NANYANG COMMERCIAL BANK, LTD v. MAN SAM KWAN AND OTHERS

CACV 418/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 418 OF 2006

(ON APPEAL FROM HCMP NO. 403 OF 1999)

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REASONS FOR JUDGMENT

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Hon Tang VP (giving the reasons for judgment of the Court):

Background

1.  By a purchase agreement dated 23 October 1992, Kuang Chiang Machinery Company Limited (“Kuang Chiang”), a Taiwanese company, agreed to sell certain machinery to Sun Win Industrial Limited (“Sun Win”), a Hong Kong company.  Under the agreement, a sum of US$899,250.00 was payable by letter of credit (“L/C”).

2.  Such machinery was intended for Jiangxi Xinwei Building Material Industry Company Limited (“Xinwei”).

3.  On 8 December 1992, the Agricultural Bank of China (“AG Bank”), opened a L/C for US$899,250.00 in favour of Sun Win on the application of Xinwei (“the AG Bank L/C”).

4.  The AG Bank L/C was irrevocable and transferable and available with any bank by negotiation.  Of the sum of US$899,250.00, US$764,362.50 would be effected against presentation of the relevant documents, the balance was to be paid “against written advice signed by (applicant) certifying qualification of equipments instalation (and) debugging”.

5.  At the request of Sun Win, the 3^rd defendant agreed to procure the plaintiff to open a L/C in favour of Kuang Chiang in the sum of US$652,015.00 (“Kuang Chiang L/C”).  At about the same time Sun Win became the beneficiary of the AG Bank L/C.  It is unnecessary to trace the steps whereby the 3^rd defendant became the beneficiary of the AG Bank L/C.

6.  The 3^rd defendant was a customer of the plaintiff.  At the material time, their relationship was governed by the General Commercial Agreement dated 9 October 1992 (“the General Commercial Agreement”), under which the 3^rd defendant enjoyed banking facilities from the plaintiff.

7.  The relevant facility letter was dated 5 February 1993, under which the 3^rd defendant was granted a “Back-to-Back Letter of Credit (no margin needed)” facility of HK$5.5 million.  It is common ground that this facility was to enable the 3^rd defendant to procure the plaintiff to open a letter of credit in favour of Kuang Chiang, which would in turn be backed by the AG Bank L/C.

8.  The 1^st and 2^nd defendants were joint and several guarantors to an unlimited extent of the 3^rd defendant’s liability towards the plaintiff.  In addition, legal charges to an unlimited extent was obtained in respect of 5th Floor, No.13 Knutsford Terrace, Kowloon, as well as Office 11, 19th Floor, Hong Kong Plaza, 188 Connaught Road West, Hong Kong.  These properties are also the subject of proceedings.

9.  In due course, the machines were duly shipped and arrived in Hong Kong on 18 May 1993.  They were then transhipped to Nanchang, Jiangsi.

10.  On 26 May 1993, Kuang Chiang through the advising bank, Corestates Bank NA, Taipei, presented documents under Kuang Chiang L/C for payment.  On 1 June 1993, the plaintiff paid US$652,015.00 under Kuang Chiang L/C to Kuang Chiang’s advising bank.

11.  On 7 June 1993, by a debit advice of that date, the 3^rd defendant’s account was debited with the sum of US$652,775.68 which was made up of the sum of US$652,015.00 as well as US$760.68 interest.

12.  By a “Collection Order” dated 25 May 1993, the relevant part of which is produced below, it was stated:

“	[the 3rd defendant] hand you draft and/or documents as under for disposal in accordance with the following instructions and subject to our General Letter of Hypothecation given to you and to the terms and conditions overleaf for:
	X	ADVANCE subject of final payment
		COLLECTION
		NEGOTIATION under DOCUMENTARY CREDIT”

13.  Thus, the documents were stated to have been handed to the plaintiff for “NEGOTIATION under DOCUMENTARY CREDIT”.  Such documents included a bill of exchange for US$764,362.50 dated 25 May 1993, drawn on AG Bank, Xinwei by the 3^rd defendant in favour of the plaintiff as the payee.  The bill of exchange was duly endorsed by the plaintiff as was required by the AG Bank L/C.

