the plaintiff’s capacity in seeking payment from the AG Bank.  The plaintiff said that the 3rd defendant had negotiated the bill of exchange under the AG Bank LC to it and it was seeking reimbursement from the AG Bank for its own benefit.  The 3rd defendant, however, asserted that it had not negotiated the bill of exchange with the plaintiff and the plaintiff was merely collecting payment from the AG Bank on behalf of the 3rd defendant and not in the plaintiff’s own right.  I will deal with these disputes below.

15.  After the said meeting, the 3rd defendant submitted an application for an irrevocable LC for US$652,015 in favour of Kuang Chiang.  Condition 13 at the back of the application stated that:

“13.   In the absence of any special arrangements, all amounts incurred by you (‘the plaintiff’) under or in connection with this Application or the Credit shall be repayable by us (‘the 3rd defendant’) in Hong Kong Dollars in Hong Kong forthwith on demand by you.”

16.  Pursuant to the application, the plaintiff duly issued the Kuang Chiang LC for US$652,015 on 2 February 1993.

17.  On 5 February 1993, the plaintiff issued the 3rd defendant with a new facility letter which increased the facilities by a HK$5.5 million back-to-back LC facility without requiring any additional security.  This additional facility was necessary for the Kuang Chiang LC as the original facilities for the 3rd defendant had all been scheduled for the 3rd defendant’s business purposes.

18.  Clause B of the facility letter dealt with the terms of repayment and duration of the facilities.  It stated:

“B     Terms of Payment and Duration

The above banking facilities are subject to our customary overriding right of repayment on demand before 30 September, 1993.”

19.  On 9 February 1993, the AG Bank LC was transferred by Sun Win to the 3rd defendant. 

Taking delivery of the machinery

20.  Kuang Chiang duly shipped the machinery by one Asia Pac Shipping Limited (“Asia Pac Shipping”) and the machinery arrived in Hong Kong on about 17 May 1993.  At that time, the documents prescribed in the Kuang Chiang LC were on the way from Taiwan and had not reached the plaintiff.

21.  In order to take delivery of the machinery from Asia Pac Shipping, the 1st defendant on behalf of the 3rd defendant submitted an application to the plaintiff on 17 May 1993, requesting the plaintiff to countersign a letter of indemnity to Asia Pac Shipping with a view to obtain delivery of the machinery without producing the bill of lading or other document of title.  In this application, the 3rd defendant confirmed to the plaintiff that it would be liable to the plaintiff for payment of the bill of exchange issued in connection with the Kuang Chiang LC even though the documents to be received from Kuang Chiang should contain discrepancies.

22.  The plaintiff and the 3rd defendant then executed a letter of indemnity and guarantee dated 17 May 1993 in favour of Asia Pac Shipping and then obtained delivery of the machinery without production of the bill of lading.  The machinery was then entrusted to Nan Song Travel Service Limited for delivery by train to Nanchang, Jiangxi.  It left Hong Kong on 25 May 1993. 

Payment under the LC issued by the plaintiff to the Taiwan seller

23.  The documents prescribed in the Kuang Chiang LC reached the plaintiff on 26 May 1993.  On 1 June 1993, the plaintiff paid Kuang Chiang US$652,015 under the Kuang Chiang LC through the advising bank, Corestates Bank NA, Taipei.

The 3rd defendant’s collection order to the plaintiff and payment thereof

24.  The 3rd defendant on 25 May 1993 submitted a collection order to the plaintiff for the plaintiff to obtain US$764,362.50 from the AG Bank under the AG Bank LC.  This order was made in a multi-purpose form.  The form could be used for obtaining an advance from the plaintiff on the security of an LC or for asking the plaintiff to collect payment from an LC-issuing bank.  It could also be used to negotiate with the plaintiff a bill of exchange issued under an LC.  In this particular case, the 3rd defendant had marked the box for “NEGOTIATION under DOCUMENTARY CREDIT”.  The 3rd defendant had thus prima facie sought to negotiate the AG Bank LC with the plaintiff.  Nevertheless, it is the 3rd defendant’s case that it had by this collection order only asked the plaintiff to collect payment on its behalf under this LC from the AG Bank.”

