FOREIGN EXCHANGE & INVESTMENT LIMITED v. LIU CHONG HING BANK LIMITED

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JUDGMENT

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Cons, V.-P.:

1. This is an appeal from the judgment of Rhind J. whereby he dismissed the Plaintiff's claim for H.K.$666,282.09 with interest thereon as from the 12th October 1983 until payment. It may be noted immediately that no evidence was called by either side before the learned judge, the submissions to him being based on a lengthy statement of Agreed Facts. With hindsight at least, that may not have been a wise move.

2. From those Agreed Facts it appears that at all material times one Mr. Chow Cham Leung ran an import/export firm in the name of the Hong Kong Oriental Corporation ("Oriental"). As such he exported goods to various customers in Venezuela. The customer who is at the root of the present litigation was a Casa Hong Kong SRL of Maracaibo ("Casa").

3. Oriental protected the credit it extended to those customers by taking out insurance with the Hong Kong Export Credit Insurance Corporation ("the Corporation") by means of their standard "Comprehensive Shipments Policy". Such a policy operates on a time basis, that is to say it will cover all shipments exported within a particular period. In the present instance Oriental's policy ran from the 1st July 1982 to the 30th June 1983. It did not give complete cover, being limited in any event to 90% of the value of any particular shipment, but in addition there was a limit on the total cover which might remain outstanding at any one time in respect of each of the several buyers scheduled to the policy. The limit in respect of Casa was originally set at H.K.$1.2 million, subsequently increased to H.K.$1.4 million.

4. Oriental financed the credit extended to its customers by discounting bills drawn on them with banks or financial institutions in Hong Kong. Its main banker was the Liu Chong Hing Bank Limited ("the Defendant").

5. Four shipments to Casa formed the foundation for the transactions material to this action. The first was on the 31st July 1982 and concerned goods to the value of U.S.$43,151. Oriental was financed for the shipment by the Bank of America, Mr. Chow putting up personal property by way of security.

6. The second shipment was on the 31st August 1982, this time to the value of U.S.$113,859. Finance came from the Defendant, with whom Oriental discounted the bill of exchange drawn on Casa. It is not expressly so stated in the Agreed Facts but it may be assumed that the discounting agreement provided for recourse to Oriental should the bill eventually not be met. For that purpose the value seems to have been calculated at H K.$659,686.57.

7. By way of security Oriental executed a "Letter of Authority" addressed to the Corporation which, after referring to the policy taken out by Oriental and the period which it covered, authorised the Corporation to pay direct to the Defendant -

"any claims and all moneys in relation to  claims which may become payable under the ,?above-mentioned Policy or under any addendum which may at any time be attached  thereto in respect of exports made to the buyer/s listed in the Schedule hereto during the above-mentioned period, and to accept the Bank's receipt in full discharge therefor. This authority is irrevocable except with the consent of the said Bank."

8. We are told that it is customary in the commercial world to treat a letter of this kind as an assignment by way of charge. This was the view taken by Pennycuick J. in Paul and Frank Ltd. v. Discount Bank (Overseas) Ltd. & Another ⁽¹⁾ .

9. The third shipment was on the 15th September 1982, of goods to the value of U.S.$119,357.52. The Defendant was unwilling to finance this transaction as Oriental had by then already drawn down to the full the facilities that the Defendant was prepared to extend to it. Oriental therefore approached the Plaintiff, a finance company, which agreed to assist and did so on the 29th September by purchasing the bill drawn on Casa. Before doing so the Plaintiff was handed a document obtained by Oriental from the Defendant (page 197 of the Appeal Bundle) which is referred to in the Agreed Facts as "a confirmation".

10. The fourth and final shipment was on the 5th October 1982, to the value of U.S.$124,988. In due course the Plaintiff again purchased a bill drawn on Casa, but before that happened certain correspondence had taken place. On the 29th October Oriental wrote to the Corporation (page 122). That letter must be set out in full -

11. Before the letter was sent to the Corporation Oriental obtained an indorsement thereon by the Defendant to the effect that-

12. The indorsement was authenticated by two authorised signatories of the Defendant.

13. On the 11th November 1982, the date that the Plaintiff actually purchased the final bill, Oriental obtained a further "confirmation" from the Defendant (page 129). It runs as follows -

 

(Signed for and 

on behalf of the Defendant) "

14. In February the following year the Venezuelan Government imposed a measure of foreign exchange control which precluded Casa from meeting its obligations under the four bills.That was a contingency covered by the Corporation's policy and in due course Oriental submitted a claim relating to all four shipments. In the appropriate space at the end of the claim form Oriental asked that the cheque in settlement be made payable as to the second shipment to the Defendant and as to the other shipments to the Plaintiff.

15. The total value of the four shipments, less 5% commission apparently deductible by the Corporation, was H.K.$2,357,911. However because of the maximum credit limit and the 90% provision in the policy all that was in fact payable was H.K.$1.26 million. That sum was sent to the Defendant by the Corporation on the 12th October 1983. On that day Oriental, both by itself and under the name of Mr. Chow, was indebted to the Defendant in a sum just under H.K.$2 million.

