Ever Eagle Co. Ltd. v. Fortune Trading Co. Ltd.

IN THE COURT OF APPEAL

1993, No 69
(Civil)

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J U D G M E N T

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Nazareth, J.A.:

1. Having heard counsel we dismissed the appeal with costs to the respondent. We now give our reasons.

2. The appeal was against the oral judgment of the Chief Justice given on 16 April 1993, discharging an ex parte injunction restraining the 2nd defendant ("the Bank") from honouring a letter of credit it issued to the plaintiff ("Eagle"), payment of which is being sought by the 1st defendant ("Fortune").

3. The underlying facts are as follows. Eagle is a Hong Kong company incorporated under the Companies Ordinance and it acts for and on behalf of Wuhan City, in the Hubei Province of the People's Republic of China. Eagle's business in Hong Kong is, inter alia, import and export trading for and on behalf of Wuhan City. Part of that business is the importation of electrical appliances and machine tools and equipment into China. For that purpose, Eagle uses Cosmo Regent International Ltd ("Cosmo") as its buying or sourcing agent for such goods manufactured in Japan. Cosmo's managing director is Mr Masabumi Kawajiri, who is Japanese. Cosmo's duty was to introduce Japanese suppliers to Eagle and it would earn it's commission from those suppliers.

4. In September 1992 Eagle was required to purchase milling and drilling tools for China, and a quotation was obtained from Cosmo for 25,250 pieces of such tools ("the said goods") at a price of Japanese Yen 401,083,200. The supplier selected in Japan was Dion World Co Ltd ("Dion") and Eagle was asked to arrange for a letter of credit in Dion's favour. Eagle requested the Bank to open a letter of credit, and the latter accordingly opened LC No F-01-J-05376, which was sent to Dion's negotiating bank, the Tokai Bank Ltd in Tokyo.

5. About the middle of October 1992 at Dion's request, the LC was amended to be a "transferable" LC as Dion thought it might have difficulty in arranging for shipment of the goods and might require the assistance of Fortune, which was another trading company in Tokyo. The LC was transferred to Fortune.

6. Apparently at some time before 30 December 1992, it was discovered in Japan, by whom and in what circumstances is not made clear, that the goods were stolen property or as described in the correspondence "robbery goods". It is not revealed how Mr Kawajiri came to know, but he discussed the matter with Fortune. Fortune, on the next day, 30 December 1992, faxed Eagle informing it that the goods were "robbery goods at Japan" and indicated that they would cancel the LC on 5 January 1993 and send the original back to Eagle. They added "we are only acting exporter for this business, and we paid over Yen 10,000,000 to untrue supplier for part of purchase price purpose".

7. On Mr Kawajiri's return from Japan, Eagle asked him to get Fortune to arrange for the goods to be shipped back to Japan as they would not accept stolen goods. At the same time they informed the Bank and asked it to withhold payment of bills presented by Fortune.

8. Meanwhile the Bank on 30 December 1992 received a collection letter dated 28 December with enclosures from the Bank of California presenting a bill of exchange pursuant to the LC for Yen 82,882,800. On receiving Eagle's request which was said to have been because of "disputes", they agreed to withhold payment as Fortune would be arranging to cancel the bill and LC. However, as the negotiating bank continued to press for payment they urged Eagle to procure cancellation. Eagle were not able to do so, and instead applied for and secured the ex parte injunction from Wong J. on 18 January 1993. The injunction was continued by the order of Mortimer J. made on 12 February 1993, until discharged by the Chief Justice for the following reasons:

"On the facts, and on the authority of Bolivinter Oil S.A. v Chase Manhattan Bank (1984) 1 WLR 392 and Harbottle Ltd v National Westminster Bank (1978) 1 QB 146, 155F-G, 156A, the autonomy of the letter of credit is to be considered quite separately from the underlying contract between Ever Eagle Co Ltd and Fortune Trading Co Ltd. It would seem that the Plaintiff's remedy may be sought from that suggested by Donaldson M.R. in the case of Bolivinter (supra), i.e. to seek restrictions upon the freedom of Fortune Trading Co Ltd and deal with the money after they have received it."

9. At the outset of the hearing of this appeal, the Court drew the attention of counsel to the principle that "the courts can only intervene ... by way of [interlocutory] injunction or by way of ancillary relief required by a party to proceedings who asserts a cause of action against the other party (United Trading Corp. SA v Allied Arab Bank Ltd [1985]2 Lloyd's Rep 554); and that "The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action" (per Lord Diplock in the Siskina [1979] AC 210 at 256). In the result Mr B.K. Ho for Eagle sought leave to amend the writ by inserting the following additional claim:

"Damages for breach of the second Defendant's duty as a banker owed to the Plaintiff in seeking to pay or honour bills which the second Defendant knew were presented by the First Defendant tainted with criminality or fraud."