25.  Clause 1(a) of the terms and conditions of this order provided:

“1. Unless the bill is drawn and/or documents are presented under an Irrevocable Credit issued or confirmed by Nanyang Commercial Bank Limited (“The Bank”), I/we (the 3^rd defendant) agree that: -

a) notwithstanding my/our instruction not to protest the bill, The Bank retains recourse on me/us in the event of dishonour.”

Clause 5 also stated:

“5. Collections are subject to the Uniform Rules for Collection as shall from time to time be in force as published by the International Chamber of Commerce.”

26.  On 7 June 1993, the plaintiff presented to the AG Bank a bill of exchange, the original AG Bank LC and the prescribed documents for reimbursement of US$764,362.50.  The plaintiff stated in the covering form to the AG Bank that the documents were sent to the AG Bank for reimbursement and the negotiated amount (at US$764,362.50) had been endorsed on the reverse side of the original LC.

27.  On the same day, the plaintiff credited US$652,015 and US$760.68 to the 3rd defendant’s account to retire the Kuang Chiang LC.  The US$760.68 were the interests on US$652,015 from 1 June 1993 to 7 June 1993.  If the AG Bank should pay the plaintiff US$764,362.50, there would be a balance of US$111,586.82 which would then be credited to the 3rd defendant’s account. 

28.  The plaintiff on 7 June 1993 also debited from the 3rd defendant’s account the interest on (US$652,015 + US$760.68 =) US$652,775.68 from 7 June 1993 to the day of receipt of funds from the AG Bank (estimated to be 17 June 1993 at US$1,269.29), a commission in lieu of exchange for US$652,775.68, a commission for collecting US$111,586.82 and some postage and telex expenses totalling HK$17,723.22.

Agricultural Bank alleged discrepancies and refused to pay under its LC

29.  On 22 June 1993, the AG Bank advised the plaintiff that it would not pay under the AG Bank LC because of alleged discrepancies in the documents presented.  The alleged discrepancies were:

“(1)   There is no number on invoice (invoice was not numbered).

(2)     There is no initial signature beside correction seals on invoice, draft, packing list, and fax copy of shipping advice.

(3)     In 120MM RMP rogid pipe, making M/C model number KC/RP-120’ on packing list and inspection certificate.  ‘Rogid’ was illogically spelt according to the context (‘Rogid’ should have been ‘rigid’)

(4)     In RMP drying and grinding machines model number KC/DG-200, on inspection certificates appendix, ‘machines’ should have been ‘machine’.”

30.  The plaintiff did not accept that there were valid discrepancies and replied on 23 June 1993 to the AG Bank as follows:

“We are astonished at your SWIFT of 21 June.

(1) Invoice number is for beneficiary’s own reference only and is not a must.  Correction chop alone is an internationally acceptable practice for authenticating alteration.  As for the word ‘rogid’, neither you nor us is in a position to judge its logicality and correctness.  Lastly, machine and machines place no difference.  So far, quantity of goods is well-related and clearly identified among documents.  Please note one set machine may be composed of many part machines.

(2) Your advice of discrepancy if it really stands is given in clear violation of Article 16E as in relation to timing.  We reiterate documents comply strictly with LC terms.  Please effect immediate payment.  We reserve the right to claim delay payment interest from you.”

31.  Article 16E of the UCP400 stipulated that rejection by an LC-issuing bank should be given without delay.  Otherwise, the issuing bank would be precluded from relying on the discrepancies.  The plaintiff and the AG Bank then continued with the correspondence with each side repeating its own stance until 28 October 1997.  The 3rd defendant was fully informed of these exchanges.

Arbitration and Litigation in the Mainland

32.  Apart from the dispute between the banks, there were other disputes which resulted in litigation in the Mainland.  On 8 July 1993, Xinwei applied to the Intermediate People’s Court of Jiangxi to freeze payment under the AG Bank LC to Sun Win.  The ground was that China International Economic and Trade Arbitration Commission (in Beijing) (“CIETAC”) was going to arbitrate a claim lodged by Xinwei against Sun Win on the quality of the machinery.  Xinwei also provided security for this application.  The court allowed the application and froze the AG Bank LC on 13 July 1993.

