NORTH ASIA LTD v. JINGDONG E-COMMERCE (TRADE) HONG KONG CORPORATION LTD

HCA 1006/2023

[2023] HKCFI 1971

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1006 OF 2023

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D E C I S I O N

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A.  Introduction

1.  On 30 June 2023, this matter first came before me as the Summons Judge. That was the first hearing of the inter partes summons (the “Summons”) of 27 June 2023 taken out by the plaintiff (“P”) for an injunction to restrain the defendant (“D”) from presenting or enforcing a Standby Letter of Credit issued on 22 July 2022 which P has previously provided to D (“SBLC”).

2.  One feature of the SBLC which bears upon the further conduct of the case is its expiry date. It is 23 July 2023. Hence, if any interim injunction, or even just interim-interim injunction, is to span beyond 23 July 2023, D could permanently be deprived of any benefit which it may otherwise derive from the SBLC.

3.  In the light of that, during that hearing on 30 June 2023, and upon D’s undertaking not to present the SBLC on or before 13 July 2023, I gave parties by consent tight deadlines for filing evidence, and adjourned the Summons to 13 July 2023 for substantive hearing – hence the present hearing.

4.  Ms Sheena Wong appears for P. Mr Martin Ho with Mr Ian Yu appear for D.

B.  Relevant affirmations

5.  On 27 June and 11 July 2023, P filed in support and in reply the affirmations of Cheng Chun Fung (“Cheng”, and “Cheng/Aff1” and “Cheng/Aff2” respectively). Cheng is a director and shareholder of P.

6.  D on 7 July 2023 filed in opposition the affirmation of Pan Lan[1] (“Pan” and “Pan/Aff”). Pan is a senior sales manager of D.

C.  Background facts

7.  P engages in trading business.

8.  Prior to its co-operation with D, to perform purchase orders placed upon it by its customers, P sourced its goods directly from its suppliers. Payment of cash to its suppliers upon delivery (“COD”) was required.

9.  Sometime in July 2021, P started to co-operate with D. They entered into an agreement dated 21 July 2021, entitled “Master Sale and Purchase Agreement” (the “Master Agreement”). As explained in the affirmations, D allowed P thereby to place orders in its name for goods which P would otherwise have sourced directly from its suppliers. Both P and D would benefit from the arrangement. P would not be required to pay its suppliers on a COD basis, but only to D 20% of the price marked up by 1.6% as the initial deposits (the “20% Deposit Arrangement”), and would have a further period to settle the balance. P would also thereby have access to suppliers and the benefit of more competitive price as a result of D’s purchasing power. D would pay the suppliers directly, and would in return have the benefit of the 1.6% mark-up.

10.  In relation to the Master Agreement, and in so far as relevant:

(a)  Shipment and delivery are governed by Clause 3.2, that unless otherwise specified, D shall deliver to P or any other party designated by P as set forth in the purchase orders;

(b)  It appears common ground that the goods so ordered would be delivered by suppliers to D’s warehouse. What is not agreed is the exact mechanism for pick up, and in particular the role of what P has described as “Pick Up Notes”, which it says is a prerequisite document for collection;

(c)  Payment is governed by Clause 4: 20% deposit within 7 business days after submission of purchase order, and balance of 80% “within 30 calendar days after receiving Products”.

(d)  According to Clause 8, the initial term of the Master Agreement shall be a period of one year from 21 July 2021, and shall thereafter be automatically renewed for additional successive terms of one year each unless at least thirty days’ written notice has been given before the last day of the current term;

(e)  According to Clause 9.8, no modification or amendment to any of its terms shall be binding unless set forth in writing and signed by the parties.

11.  In July 2022, a further agreement dated 6 July 2022 was entered into (the “Sales Agreement”).

12.  The Sales Agreement is in English and simplified Chinese. The version in simplified Chinese is fuller. Some blanks in the English version were not filled in. According to Clause 11 of the Sales Agreement, in case of differences, the Chinese version prevails.