14.  The figure of $764,362.50 was made up of US$652,775.68, the amount which the plaintiff had debited the 3^rd defendant’s account, as well as a balance of US$111,586.82.  So far as US$111,586.82 was concerned, it is quite clear that the plaintiff was collecting this amount for the 3rd defendant.  Another debit note dated 7 June 1993 showed that the plaintiff charged the 3rd defendant an outward bill collection commission in respect of the balance of US$111,586.82.

15.  The relevant documents were couriered to AG Bank for payment on 7 June 2003.  The last day for presentation of documents under AG Bank L/C was 15 June 2003.  In presenting the documents to AG Bank, the plaintiff stated “we enclose the documents for reimbursement” as well as “we certify that the negotiated amount has been endorsed on the reverse of the original L/C”.  It appeared that the negotiated amount was stated to be US$764,362.50 (see C116).

16.  On 22 June 2003, AG Bank purported to reject the documents on the ground of discrepancies.  On the same day, the plaintiff informed the 3^rd defendant of the rejection.

17.  On 23 June 2003, the plaintiff sent a swift message to AG Bank, contending that there was no material discrepancies, and payment should be made under AG Bank L/C.

18.  It is common ground that the discrepancies were immaterial.

19.  On 9 July 1993, Xinwei commenced arbitration proceedings against Sun Win at China International Economic and Trade Arbitration Commission, in Beijing (“CIETAC”).

20.  On 13 July 1993, on the application by Xinwei through CIETAC, the Intermediate People’s Court of Jiangxi (“Jiangxi Court”) forbad payment under the AG Bank L/C.

21.  On 27 July 1993, the plaintiff by a swift message claimed that as a negotiating bank, it was entitled to be paid.  AG Bank replied stating that the matter was out of its control because payment under the AG Bank L/C had been frozen by the court.  Further exchanges between the plaintiff and the AG Bank led nowhere although they continued until at least March 1994.

22.  For the sake of completeness, we will deal briefly with efforts to seek recovery in the mainland.

23.  On 18 March 1994, Xinwei’s claim in the CIETAC arbitration was dismissed.  The arbitrators decided that Xinwei was not entitled to reject the machinery nor refuse to pay the AG Bank L/C.

24.  However, Xinwei did not comply with the arbitration award.  On 16 September 1994, Sun Win applied to the Intermediate People’s Court of Jiangxi for the enforcement of the award.  That court, on 5 December 1994, held that CIETAC had exceeded「超越仲裁范围与权限，违背社会公共利益。」, and refused to enforce the award.

25.  On 21 July 1994, the 3^rd defendant sued the AG Bank in the Higher People’s Court of Jiangxi, claiming payment of US$899,250.00 under the AG Bank L/C.  The court gave judgment on 15 May 1995, and appeared to have upheld AG Bank ‘s defence on the alleged discrepancies.  It concluded the AG Bank was acting within the requirements of UCP 400 in rejecting the documents.  The Court also held that the 3^rd defendant had already negotiated the AG Bank L/C with the plaintiff and received payment thereunder.  Further, as the plaintiff had not returned the documents to the 3^rd defendant, the Court held that the AG Bank was not liable to make payment to the 3^rd defendant.  The 3^rd defendant’s appeal to the Supreme People’s Court was dismissed on 17 November 1996.  The Supreme People’s Court held that as the 1^st defendant had already received payment from the negotiating bank, namely, the plaintiff, and the plaintiff’s request to the AG Bank for reimbursement was made to further the plaintiff’s own right, the documents rejected by AG Bank was still owned by the plaintiff.  However the Supreme People’s Court did not make it clear whether AG Bank was entitled to reject the documents presented for discrepancies.