33.  On 9 July 1993, Xinwei lodged a claim against Sun Win with CIETAC seeking a ruling that Sun Win had repudiated the purchase contract because the machinery was not up to standard and was of poor quality.  Xinwei had in fact on 6 July 1993 notified Sun Win that the purchase contract would be terminated and the machinery rejected.  Xinwei relied on an inspection certificate issued by the Jiangxi Import and Export Commodity Inspection Bureau dated 25 June 1993.  (That was not the inspection certificate stipulated in the AG Bank LC.)

34.  Sun Win raised a number of points in its defence.  It also sought damages caused by the freezing of the AG Bank LC.  CIETAC gave its decision and the reasons thereof on 18 March 1994.  CIETAC did not agree with Xinwei that the machinery was not up to standard as the purchase contract did not stipulate the particular standard that Xinwei had contended for.  On the question of whether the machinery was in compliance with the contractual requirement and could produce products of the proper quality, CIETAC was of the view that the machinery should first be installed and tested before these questions could be answered.  CIETAC thus dismissed Xinwei’s claim and further adjudicated that Xinwei could not refuse to pay the AG Bank LC.

35.  Xinwei did not comply with the arbitration award.  On 16 September 1994, Sun Win applied to the Intermediate People’s Court of Jiangxi for enforcement of the award.  This court on 5 December 1994 held that if the parties had difference over the inspection certificate issued by Jiangxi Import and Export Commodity Bureau, they should apply for an inspection de novo per the rules.

36.  Regarding the dispute on the payment of the AG Bank LC because of discrepancies, the court held that not until the machinery had been dealt with technologically and successfully inspected again, not until this LC dispute had been accepted for arbitration and not until it was proved that there was no discrepancy in the documents presented, CIETAC’s decision that Xinwei could not refuse to pay the AG Bank LC was beyond the scope of the arbitration, beyond the limits of CIETAC’s power and contrary to public good.  The court thus refused to enforce the arbitration award.

37.  On 21 July 1994, the 3rd defendant also sued the AG Bank in the Higher People’s Court in Jiangxi claiming payment of US$899,250 under the AG Bank LC.  The AG Bank defended the claim by saying that the 3rd defendant had already negotiated the AG Bank LC with the plaintiff for US$764,362.50.  Therefore, the AG Bank was no longer liable to make any payment to the 3rd defendant under this LC.  The AG Bank also relied on the alleged discrepancies between the terms of the AG Bank LC and the documents presented for reimbursement under it.

38.  The court gave judgment on 15 May 1995 and upheld the AG Bank’s defence on the alleged discrepancies and decided that there were discrepancies between the AG Bank LC and the documents presented and they were inconsistencies on the face of the documents themselves.  This court therefore concluded that the AG Bank was acting within the requirements of UCP400 in rejecting the documents.

39.  The court further held that the 3rd defendant had already negotiated the AG Bank LC with the plaintiff and received payment thereunder.  The plaintiff had not returned the documents to the 3rd defendant.  The court therefore held that the AG Bank was not liable to make payment to the 3rd defendant.

40.  The 3rd defendant then appealed to the Supreme People’s Court.  The court gave judgment on 17 November 1996 and held that the 3rd defendant had already received payment from the negotiating bank (the plaintiff) and realised its rights under the AG Bank LC.  The plaintiff’s request to the AG Bank for reimbursement was made to further the plaintiff’s own right.  The documents rejected by the AG Bank were still owned by the plaintiff.  The court therefore rejected the 3rd defendant’s claim for payment from the AG Bank.  The court upheld the Jiangxi Court’s decision to reject payment under the AG Bank LC, but it did not make it clear on whether it regarded the alleged discrepancies as valid.

41.  The plaintiff on 4 July 1996 also sued the AG Bank in the First Intermediate People’s Court in Beijing for payment under the AG Bank LC.  The claim was, however, dismissed on 17 February 1997 on the ground that the plaintiff could sue the Jiangxi branch of the AG Bank in accordance with section 49 of the Civil Procedure Law of the PRC, 中華人民共和國民事訴訟法第49條 and item 6 of section 40 of the Opinion on Certain Questions of the Appropriate Use of the Civil Procedure Law of the PRC, 關於適用中華人民共和國民事訴訟法若干問題的意見第40條第6項.