13.  Clauses 2 to 4 of the Sales Agreement is in the following terms:

“2.  Trade terms 贸易条款：买方自提

Port of departure 启运港：根据采购订单

Port of destination 目的港：根据采购订单

3.  Acceptance method: The buyer and the seller inspect the goods in the seller’s warehouse and deliver the goods. The seller is only responsible for the appearance of the goods handed over to the buyer. After the delivery is completed, the ownership of the goods is transferred, and the seller no longer assumes any responsibility for the goods.

验收方式：买卖双方在卖方仓库验货交货。卖方只对交接给买方的货物外观负责。交付完毕后，货权由卖方转移到买方，卖方不再承担任何关于货物的责任。

4.  Payment 付款：

  T/T: 20% of the total order amount shall be paid within 5 days from the date of signing the contract order; the remaining [blank] % shall be paid within [blank] days. The buyer shall pay balance before delivery.

自合同订单签订之日起5天内支付订单总金额的20%；余款80% 60天内支付，支付余款后交货。

  Other payment methods: The standby letter of credit for the specified amount shall be issued after the signing of the order, and 100% payment shall be paid before delivery.

其他付款方式：合同订单签订后开具指定金额的备用信用证，100%货款在提货前付清。”

14.  For the purpose of the Sales Agreement, and on 25 July 2022, HSBC issued the SBLC in favour of D. The receiving bank is Standard Chartered Bank. P is the applicant. D is the beneficiary. The undertaking amount is US$8,000,000. It is available by sight. The “Document and Presentation Instructions” states inter alia that:

“BENEFICIARY'S SIGNED CERTIFICATE[2] CERTIFYING THAT BENEFICIARY HAS MADE SHIPMENT OF THE REQUIRED GOODS AND HAS SUPPLIED THE REQUIRED DOCUMENTS TO BUYER AND HAS NOT BEEN PAID AT SIGHT OF THE INVOICE DATE.”

15.  About the same time when the Sales Agreement was signed, D suspended and eventually closed down its trading services.

16.  Upon and despite the closing down of D’s trading services, there remained a number of outstanding purchase orders which P had placed with D (the “Outstanding POs”). According to Cheng/Aff2[3], there were 17 of them. They were placed between 29 June and 21 July 2022 – Batch (or Order) Nos 57 to 60 on 29 June 2022, 62 to 65 on 7 July 2022, 66 to 68 on 15 July 2022, and 69 to 74 on 21 July 2022. Also according to Cheng/Aff2, and supported by bank transfer documents[4], 20% deposits for all of them had been paid by book transfer by and via Standard Chartered Bank.

17.  P says that all those orders were placed under the Master Agreement. It points to the payment of the 20% deposits, so that it says the use of the SBLC was not engaged.

18.  According to Pan/Aff, P currently owes D more than US$15 million in outstanding payments. D places emphasis on Batch (or Order) Nos 63 to 68 (the “Outstanding POs 63-68”). They were placed between 7 and 15 July 2022, after the date which the Sales Agreement bears. The aggregate of Outstanding POs 63-68 is US$9,641,773.78, already larger than the undertaking value of the SBLC.

19.  D had presented the SBLC once. P says that that was wrongful, as the SBLC was not provided to cover purchases under the Master Agreement. P says further that there could not have been the Certificate as required, as no Pick Up Notes had been issued. The presentation had subsequently been withdrawn. P bore the expenses of US$20,000. P says that D has threatened to present the SBLC again, regardless of whether it would be wrongful to do so.

20.  On 27 June 2023, P took out the Writ herein with general indorsement. P seeks damages for breach of the Sales Agreement. It also seeks an injunction restraining D from presenting or enforcing the SBLC. On the same day, the Summons was issued.

D.  Parties’ stances

21.  Ms Wong submits that the Summons should be allowed. She submits that P has a strong case and good prospect of success on the merits. The threatened drawdown is a breach of the term that payment under the SBLC shall only be used as an alternative payment method. The Outstanding POs were all placed under the Master Agreement. 20% deposits had in fact been paid. The SBLC is not engaged. The threatened drawdown would further or alternatively be a breach of the implied term that D would not act dishonestly. Withholding the injunction sought would cause P irreparable harm. The contrary would not be true for D, and balance of convenience is in favour of grant.