Thereupon, without actually granting leave to amend, we permitted him to make submissions upon the basis of such grounds of action, i.e. criminality or fraud.

10. There is now a wealth of authority on the propriety of interlocutory injunctions to restrain the honouring by banks of letters of credit. We find it convenient to state the position in the way set out by Hirst J. in Tukan Timber Ltd v Barclays Bank Plc [1987]1 Lloyd's Rep 171; 174; 175:

"It is of course very clearly established by the authorities that a letter of credit is autonomous, that the bank is not concerned in any way with the merits or demerits of the underlying transaction, and only in the most extremely exceptional circumstances should the Court interfere with the paying bank honouring a letter of credit in accordance with its terms bearing in mind the importance of the free and unrestricted flow of normal commercial dealings....

As stated in the leading case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978]1 Lloyd's Rep. 166; [1978] QB 159, only if the bank has notice of a clear fraud committed by the beneficiary is the Court entitled to interfere. ...

... The evidence of fraud must be clear, both as to the fact of fraud and as to the bank's knowledge. The mere assertion or allegation of fraud would not be sufficient (see Bolivinter Oil SA v Chase Manhattan Bank NA [1984]1 Lloyd's Rep 251)"

11. The only evidence of fraud before us is the reference in Fortune's fax to Eagle on 30 December 1992 that they were very surprised to hear that the goods were "robbery goods" and that they would cancel the bill of exchange and return the LC. That evidence is equally consistent with Fortune having been told that it was suspected that the goods had been stolen. Mr Kawajiri's account (which does not come from any affidavit of his, but is recounted by the vice general manager of Eagle) reveals little and does not take the matter much further. The vice general manager states that Mr Kawajiri informed him that the goods shipped by Fortune were stolen goods obtained from a robbery in Japan and assured him that he should not be concerned as Fortune had admitted the goods were stolen goods and their mistake in buying them from a dubious source. It was said that later Fortune changed their minds because they could not get the money they had paid to the supplier who had supplied them with the stolen goods. Mr Kawajiri on 26 January 1993 faxed the Bank stating that he did not accept the shipment was in good condition, that the inspection certificate was not a true copy, and that there was some dishonesty on the part of Fortune. That in substance is the sum total of the evidence. We are far from persuaded that such bare allegations can be clear evidence of fraud. Likewise we are not persuaded that the evidence establishes clear knowledge of fraud on the part of the Bank.

12. Turning then to Mr Ho's submission on criminality, he relies upon City of London Cord. v Bovis Construction Ltd [1992]3 All ER 697 as authority for the proposition that an interlocutory injunction will be granted to prevent infringement of criminal law. Assuming, without accepting, that such an injunction would be granted without something more than mere infringement of the criminal law being first shown, we turn to Mr Ho's submission that in paying out the bill of exchange the Bank would be aiding and abetting the disposal of stolen property; and that further or alternatively it would be aiding and abetting the commission of the offence of obtaining by deception, in that Fortune, in pressing for payment of the bill, must represent that it had good title to the goods. It seems to us plain that criminality, no less than fraud, has to be shown by clear evidence, which as we have said, is lacking. Upon that basis, the submission fails in limine. Moreover as has already been seen, the letter of credit is autonomous, and the Bank is not concerned in any way with the merits or demerits of the underlying transactions. As pointed out by Lord Diplock at p.183 D of United City Merchants v Royal Bank of Canada (HL(E)) [1983] AC 168, albeit in relation to a confirming as opposed to an issuing bank, the banks "deal in documents and not in goods" as article 8 of the Uniform Customs puts it. To address the matter in terms of the buyer's right to reject the goods would, as his Lordship pointed out at p.185E, "destroy the autonomy of the documentary credit which is its raison d'etre; it is to make the seller's right to payment by the confirming bank dependent upon the buyer's rights against the seller under the terms of the contract for the sale of goods, of which the confirming bank will have no knowledge."

13. We see no reason therefore why this Court should interfere with the Bank honouring the letter of credit in accordance with its terms.

14. Returning then to the absence of any assertion of a cause of action against the Bank, we are unable to see any grounds upon which such an assertion could properly be made, and in this respect also conclude that the interlocutory injunction sought cannot be justified.

15. The foregoing reasons in our view required the appeal to be dismissed.