26.  On 4 July 1996, the plaintiff at the request of the 3^rd defendant sued the AG Bank in the First Intermediate People’s Court in Beijing for payment under AG Bank L/C.  That claim was dismissed on 17 February 1997 on the ground that the plaintiff should sue the Jiangxi Branch of the AG Bank in accordance with section 49 of the Civil Procedure Law of People’s Republic of China (“PRC”), and item 6 of section 40 of the “opinion on certain questions of the appropriate use of the Civil Procedure Law of PRC”.

The proceedings

27.  In 1999, the plaintiff sued the 3^rd defendant, inter alia, under the terms of the general commercial agreement for the balance of US$559,127.35 under the AG Bank L/C, together with interests.  As for the 1^st and 2^nd defendants they were sued as joint and several guarantors. The plaintiff also sought possession of the mortgaged properties.

28.  After trial before Deputy High Court Judge L Chan, the plaintiff obtained judgment against all three defendants essentially as claimed.  The 2^nd defendant did not take part in the trial.

The appeal

29.  This is the appeal by the 1^st and 3^rd defendants.

30.  Ms Jessica Ng, who appeared for the appellants submitted that, although the plaintiff was the negotiating bank vis-à-vis AG Bank, the plaintiff acted both as negotiating bank and collecting bank so far as the 3^rd defendant was concerned, and as collecting bank, the plaintiff owed the 3^rd defendant the duty under Article 1 of the Uniform Rules for Collections, ICC No. 322, applicable at the time, to “exercise reasonable care”.

31.  She also submitted that insofar as the plaintiff acted as the 3^rd defendant’s agent as collecting bank, the plaintiff was under a duty to follow the instructions of the 3^rd defendant:

“	(1)	[pursue] the AG Bank by reason of the AG Bank’s breach of Article 16(e) of UCP400, in that any discrepancies raised were given too late to obtain payment under the AG Bank LC;
	(2)	[pursue]the AG Bank, to obtain payment by reason that there were no material discrepancies in the documents required under the AG Bank LC;
	(3)	[take] action on behalf of the 3rd Defendant, to issue proceedings against the AG Bank, subject to 3rd Defendant’s indemnity for costs, in order to obtain payment under the AG Bank LC.”

32.  Ms Ng submitted that “… the roles of a collecting banker and of a discounting banker are not mutually exclusive”.  Benjamin’s Sale of Goods, 7^th edition §22-075.  She also relied on what Milmo J said in Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527 at 538C:

“

I am unable to accept the contention that a banker cannot at one and the same time be an agent for collection of a cheque and a holder of that cheque for value. It seems to me that the language of section of the Cheques Act, 1957, negatives this proposition since it presupposes that a banker who has been given a cheque for collection may nevertheless have given value for it. It is, moreover, a commonplace occurrence for a banker to allow credit to a customer against an uncleared cheque. A banker who permits his customer to draw £5 against an uncleared cheque for £100 has given value for it, but is it to be said that in consequence he is no longer the customer’s agent for the collection of that cheque?”

33.  We agree that insofar as the plaintiff was collecting the balance (US$111,586.82) on behalf of the 3^rd defendant, the plaintiff owed the 3^rd defendant a duty to act in good faith and exercise reasonable care. 

34.  Thus, had the plaintiff failed to present the documents for payment, the plaintiff would be liable to the 3^rd defendant for the balance of US$111,586.82.  See Benjamin’s Sale of Goods, at para. 22-115 and Paget’s Law of Banking, 13^th Edition at para. 22.9.

35.  We make no comment on the plaintiff’s position in relation to the account of US$652,015.  In any event, we are not concerned with any such failure to exercise reasonable care.  The duties of care asserted by the 3^rd defendant are those set out in para. 31 above.

36.  Ms Ng submitted that such duties of care are either express or implied.  We do not agree.  No such express terms could be found. 