22.  Mr Ho submits that the Summons should be dismissed. He submits that letters of credit are treated as equivalent to cash. To obtain the injunction sought, P faces a higher merits threshold. But there is no term, express or implied, which restricts D’s right to present the SBLC to only those orders placed pursuant to the Sales Agreement. The Master Agreement and the Sales Agreement are not separate agreements. The sums due and owing have been treated as one composite debt. The SBLC covers the purchase of electronic components, with no distinction between the Master Agreement and the Sales Agreement. P’s case based on the Pick Up Notes is not understood, and is not consistent with the terms of the Sales Agreement. In any event, Outstanding POs 63-68 post-date the Sales Agreement. The total of their outstanding sums alone exceeds the value of the SBLC. P is admittedly indebted to D. D may forthwith present a winding up petition against P. The value of the goods which D is holding has dropped in value. And despite all those matters, D is willing to proffer an undertaking (“D’s Proposed Undertaking”) that if it presents the SBLC, the proceeds of the same will be paid into a stakeholder account or into court pending the substantive determination of P’s liability under the Master Agreement and the Sales Agreement, for which D will make a counterclaim.

E.  Discussion

23.  As can be gathered from the authorities[5], letters of credit are treated as cash. The general principle is that the court will not grant an injunction interfering with their presentation or enforcement even though there may be disputes relating to the underlying transactions. The position remains the same whether the injunction is directed against the bank or the beneficiary. The difference is mere mechanics.

24.  To that general principle there are exceptions. One is the fraud exception (the “Fraud Exception”). In that regard, and as observed by Deputy Judge Dawes SC in JML-Craft at §20:

“In order to restrain the enforcement of an on-demand bond in the interlocutory stage on the basis of the Fraud Exception, the court must be satisfied that it is seriously arguable that the only realistic inference on the facts is that there has been fraud by the beneficiary and that the bank (payor of the bond) was aware of the fraud: see for example Alternative Power Solution Ltd v Central Electricity Board [2015] 1 W.L.R. 697, at §59, cited with approval in West Kowloon Cultural District Authority v AIG Insurance Hong Kong Ltd [2020] HKCA 778. This is a high threshold.”

25.  One other apparent exception is where the beneficiary has entered into an express or implied agreement with the applicant not to drawdown (the “Agreement Exception”), in which case the court is free to enforce the negative promise by injunction. I say that this may only be an apparent exception because if the parties have reached such an agreement, the general rule may not apply, so that one does not start to talk about any exception. However, in this case, nothing turns on this point.

26.  I bear in mind also the factor that, in the light of the imminent expiry date of the SBLC, the grant or refusal of the injunction sought may have the effect of finally disposing of the action[6].

27.  In the light of the above, parties accept that P faces a higher evidential burden in proving merits than is required in ordinary matters to which American Cyanamid applies. As observed by Chow J (as he then was) in Grande Cache at §32:

“… that threshold has variously been described as ‘it is positively established that the party was not entitled to draw down’, or ‘a strong case’ has been shown, or ‘the 'serious issued to be tried' threshold is in practice a more difficult one to overcome’, or ‘it has been clearly established that the beneficiary is precluded from making a call by the terms of the contract’. All these different formulations seem to me to convey the same idea, and probably would not lead to any different result in practice.”