Further collection order by the 3rd defendant to the plaintiff

42.  Apart from the collection order dated 25 May 1993 relating to US$764,362.50, the 3rd defendant had on 21 April 1994 submitted another collection order to the plaintiff.  This time, the collection order was marked for “COLLECTION” of the balance of the AG Bank LC at US$134,887.50.  However, as Sun Win could not have obtained the necessary certificate from Xinwei certifying installation and debugging of the machinery, the AG Bank could and did refuse to pay.

Submissions and analysis

43.  On the above facts, the defendants raised the two issues mentioned above.  The second issue was whether the plaintiff was acting as a negotiating bank or a collecting bank when it tried to obtain payment from the AG Bank pursuant to the 3rd defendant’s collection order dated 25 May 1993.  This issue requires more discussion.  Despite the collection order was marked for negotiation, the defendants did not accept that there was a genuine negotiation by the plaintiff.  They submitted that the plaintiff was only a collecting bank trying to collect payment from the AG Bank on behalf of the 3rd defendant. 

44.  Counsel for the defendants referred me to clause 5 at the back of the collection order and submitted that the relationship of the plaintiff and the 3rd defendant was subject to the Uniform Rules for Collection (“URC”).  Though counsel accepted that the collection order was made on a multi-purpose form and it was open to the applicant to choose the particular purpose for which the form was to be used, counsel maintained that the URC had been incorporated into the order and the plaintiff’s position and capacity were governed by the URC. 

45.  Counsel also submitted that by reason of a number of matters, the plaintiff was merely the remitting bank and the 3rd defendant was the plaintiff’s principal.  These matters are:

(1)     The purpose of entrusting the plaintiff with the handling of all the documents to obtain payment under the AG Bank LC (irrespective of whether there had been negotiation of the AG Bank LC by the plaintiff).

(2)     There was an informal but established practice whereby the plaintiff was in possession of the 3rd defendant’s round company chop and was authorised by the 3rd defendant to use it when necessary when making amendments to documents in the outward bills department.

(3)     The plaintiff would correct discrepancies as the plaintiff’s customers would not have the expertise to identify and/or rectify discrepancies.  The plaintiff would, upon identifying such discrepancies, inform the clients and the clients would decide who (the plaintiff or the clients) should correct the discrepancy.

(4)     The plaintiff would inform clients of the existence of discrepancies in the documents for outward bills and ask them if they should be corrected or not.  In the circumstances where the discrepancies were more complex than mere spelling errors, the plaintiff would ask the clients for submission of new documents.

(5)     The plaintiff and the 3rd defendant had a long established relationship.  Tang had begun to serve the 1st and the 3rd defendants’ accounts since 1987/1988.

(6)     The 1st/3rd defendants trusted Tang’s advice and judgment in relation to LCs.

(7)     The 1st/3rd defendants relied on Tang’s advice in relation to the terms and conditions of LCs.

46.  However, counsel accepted that if “entrusting the plaintiff with the handling of all documents” in (1) simply means passing the documents to the plaintiff’s custody, then all these factors are also consistent with the plaintiff acting as the negotiating bank. 

47.  Counsel also referred to paragraph 20-075 of Benjamin’s Sale of Goods, 7th edition, which reads:

“Secondly, even if the banker negotiates a bill or grants the customer an advance against it, he usually requests the customer to sign a collection order which includes instructions concerning the procedure to be adopted if the bill is dishonoured.  It follows that most “discounting” transactions involve an element of agency.  Presumably, the banker can recover the amount advanced to the customer only if he follows these instructions and his merely adhering to the procedure laid down in the Bills of Exchange Act 1882 is, in such a case, inadequate.  Thus, the roles of a collecting banker and of a discounting banker are not mutually exclusive.”

However, counsel accepted that the collection order dated 25 May 1993 did not contain any instruction as referred to in Chitty. 

48.  Counsel then referred to Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Bank of China [2004] 3 HKC 119.  There are a number of features in that case which can be distinguished from this case.  The plaintiff bank in that case presented the documents to the defendant (LC-issuing bank) on 12 November 1999 seeking payment before it had made payment under the back-to-back LC issued by it.  It only paid under its LC on 19 November 1998.  On this later date, it also debited the sum paid against the import loan account of its customer, the applicant of the back-to-back LC.

