WATANMAL (LIBERIA) INC v. THE CHASE MANHATTAN BANK, N.A. AND ANOTHER

HEADNOTE

Guarantee issued by bank - injunction to restrain bank paying - principles of granting - ex parte applications should be rarely granted - scale of costs when injunction improperly obtained.

IN THE HIGH COURT OF JUSTICE

HONG KONG

Action No. 7141 of 1986

___________

BETWEEN

____________

___________

JUDGMENT

____________

1. On December 17th, 1986 the plaintiffs issued a writ specially endorsed, amended the next day, claiming against the 1st defendants a variety of declarations and an injunction against the 2nd defendants. On the same day Mr. Justice Wong granted an ex-parte injunction against the 2nd defendants in the terms of claim 8 in the writ. This matter now comes before me on an inter-partes summons. I should stress at the outset that I am not concerned with the claims the plaintiffs make in this action save for the injunction which currently restrains the defendants.

2. As I have come to a clear conclusion as to the outcome of this action, I give my reasons now orally. I hope I will not be considered discourteous if I do not set out all the submissions made by Counsel nor refer to all the authorities which were brought to my attention. I am grateful to Counsel for the helpful and as I would expect from experienced members of the Bar the concise sub-missions made by them and also to Mr. Ribeiro in presenting his submissions in a written skeleton form.

3. The facts are as follows: The plaintiffs carry on business in Liberia and are a part of a group of companies called Watanmal Boolchand & Co. Ltd. which is incorporated in Hong Kong and has its registered offices in Wyndham Street. In early 1982 the plaintiffs suffered cash flow problems and Mr. Daswaney, the General Manager of the plaintiffs, approached Chase Manhattan at its Monrovia Branch to obtain a loan facility of 1 Million Liberian Dollars. The negotiations for this were carried out, as I am told in the affidavit of Mr. Viswanathan filed on behalf of the plaintiffs, verbally between Mr. Daswaney and Mr. Fairall, then Manager of the Monrovia Branch of Chase Manhattan Bank. Mr. Sakhraney is a director of the plaintiffs and he was asked to guarantee the loan to the plaintiffs by a charge secured on a deposit personally maintained by him at Credit Lyonnais, Hong Kong. A guarantee was effected - GV1 - and was issued by the 2nd defendants to the Monrovia Branch. It was for a maximum amount of US$1 million and it reads:

                    "Letter of guarantee No. 028

To the Chase Manhattan Bank (Monrovia) from Credit Lyonnais,Hong Kong.

 

We hereby issue our guarantee for a maximum amount of US$1 million against your granting a loan facility to Watanmal (Liberia) Inc. P.O. Box 394, Monrovia. Our guarantee will be valid for a period of one year from the date hereof to 30th July, 1983. We undertake to remit upon first request from your part the total amount outstanding in your books due to you by Watanmal (Liberia) Incorporated, Monrovia provided that the maximum amount of our liabilities under this guarantee does not exceed the maximum amount of US$1 million and that your request for the reimbursement of the sum due to by Watanmal (Liberia) Inc., Monrovia is received by us not later than 30th July, 1983, date of expiration of our guarantee. This guarantee is construed according to the laws of Hong Kong."

Subsequently this guarantee was extended to 30th January, 1987. See GV-22.

4. It is clear that the banking facilities were provided for the plaintiffs account at the Monrovia Branch, see GV-2 and 3 bank accounts. This account was the only account the plaintiffs had at that branch and it was in Liberian Dollars. I am told that there is parity between the US and Liberian Dollars. On 24th December, 1986 (GV-21) the defendants branch bank wrote to Mr. Daswaney. On p.2 I find this:

                    "An additional facility granted in 1982 is as follows:

5. There was apparently no denial by Mr. Daswaney that that statement did not actually reflect the arrangement which had been arrived at between the parties for the advancement of this additional facility. This facility, as I have said, was extended, and interest was paid by the plaintiffs to the Monrovia Branch by direct debiting of the plaintiffs' account which was in Liberian Dollars.

6. In 1986 it became clear that the plaintiffs and the defendants were in dispute as to the manner in which the loan was to be repaid. The defendants asserted as they had done in 1982 that it was to be in US dollars and the plaintiffs said that it should be effected in Liberian dollars. Correspondence ensued stating the position the parties were taking.

7. I should stress that I am not concerned with this issue. It figures prominently in the plaintiffs' main affidavit, and it is the basis on which the plaintiffs' claim a variety of declarations against the 1st defendants. What were the terms and conditions of the loan and the manner of repayment will be determined by the trial judge who hears this action. I am only concerned with a different aspect, namely that when the dispute arose the 1st defendants' London branch sent a telex (GV-28) on 3rd December, 1986 demanding repayment of the loan in US dollars.