28.  On the facts before me, and for the following reasons, I am of the view that P has made out a case to the requisite high threshold that on a proper construction of the express terms, the parties have agreed that the SBLC shall be used as an alternative payment method under the Sales Agreement, so that the SBLC is not available for payment of the Outstanding POs, so that the Agreement Exception is engaged:

(a)  On the face of the Master Agreement and the Sales Agreement, they are separate agreements;

(b)  Within the Master Agreement there is a mechanism for its automatic continuation or termination. On the evidence, no written termination notice has been serve, and none has been produced;

(c)  The terms of the two agreements are materially different. I point in particular to the respective terms on delivery and payment, which I have recited or summarised above. I highlight the point that under the Master Agreement, payment of the balance of 80% is “after receiving Products”, whereas under the Sales Agreement, it is “before delivery”;

(d)  On the evidence, I do not accept that the Master Agreement was somehow varied by the subsequent Sales Agreement, as D is apparently suggesting. No explanation has been put forward as to how the terms governing purchase orders placed under the Master Agreement which remained outstanding would or could have been retrospectively varied by the Sales Agreement. No document expressly recording such variation has been produced. I heed also in this regard Clause 9.8 of the Master Agreement summarised above;

(e)  According to the terms of the Master Agreement, payment of purchase orders placed pursuant to it does not involved the use of the SBLC. It came into being only as a result of the Sales Agreement;

(f)  Under Clause 4 of the Sales Agreement, there are expressly and clearly 2 alternative methods of payment (respectively “Alternative 1” and “Alternative 2” in the order they are set out in Clause 4). They are true alternatives, as their terms are different, and are inconsistent with one another. In particular, if Alternative 2 is adopted, payment of 20% deposits is not necessary, which is required under Alternative 1;

(g)  As expressly set out, only Alternative 2 involves the use of the SBLC;

(h)  There is no provision for any combined or mixed use of the 2 methods, eg payment of 20% deposits within 5 days of purchase orders and the rest covered or guaranteed by the SBLC;

(i)  I have considered the interpretation which Mr Ho has put forward, that Alternative 1 goes only to the timing, with Alternative 2 to the mode, so that they in effect are complementary of one another. For the plain wording of the clause (in particular the words “Other payment methods” or “其他付款方式”), and on the factual matrix before this court, I do not accept that interpretation;

(j)  The contemporaneous conduct of the parties is consistent with the use of the SBLC having been agreed to be confined to (1) payment of goods ordered under the Sales Agreement, and (2) when Alternative 2 is adopted but not when 20% deposits having been paid (the “Agreed Use”);

(k)  Whilst the Sales Agreement bears the date of 6 July 2022, according to Cheng[7], the version countersigned by D was only posted to him on the 21^st, and he only received it on 24 July 2022. Importantly, the SBLC was not issued until 25 July 2022;

(l)  I refer to the Outstanding POs. I note that they (including Outstanding POs 63-68 which D heavily relies on) were all placed on or before 21 July 2022, before the issue of the SBLC;

(m)  I note further, and importantly in my view, that P paid D 20% in respect of all the Outstanding POs. D does not dispute that – see §§10 and 28 of Pan/Aff. The deposits were all paid prior to the issue and provision of the SBLC;

(n)  On the evidence, it appears clear that parties’ entry into the Sales Agreement was so as, on P’s part, to obviate the need to pay the 20% deposits so as to free up its fund flow further, and on D’s part, to have the SBLC so as to mitigate the added risk of not having any deposit. If the SBLC had been agreed or were intended to cover any of the Outstanding POs, I see no commercial reason why P would still have paid the 20% deposits, thereby defeating the purpose of having the Sales Agreement in place;

(o)  As I have said, D relies heavily on the fact that Outstanding POs 63-68 post-date the date which the Sales Agreement bears. But bearing in mind the fact that they were placed before the issue of the SBLC, and that P had paid 20% deposits for all of them, I do not agree that they are necessarily placed under the Sales Agreement. On the evidence, the much stronger inference is that they were not, but were placed under the Master Agreement, and that even if they were placed under the Sales Agreement, Alternative 1 had been adopted as their payment, which did not involve the use of the SBLC;

(p)  D relies on the Repayment Agreement[8]. Mr Ho submits that it is significant as P acknowledged that there is a single debt of US$16,681,418.43 under both the Sales Agreement and the Master Agreement[9]. I do not agree. P only acknowledged 11 sums in the total amount of US$16,681,418.43. That is neutral;