49.  In the present case, the plaintiff had paid under the Kuang Chiang LC issued by it on 1 June 1993.  On 7 June 1993 and upon receipt of documents under the AG Bank LC, the plaintiff then credited US$652,775.68 to the 3rd defendant to retire the Kuang Chiang LC.  The present case is also not one of “without recourse” to the applicant.  The instructions on disposal of proceeds in the collection order also referred to proceeds/net proceeds.  It therefore did not necessarily refer to the total proceeds to be received but could refer to surplus proceeds after settling the negotiated sum.

50.  Counsel for the plaintiff placed emphasis on the following contemporaneous documents:

(1)     The AG Bank LC was expressed to be available by negotiation.

(2)     In the collection order dated 25 May 1993, the 3rd defendant expressly chose the option of “negotiation.”  The 1st defendant has not given any evidence to contradict this express instruction for negotiation as marked on the collection order.

(3)     On 25 May 1993, the 3rd defendant drew a bill of exchange on the AG Bank payable to the order of the plaintiff.  This is inconsistent with the plaintiff acting only as the collecting agent of the 3rd defendant.

(4)     The outward bills file of the plaintiff shows that on 7 June 1993, the plaintiff sought reimbursement from the AG Bank.  This would only occur where the plaintiff had negotiated the AG Bank LC.

(5)     On 7 June 1993, the plaintiff credited the 3rd defendant a sum of US$652,775.68 to settle the sum of US$652,015 paid by the plaintiff on 1 June 1993 under the Kuang Chiang LC plus the interest thereon from 1 June 1993 to 7 June 1993.  If plaintiff was only acting as the 3rd defendant’s agent, there would have been no source of funding for this credit.  Funding would only have been available if there was a negotiation of the AG Bank LC.

(6)     In various contemporaneous correspondence to the plaintiff, the 1st defendant on behalf of the 3rd defendant had used the word “negotiation” in Chinese to describe the plaintiff’s position and its relationship vis-à-vis the AG Bank LC.  The 1st defendant never used the expression “collection.” 

(7)     The 1st defendant confirmed under cross-examination that he wrote these letters based on his own understanding of the position.  The defendants had therefore admitted and accepted that the plaintiff had negotiated the AG Bank LC.  The 3rd defendant’s Mainland lawyers also referred to the plaintiff as the negotiating bank in their advice to the 3rd defendant.

(8)     In its claim against the AG Bank in the Mainland, it was the 3rd defendant’s case that the plaintiff was the negotiating bank.

(9)     The plaintiff in its correspondence with the AG Bank has consistently maintained that it had negotiated the AG Bank LC and was demanding payment in such a capacity.  In contrast, when the 3rd defendant submitted the collection order of 21 April 1994 to the plaintiff in relation to the balance of US$134,887.50 under the AG Bank LC, it was expressly marked for collection.  This distinction was also made clear in the plaintiff’s correspondence with the AG Bank.

51.  Regarding the defendants’ reliance on the fact that in a debit advice dated 7 June 1993, the plaintiff had charged interest on the “bill purchased” amount of US$652,015 and outward bill collection commission on the balance of US$111,386.82 and the plaintiff’s witnesses had said that the US$111,386.82 were to be collected by the plaintiff, the plaintiff’s answer is that there was only one set of documents; hence, only one negotiation of the AG Bank LC. 

52.  Secondly, Tang had also made it clear in his evidence that what had happened was that the plaintiff had paid the 3rd defendant a sum of US$652,015 first to retire the amount owing under the Kuang Chiang LC and would pay the 3rd defendant the balance of US$111,386.82 if the money should be received from the AG Bank. 

53.  Thirdly, this arrangement was obviously sensible and beneficial to both sides, because if the plaintiff were to pay the 3rd defendant the entire sum of US$764,362.50 upon negotiation, the 3rd defendant would have to pay interest on the balance of US$111,386.82 as well.  In that event, the plaintiff’s exposure would also be enlarged.  Hence, the balance at US$111,386.82 would only be paid by the plaintiff to the 3rd defendant when payment should be received from the AG Bank, but the plaintiff should be entitled to charge some handling fee for this balance which fee was expressed as the collection commission.  Such arrangement was not inconsistent with the plaintiff having negotiated the AG Bank LC.