16. The following day the Plaintiff wrote to the Defendant, referring to Oriental's policy and to the second Letter of Authority on which it observed the Defendant had "declared an outstanding bill amount of H.K.$659,686.57". The Plaintiff requested the Defendant to send a cheque for the difference between 90% of that amount and the amount actually paid by the Corporation. (That difference is H.K.$666,282.10, the amount sued for). The Defendant did not oblige.

17. 0n the 12th November Oriental wrote to the Defendant in support of the Plaintiff, confirming "that we had all along assigned the benefit of the proceed of the above policy to them subject to your right under the said policy in respect of your unpaid bill for $659,686.57". The Defendant still did not respond.

18. In addition to the payment relating to Casa the Defendant received a further approximate H.K.$750,000 from the Corporation in  respect of other buyers scheduled to the policy. We have not been told when this was, but on the 23rd November the Defendant credited the grand total of payments, roughly H.K.$2.06 million to the various accounts of Oriental and Mr. Chow. The total debit stood at that time at roughly H.K.$2.08 million.

19. In January 1984, the Plaintiff issued its writ reciting in substance the history I have attempted to set out and putting its claim as being for moneys the property of the Plaintiff had and received on its behalf by the Defendant, alternatively as being moneys held on trust for the benefit of the Plaintiff. The judge below found both approaches misconceived, although perhaps he did not express himself that bluntly. The Plaintiff now appeals.

20. Mr. Litton for the Plaintiff concedes that any argument based solely on the second Letter of Authority is doomed to failure. That must be so, for the charge which the Defendant then obtained was only upon moneys which might become payable in respect of shipments exported between the 1st October 1982 and the 30th June 1983 ("the Second Period"). However due to the financial limit imposed by the policy itself the policy did not ever become operative in respect of that period. The maximum cover became exhausted at the time of the third shipment.

21. Mr. Litton contends instead for a prior interest. It will be recalled that the charge given to the Defendant, was, as subsequently amended with the Defendant' s consent, upon moneys which might become payable in respect of shipments exported between the 1st July 1982 and the 30th September 1982 ("the First Period"). It was alleged in :the, defence (page 57) that it was given to secure "debts drawn on general credit facilities given to the Defendant by Oriental", but the Agreed Facts indicate otherwise. At page 280 it is agreed -

"

This Letter of Authority was given by Oriental to the Defendant to secure amounts advanced on bills purchased from Oriental by the Defendant."

The wording is loose but the intent is clear. Then we know that in fact only one bill was purchased from Oriental - that is in relation to the particular customer we are concerned with. It follows that the Defendant's charge was, in the event, limited to securing that one bill. It follows also that if the security were realised for more than that amount, as eventually it was, the Defendant, after satisfying itself to that extent, would be bound to hold the balance of the moneys payable ("the excess") for the benefit of Oriental. However being Oriental's bankers, the Defendant would have a right of set off against any other moneys due to it at the time insurance moneys were paid, and "subject of course to their not having received notice of a valid charge created on that fund previously to the time when the right of set off arose"⁽²⁾.

22. During the course of the appeal the argument roamed over many interesting byways of the law that were thought to lead from the unusual circumstances of this case, but eventually the grounds of appeal were refined to the single suggestion that the Defendant did in fact have notice of such a like charge over the proceeds of claim under the policy in favour of the Plaintiff. It is not, I think, disputed that such a charge was created as between the Plaintiff and Oriental. The Agreed Facts (para. 4(b) at page 281) speak of "all the beneficial interest under the ECIC policy..... subject to the Defendant's claim of HK$659,686.57". The crucial question is whether the Defendant had notice thereof. Counsel for the Plaintiff submits that there is an inescapable inference not only that the bank did have such notice but that the Defendant actually consented to the arrangement.

23. Mr. Litton accepts that the documents in themselves do not constitute notice. They contain no mention of the excess, referring expressly to only the Second Period. But he asks us to look at the context in which those documents came to be made and he relies heavily on the "confirmations" given by the Defendant.

24. For my part I do not think the context as such is of any assistance. The documents were made in a context which embraced only the Plaintiff and Oriental. It extended to the Defendant only when the Defendant was asked "to confirm". Unfortunately the Agreed Facts give us little or no information as to how that was. At page 281 it is said -

"On the 29th September 1982 upon the request of Oriental, the Defendant gave a confirmation to Oriental (now page 33) who handed the same to the Plaintiff."

25. The "confirmation" in that case is no more than a copy of what appears to be a sheet from the Defendant's ledgers in the name of Oriental referring to the particular ECIC policy. It records inter alia that a bill for a certain number of U.S. dollars represented by H.K.$659,686.57 was purchased on the 10th September 1982 and it is endorsed in the bottom right hand corner with a signature "for and on behalf of" the Defendant.