37.  Under the General Commercial Agreement, the 3^rd defendant agreed and undertook:

“	In consideration of (the Bank) …
	(a)	opening or establishing such documentary credits as you may think fit;
	(b)	collecting, purchasing, negotiating or otherwise discounting bills of exchange …;
		….
		(1)	To pay to you on demand, or, as the case may be, on their respective due dates without demand, all monies advanced to me/us …”

38.  The General Commercial Agreement went on to provide:

“	(6)	Without prejudice to any of your other rights powers and remedies whether conferred to you hereunder or by virtue of any other security, statute or rule of law or equity, I/we hereby agree that (inter alia) the following stipulations shall apply to all transactions whereby you have purchased or may from time to time purchase or negotiate or collect bills of exchange pursuant to my/our request, namely;-
		……
		(e)	Should any bill be dishonoured by non-acceptance or non-payment for any reason whatsoever, I/We shall pay to you on demand the amount of such bill.  In addition to your aforesaid right of full recourse against me/us in respect of a dishonoured bill, you or your agents are authorized to dispose of the goods to which such bill relates at your discretion and at my/our sole risk and expense without being under any responsibility in respect of such sale but before doing so you are requested (but shall not be obliged) to notify my/our agent if specified in the instructions accompanying the bill. You are further entitled at your discretion to protest or delay or withhold from protesting any bill which is dishonoured and to take any other steps you may think necessary to protect your interest therein.”

39.  These provisions are inconsistent with the suggested implied terms.

40.  Nor do the Uniform Rules for Collection support the 3^rd defendant’s submission.  Collection is defined in the Uniform Rules for Collection to mean:

“	1.	(i)	…the handling by banks, on instructions received, of documents as defined in (ii) below, in order to
			(a)	obtain acceptance and/or, as the case may be, payment, or
			(b)	deliver commercial documents against acceptance and/or, as the case may be against payment, or
			(c)	deliver documents on other terms and conditions.”

41.  The suggested duties to pursue or sue AG Bank fall outside the ambit of collection.  Indeed, as Ms Jessica Ng rightly accepted, as collecting bank the plaintiff had no right to sue in its own name.

42.  Indeed Article 17 which deals with specific instructions regarding protest supports the view that any duty of care owed related to collection only. 

43.  Moreover, as Ms Ng rightly accepted the plaintiff was the negotiating bank vis-à-vis AG Bank, and it is not contended that as such the plaintiff owed any duty to the 3^rd defendant to take action against the AG Bank.  The fact that the plaintiff was also the negotiating bank would not enlarge the scope of its duties as collecting bank.

44.  Nor would business efficacy require the implication of any such terms.  The simple solution would have been for the 3^rd defendant to pay the plaintiff, which it was contractually liable to do.  Upon payment to the plaintiff, the 3^rd defendant would have been able to proceed against the AG Bank in its own name.  The fact that the 3^rd defendant could not pay would not affect the legal position.

45.  The 3^rd defendant also complained that the plaintiff should have sued the AG Bank in Jiangxi and not in Beijing.  But as the judge said the plaintiff’s decision to sue in Beijing was supported by uncontradicted expert’s opinion on the matter.  The learned Deputy Judge also said, and with respect, we agree:

“

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.”

46.  We turn to what the learned judge described as a “faint” ground, namely that the plaintiff did not have any right of recourse against the 3^rd defendant.  It seems to be said that because of the back-to-back arrangement, the plaintiff had no recourse against the 3^rd defendant, at least until after the plaintiff had exhausted all remedies against AG Bank.  We agree with the learned Deputy Judge that:

“	All relevant contemporaneous documents show that there was a right of recourse …”

47.  The General Commercial Agreement also supports this view.  Nothing pleaded in the Re-Amended Defence shows otherwise.

Conclusion

48.  For the above reasons, we dismissed the appeal with costs.  It was agreed that contractually the plaintiff was entitled to costs on a solicitor and own client basis, and so we ordered.