54.  Counsel also referred to the oral evidence of the plaintiff’s witnesses who have all confirmed that the plaintiff had negotiated the AG Bank LC.  They said that given the involvement of transhipment in the present case, the plaintiff would only agree to issue the Kuang Chiang LC on a back-to-back basis by negotiating the AG Bank LC as the plaintiff would then have the beneficial interest in the AG Bank LC and thus more security.  Furthermore, the plaintiff would not have paid out US$652,775.68 to the 3rd defendant on 7 June 1993 to retire the 3rd defendant’s liability under the Kuang Chiang LC if the plaintiff had not negotiated the AG Bank LC.

55.  In contrast, the 1st defendant readily admitted under cross-examination and in answering the court’s question that at the meeting in January 1993, he did not discuss with Tang on the plaintiff’s role in relation to the AG Bank LC and they had only discussed the risk concerning compliance with the AG Bank LC.  Furthermore, the 1st defendant did not know about nor did he understand the plaintiff’s role in relation to the AG Bank LC.  He was also not concerned about it.  Once the money had been paid to Kuang Chiang under the Kuang Chiang LC, the 1st defendant was not concerned about how the money would be collected under the AG Bank LC.

The plaintiff was a negotiating bank in the first collection order

56.  I accept the evidence of the plaintiff’s witnesses as their evidence was clear, straightforward and reasonable.  The fact that the 3rd defendant would have been credited US$111,386.82 had reimbursement come from the AG Bank is neither here nor there.  It could not have changed the character of the transaction or the plaintiff’s capacity.  Clause 5 at the back of the collection order is also immaterial.  I find that this clause would only operate in the event that the plaintiff was asked to “collect” rather than to “negotiate”.  The URC did not apply to negotiation.  It only applied to “collection”.

57.  In the light of the documentary evidence and oral evidence, I find that the plaintiff had negotiated the AG Bank LC for US$652,775.68 pursuant to the collection order dated 25 May 1993 and had sought reimbursement of US$764,362.50 from the AG Bank on such basis.  The evidence for the plaintiff’s case is overwhelming.

58.  I also do not think that the plaintiff was acting partly as a negotiating bank and partly as a collecting bank.  That in fact is not part of the defendants’ case.  The defendants merely submitted as an alternative case that if the plaintiff had negotiated the AG Bank LC, there was still an element of collection vis-à-vis its relationship with the 3rd defendant.  In the absence of any special instruction in the collection order, I do not think there is a sound basis for this argument.

Other arguments

59.  The amended defence and counterclaim also contained an argument that even if the plaintiff had negotiated the AG Bank LC, the plaintiff had elected to assert ownership or entitlement under the AG Bank LC and was estopped from relying on any recourse agreement against the 3rd defendant.  I do not quite understand how this estoppel was constructed.  By negotiation, the plaintiff had indeed acquired the rights under the AG Bank LC.  On the defendant’s argument, if the plaintiff should have been estopped, it was estopped by the act of negotiation.  I do not think I can agree with this argument because it seeks to contradict the very agreement that the parties had. 

60.  There was also an argument based on the Control of Exemption Clauses Ordinance, Cap. 71 but that was expressly abandoned in the course of the trial.

61.  The defendants also submitted several arguments which appeared to be made on the basis that the plaintiff was merely a collecting bank.  I would refer to them for the sake of completeness.  They submitted that the plaintiff had failed to pursue the AG Bank for payment as there was no material discrepancy. 

62.  The frivolous nature of the alleged discrepancies is supported by the undisputed facts and authorities.  See Hing Yip Hing Fat v Daiwa Bank [1991] 2 HKLR 35 at 44G and NEC Hong Kong Limited v Industrial and Commercial Bank of China & Ors [2006] 2 HKLRD 645 at 662H to I, 663H to 664B per Stone J.  However, it cannot be denied that the plaintiff had responded to the AG Bank promptly and correctly over the discrepancies.  The plaintiff had in fact sent out repeated demands to the AG Bank for payment on the ground that there was no material discrepancy that could justify non-payment.

63.  The next argument is an alleged breach of duty by the plaintiff in not seeking an extension of time to present the documents under the AG Bank LC again.  Under UCP400 Article 47, the last day for presentation of documents under the AG Bank LC was 15 June 1993 which was 21 days after the goods had been delivered on 25 May 1993.  The AG Bank’s notice of rejection only came on 22 June 1993.  Any presentation of document on or after 22 June 1993 would be out of time. 

