SUMMER COMMODITIES TRADING LTD. AND ANOTHER v. SEQULIA CONFECTIONERY CO. LTD. AND ANOTHER

1998, HCA No. 493

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 493 OF 1998

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REASONS FOR ORDER

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1. On 7 July, 1998, the 1st Defendant applied for the discharge of the Injunction Order dated 10 January, 1998 enjoining inter alia the 1st Defendant from making any or further demand or request for or from receiving any payment under a letter of credit issued earlier by the Plaintiffs in favour of the 1st Defendant.

2. The applications were in fact related to 3 respective actions: the present action as well as actions Nos. 494 of 1998 and 495 of 1998. Since it was accepted by the parties that the issues involved in the applications in the 3 respective actions were the same, I will only refer to the present case; the same reasoning is applicable to the other 2 applications.

3. After having heard the parties and considered the materials, I dismissed the applications giving brief reasons for doing so. I informed the parties that full reasons would be given later and the following are the full reasons.

4. The Plaintiffs traded in confectionery products in Hong Kong. The 1st Defendant was a supplier of confectionery products in Korea. By an agreement made between the Plaintiffs (as buyer) and the 1st Defendant (as seller), certain confectionery products were sold and shipped to Hong Kong. Among the many involved factual disputes between the parties was whether the goods sold should be Sunflower Chocolates, as the Plaintiffs contend. When the goods arrived in Hong Kong, the Plaintiffs claimed that they were not the goods contracted for (that is, Sunflower Chocolates), but various other items including lollipops and Star War toys.

5. A letter of credit was issued by the Plaintiffs in favour of the 1st Defendant for payment of the contract price. The Plaintiffs contend in this action that the 1st Defendant had committed a fraud by shipping worthless goods to them. They further claim that the 1st Defendant was and is not therefore entitled to any payment under the letter of credit. Hence, the application for an Injunction Order to restrain the 1st Defendant from obtaining payment thereunder.

6. One of many factual issues raised by the 1st Defendant in its Defence was that there was an oral variation to the original contract resulting in some other goods being shipped to Hong Kong. There was complete performance of the contract as varied.

7. I do not think that in an application of this kind, I can, or indeed should, attempt to resolve these various involved factual disputes. In the circumstances of this case, even if I had wanted to, I do not think that it could be properly done. Indeed, neither party argued that I should do so.

8. By the end of the hearing before me, the issues between the parties have been narrowed down to a relatively short one: whether or not an Injunction Order should be granted against the 1st Defendant to prevent payment when the payment was to be made by way of a letter of credit. The basis advanced by Mr. Lam for the 1st Defendant in this discharge application was derived from:-

(a) the Judgment in the Singaporean Court of Appeal in Korea Industry Co. Ltd. v. Andoll Ltd [1990] 2 Ll. L. R. 183;

(b) the Judgment in the U.K. case of Hamzeh Malas & Sons v. British Imex Industries Ltd. [1957] 2 Ll. Rep. 549 (applied in the Andoll Ltd. case, above).

9. Both parties agreed that the relevant legal principles are as follows:-

(a) "in the ordinary course of events the Court would not restrain the payment of funds due under an irrevocable letter of credit; it would not do so simply because there was a dispute between the buyer and seller with regard to the contract underlying the letter of credit";

(b) "if there was or likely to be a fraudulent demand under the letter of credit .... the Court would restrain .... from making such payment under the letter of credit" ("the fraud exception") (see the headnote of the Andoll Ltd. case);

(c) an interlocutory injunction order will only be granted to prevent such payment if the plaintiff is able to show "that they had a seriously arguable case at trial that fraud was the only realistic inference." (see Themehelp Ltd. v. West [1996] Q.B. 84 at the footnote and at pp.98-99, 100-1 and 106-7).

10. Mr. Lam argued that the Plaintiffs had not been able to bring their case within the fraud exception. He agreed whether or not they were able to do so should be analysed on two basis:-

(a) the Plaintiffs failed to do so on their own evidence;

(b) even if the Plaintiffs' own evidence established such a seriously arguable case, their case was destroyed by the 1st Defendant's evidence. By saying that "their case was destroyed by the 1st Defendant's evidence", this is not meant to shift the burden of proof to the Defence. The legal burden of proof always rests with the Plaintiffs, the "burden" (used as a matter of convenience in the absence of a better term) is nothing more than an evidential one.

11. Mr. Lam did not dispute that the Plaintiffs' evidence, if accepted, shows such a seriously arguable case, but he submitted that the following evidence is tenuous and therefore ought to be rejected:-

(a) the evidence in the Plaintiffs' supporting affirmation relating to the alleged inspection of the shipped goods was tenuous. The deponent did not aver that "he" inspected the goods in Hong Kong but only averred that "we" did so;

(b) the surveyors' reports exhibited to the supporting affirmation were not made by way of sworn evidence. There was also a mistake in the reports as to when the vessel sailed to Hong Kong.

I have no hesitation in rejecting these arguments as having no substance.

12. Mr. Lam's alternative argument was that even if the Plaintiffs' supporting evidence established such an arguable case, this had been refuted by the 1st Defendant's evidence. The Court of Appeal observed in a number of Order 14 appeals, when leave to defend was given to the defendants, that the Court should refrain from making any comments which may prejudice the fair trial of the action. I consider that this observation of the Court of Appeal applicable here because the dispute in this action will need to be resolved at trial. For this reason, I do not think that it is appropriate to set out in detail why I disagreed with Mr. Lam and will therefore only say this:-

(a) while the evidence filed by the respective parties contained contradicting factual accounts, there was no undisputed or indisputable evidence (whether documentary or not) which materially affected the credibility of the Plaintiffs' affidavit evidence;

(b) Mr. Cheung for the Plaintiffs submitted that the part of the 1st Defendant's affirmation setting out the alleged oral variation to the types of goods sold to the Plaintiffs did not tally with the types of shipped goods as inspected by the surveyors in Hong Kong. He submitted that it is therefore questionable as to whether the 1st Defendant's account is truthful. Mr. Lam answered this point by drawing my attention to the 1st Defendant's explanation that some of the containers inspected did not have the original seal and the goods might have been tampered with. As I said earlier, this is not the forum to decide these issues but I agree with Mr. Cheung that the totality of the evidence falls far short of Mr. Lam's argument that the Plaintiffs had failed to establish an arguable case.

13. For the above reasons, I find that the Plaintiffs have shown a seriously arguable case of the fraud exception.

14. Mr. Lam did not advance any argument on matters relating to what the legal profession generally called "balance of convenience". Having examined the whole circumstance, I do not find that there was any matter relating to this limb upon which I could properly discharge the Injunction Order.

(Andrew Chung)

Deputy Judge of the Court of First Instance