(q)  I have considered the complaint letters written by P to the Standard Chartered Bank, and the letter from P’s lawyers. Mr Ho submits that they are not consistent with the case P is now running. But at the same time, he fairly accepts that none of the apparent inconsistencies have been tested. I accept also Ms Wong’s submissions that they do not materially alter the objective interpretation of the agreements and Clause 4 of the Sales Agreement as this Court has undertaken above;

(r)  In the circumstances, I am of the view that P has made out a strong case of the Agreed Use. D is now seeking to use the SBLC in effect as a guarantee to cover the balance of the 80% that did not involve the use of the SBLC. That is in my view outwith the Agreed Use;

(s)  The Agreement Exception is engaged. On the evidence, and upon the above analysis, P has established a strong case in that regard.

29.  On adequacy of damages, irreparable loss and balance of convenience, I have also taken the following points into account:

(a)  D says that the grant of any injunction would “irrevocably destroy the security (in the form of the SBLC) to which [D] is entitled ”[10]. That begs the question as to whether D is to start with entitled to present the SBLC as security for the balances of the 80% in relation to the Outstanding POs. For the reasons set out above, I am of the view that P has made out a strong case that D is not;

(b)  D further says that if the SBLC as security is destroyed, “any subsequent judgment obtained by [D] would only be a paper judgment.”[11] The goods ordered under the Outstanding POs are remain in D’s possession. Although their values have apparently dropped, but as Ms Wong has submitted, their values fluctuate, and can go back up;

(c)  According to the financial statements produced, P does have further assets, though not to the extent of the purchase price of the Outstanding POs;

(d)  I have considered Cheng’s evidence on irreparable damage. Considered together the commercial reality of the damage to a company of becoming insolvent, and the case of Tetronics (International) Ltd v HSBC Bank [2018] EWHC 201 (TCC), 177 Con LR 159, I form the view that any damage of allowing D to present the SBLC to P would be irreparable. D’s Proposed Undertaking would not be able to address that;

(e)  Against P’s case on irreparable damage, D says that as P is admittedly indebted to it, D can petition for its winding up. But it is speculative at this stage to say whether P may be able to raise substantial disputes to any statutory demand which D may serve;

(f)  Mr Ho further relies on §15-032 of Gee, that:

“Another factor which is relevant is whether the position can adequately be dealt with by Mareva relief over the proceeds. Where it can be, no injunction should be granted restraining payment.”

(g)  In that regard, I accept Ms Wong’s submissions that the instant facts are important. The consideration is whether, in the light of my view on P’s strong case, the irreparable damage of insolvency, the availability of some assets for albeit partial satisfaction of any judgment, and P’s undertaking for damages, whether D’s Proposed Undertaking can tilt the balance in D’s favour so as to allow it to present the SBLC which in my view P has shown a strong case that it should not be. In my view, the answer is in the negative.

30.  Having reached the above conclusion, there is no need for this Court to consider the Fraud Exception. To that I say only the following:

(a)  Ms Wong refers to the Document and Presentation Instructions in the SBLC and submits[12] that as neither shipment has been made nor any Pick Up Notes issued, the only realistic inference is that if D were to present the SBLC for payment, the Certificate must be false and dishonestly presented;

(b)  I note however the contents of Cheng/Aff1 – and in particular §§25-27 thereof. The evidence is sparse and lacks particulars. I highlight §27, when Cheng merely seeks to state P’s stance “in short”. The dispute as to the role of the Pick Up Notes is also a realistic one. Proof of HSBC’s knowledge of the fraud is also a concern;

(c)  On the evidence, I am not satisfied that P has been able to meet the high threshold as explained in JML-Craft.

F.  Disposition

31.  Despite my view on the Fraud Exception, for all of the other reasons set out above, I allow the Summons and grant the injunction in terms.

32.  For the avoidance of doubt, I state that P is nonetheless required to provide the usual undertaking on damages, which Ms Wong states[13] P is prepared to give.

G.  Costs

33.  Counsel agree that costs of this application shall be in the cause, and I so order.