64.  Given the frivolous nature of the alleged discrepancies and the insistence on them by the AG Bank (the issuing bank) in all subsequent correspondence and the dispute between Xinwei and Sun Win, I do not think there was any realistic chance that Xinwei would have instructed the AG Bank to extend any time limit for the plaintiff to present any document again.

65.  The next argument was the plaintiff’s failure to sue the AG Bank in the appropriate forum and without delay as per the 3rd defendant’s instructions.  The plaintiff has filed expert evidence by a Mainland lawyer.  Such evidence was undisputed.  The plaintiff has sued the AG Bank in Beijing but its claim was dismissed on the ground that it should sue the Jiangxi branch of the AG Bank at the People’s Court in Jiangxi. 

66.  I accept the expert evidence that in the light of the Jiangxi Court’s favourable decisions on the frivolous discrepancies, there was no point for the plaintiff to go to Jiangxi to sue the AG Bank again.  I also accept that it is not a wise move for the plaintiff to sue the AG Bank in Hong Kong as such action would be met with a very strong application to stay on the basis of forum convenience.  I therefore do not think that the plaintiff can be faulted on this.  In any case, the plaintiff could only have sued in its own right if it was the negotiating bank.  If it was a collecting bank, it could not have sued as the right to sue would have vested in the 3rd defendant.

67.  There is a further argument that the plaintiff had failed to preserve the cause of action for the 3rd defendant.  There is also the plaintiff’s expert evidence that the claim against the AG Bank has been kept alive by regular demand letters issued by the plaintiff.  I would not want to go into this deeply as it is a matter of the Mainland’s law.  I would, however, observe that if the plaintiff was the negotiating bank, it would not have owed the 3rd defendant such a duty.  The 3rd defendant could also have restored the right to sue by paying off the plaintiff.

68.  I now refer to the first ground, which is a faint one, that the plaintiff would not have any right of recourse against the 3rd defendant over this back-to-back Kuang Chiang LC.  The evidence, however, does not support such argument.  All relevant contemporaneous documents show that there was a right of recourse of the plaintiff as against the 3rd defendant.  If the plaintiff should have been contented not to have any right of recourse against the 3rd defendant, it would have been simple and straightforward for it to have asked Sun Win to be the applicant of the Kuang Chiang LC rather than going through the trouble of having the AG Bank LC transferred to the 3rd defendant and increasing the banking facilities for the 3rd defendant.

69.  Having made the above findings, in particular the finding that the plaintiff was a negotiating bank, I do not think it necessary for me to go into the other arguments of the defendants which were constructed on the basis that the plaintiff was only a collecting bank.

70.  Finally, the defendants also relied on the principle that no one should be permitted to take advantage of its own wrong (Kensland Realty re Whaleview Investment Limited [2002] 1 HKLRD 87).  However, I do not think the plaintiff has committed any wrong to the defendants. 

Judgment

71.  I therefore give judgment to the plaintiff for the amount claimed with interest.  The rate would be at the plaintiff’s prime rate plus 5.5 per cent per annum, but I would not award any interest for the three years and three months prior to today as this is the period of inordinate and inexcusable delay on the part of the plaintiff in prosecuting this action (see the decision of Master J Wong dated 1 March 2005 in this action).

72.  I also order the 1st and 2nd defendants to deliver up vacant possession of the two mortgaged properties to the plaintiff. 

73.  I also make an order nisi that the 1st and 3rd defendants do pay the plaintiff the costs of this action on a solicitor-and-own-client basis.

74.  Regarding the 2nd defendant, I make an order nisi that she should pay the costs of this action to the plaintiff on the same basis but only up to the day when she ceased to be legally represented.

75.  I also note that most of the above relief has been set out in a draft order presented by the plaintiff save the suspension of interest for the last three years and three months and the costs liability of the 2nd defendant.  I give judgment in terms of the rest of draft order which reflects what I have ordered above. 

76.  If any party is unhappy about the costs orders nisi, there is the machinery for it to be revisited.  The judgment, once properly engrossed and corrected, will be sent to the parties.