26. At the foot of the same page of the Agreed Facts it is said-

"        On the 29th October 1982, Oriental wrote to ECIC (page 122)...... Mr. Chow Cham Tong then immediately took (the letter) to the Defendant for the attention of Mr. Cheng Wan Yen. Mr. Chow Cham Tong also talked to a representative of the Defendant on the phone and requested for the Defendant's consent for Oriental to transfer the benefit of the ECIC policy for the Buyer Casa Hong Kong from the Defendant to the Plaintiff. This was agreed by the said representative of the Defendant. A few days later Oriental obtained (the letter) from the Defendant (with the endorsement thereon)."

27. Counsel asks us to read the words "the benefit of the ECIC policy" to include the excess, but as has already been observed, the letter then under consideration by the Defendant referred only to the Second Period.

28. At the end of October the Plaintiff was considering the purchase of a second bill from Oriental and from page 283 of the Agreed Facts we learn -

"On the 11th November 1982 Oriental had obtained another confirmation from Mr. Chan Kai Tao of the Bills Department of the Defendant to the effect that up to 11th November 1?982, the outstanding bill drawn on Casa Hong Kong and purchased by the Defendant from Oriental was still for HK$659,686.57 (page 37). Before Mr. Chan gave such confirmation to Oriental, Mr. Chow had informed Mr. Chan that Oriental  needed such confirmation to prove to the Plaintiff that up to then, under the ECIC policy, how much credit limit covered by the policy had been utilised by bills purchased by the Defendant."

29. However that takes the matter no further. Although the cover provided by the policy was broken into two periods with reference to the Defendant and to the Plaintiff, the policy still remained as one policy and it was important in view of the monetary restriction imposed by the policy,and in order to find out whether cover was available with regard to the Second Period, to know what had already been utilised with regard to the First Period. It seems to me that Mr. Chan of the Bank would have assumed that the Plaintiff was concerned only for just that purpose. I see no reason why he should have assumed from the Plaintiff's inquiry that the Plaintiff had an interest in the excess under the First Period.

30. I accept that by issuing the confirmations that it did, the Defendant indicated, at least so far as the policy itself was concerned, that the Defendant had no interest beyond moneys due upon the one bill. But it does not necessarily follow that it knew therefore that any one other than Oriental had an interest in the excess. Indeed so far as the Plaintiff is concerned the Agreed Facts indicate the contrary.At page 285 it is agreed -

"It was the intention of Oriental all along to assign the benefit of HK$659,686.57 to the Defendant and US$119,357.52 and US$124,988.69 to the Plaintiff up to the limit of the policy and subject to default of payment of the bills. Any surplus from the claim should then be reverted back to Oriental for its benefit. The Defendant was not aware of such intention until receipt of the Plaintiff's letter .......... dated the 13th October 1983."

31. It is suggested that this passage should be read as though it was only the actual amounts referred to of which the Defendant was not aware until the 13th October. With respect I do not find that argument convincing.

32. For these reasons in my view the Plaintiff has not sufficiently established that the Defendant received notice of the charge, and the conclusion of the judge below was therefore correct I would dismiss the appeal.

Sir Alan Huggins, V.-P.:

33. I agree. The Defendant had at the material time an equitable charge over the proceeds of any claim under Oriental's policy in respect of the period from 1st July 1932 to 30th September 1982. Such claims could be made in respect of goods shipped whether to the order of Casa Hong Kong or of other persons. The security was realised when payment was made under the policy in respect of shipments to Casa Hong Kong made on 31st July, 31st August and 15th September 1982. No part of the moneys received by the Defendant was in respect of the shipment on 5th October 1982, the claim in respect of that shipment having been rejected by the Corporation on the ground that the limit of the policy had been reached in respect of the previous shipments, so that the shipment on 5th October was not covered.

34. The sum realised exceeded the debt secured and the excess would, in the absence of any other rights of the Defendant or third parties, have been payable to Oriental. At the time this security was realised the Defendant had no knowledge of the Plaintiff's claim to be assignee of the excess: it knew only that the Plaintiff had an equitable charge over the proceeds of claims under the policy in respect of the period from 1st October 1982 to 30th June 1983. That the Defendant had no knowledge of the Plaintiff's alleged right to the balance is an agreed fact: I do not read the statement of agreed facts in the sense contended for by the Plaintiff.

35. It seems to me that, once the Defendant realised its security, its right to set off any balance against the general indebtedness of Oriental crystallised: the further fact that it did not actually credit the account of Oriental immediately cannot assist the Plaintiff.

Fuad, J.A.:

36. I agree with the judgments just delivered, and that the appeal should be dismissed.

Sir Alan Huggins, V.-P.:

37. The appeal is therefore dismissed. We understand that the Defendant wishes to put forward argument with respect to the order for costs made below. We shall there for be pleased to hear argument generally as to costs on some other occasion, unless of course, the parties come to some agreement.

(1)   [1967] 1 Ch. 348 at 363G

(2)    Per Baggallay L. J. in Roxburgue v. Cox [1881] 17 Ch.D. 52O at 527