8. It was clear, see e.g. GV-27, that what had happened was that the loan facility was provided by Chase Manhattan London in US dollars and booked to them. This merely repeats what the bank said in 1982. GV-29 gave the plaintiffs' answers and on 10th December, 1986 the 1st defendants' Monrovia Branch gave notice to the 2nd defendants calling in the guarantee.

9. On 12th December, 1986 the plaintiffs authorised the 1st defendants' Monrovia Branch to debit their account with $850,000 as partial repayment of the loan, with the balance of $150,000 to be paid by 17th December, 1986. On December 16th, 1986 the 1st defendants found this unacceptable (GV-32). The plaintiffs tendered a cheque in Liberian dollars and this was rejected.

10. The thrust of the plaintiffs' claim justifying an injunction is found in paragraph 29 of Mr. Viswanathan's affirmation. It reads as follows:

"I humbly submit that the facts herein deposed and documents in support clearly indicate that the loan was advanced by the 1st defendant in Monrovia in Liberian dollars currency and is repayable in that currency in Monrovia and that the Monrovia Branch has wrongfully refused to accept repayment thereof and has wrongfully demanded repayment from the 2nd defendant under their guarantee. I therefore humbly pray that the 2nd defendant be restrained from effecting such payment as demanded by the 1st defendant pending trial of this action or until further order."

11. It can be seen, therefore, that the basis of the claim as set out in the affidavit is that indeed the agreement that was entered into between the parties was for repayment in Liberian dollars and in some way the plaintiffs were trying to restrain the 2nd defendants paying out under a guarantee.

12. Before me, however, Mr. Mills-Owens puts his application in quite a different way. He accepts that the issue of the manner in which the loan is repayable is not to be determined by me. He submits that the guarantee was to the Monrovia Branch of the Chase Manhattan and that the undertaking was to remit the total amount outstanding in your books due to you by the plaintiffs. He says that GV-30, the demand calling in the guarantee or the first request does not assert that there is any sum of money owing in the books of Chase Manhattan Monrovia Branch, but by implication there is a sum of money owing in the books of the London Branch. There has been no valid demand by Chase Manhattan and I should restrain the surety, that is Credit Lyonnais, from paying the sum guaranteed to the lst defendant. I was referred to Esal Commodities Ltd. (1985) L.L.R. 546 in particular at p.550 when Lord Justice Ackner, as he then was, said:

"However, I accept Mr. Tugendhat's alternative submission that in addition to the beneficiary making the demand, he must also inform the bank that he does so on the basis provided for in the performance bond itself."

I was also referred to Siporex v. Banque Indosuez 1986 2 L.L.R. 147 and to Elian v. Matsas 1966 2 L.L.R. 495 where it was submitted that relief similar to that sought before me was granted.

13. There are well-known principles on which injunctions are granted for particular situations. In this instance the position is that the guarantee is given by a bank at the request of a director of the plaintiffs' company pursuant to the general agreement for a commercial business of 21st April, 1981 between the 2nd defendant and Mr. Sakhraney. These and other relevant documents are in the bundle marked "SF-2". I do not read the general agreement. The agreement is in standard form and contains a number of standard clauses. In particular clause 6 deals with counter indemnity and at (C) I find:

"I hereby irrevocably authorise the Bank to pay immediately any amounts demanded from the Bank or which the Bank from time to time becomes liable to pay under or by reason of the Guarantees without any reference to or further authority from me and without being under any duty to enquire whether any claims or demands on the Bank are properly made notwithstanding that I may dispute the validity of any such claim or demand and I shall accept any claim or demand on the Bank as conclusive evidence that the Bank was liable to pay and any payment which the Bank makes purporting to be in accordance with the Guarantees as binding upon me."

14. The Elian case was decided on its particular facts and concerned an injunction to restrain the ship owners or their agents from enforcing the guarantee. What is sought here is not an injunction against the 1st defendant requesting payment but against the 2nd defendant , the surety, from paying once they had a request made.

15. There is a line of authorities which exemplifies the special status of guarantees given by banks. Mr. Justice Kerr, as he then was, in Harbottle (Mercantile) Ltd. v. National Westminster Bank (1978) Q.B. 146 at 155 G said:

"It is only in exceptional cases that the Courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life blood of international commerce."

16. I do not refer to the other authorities which are found in the admirable skeleton argument of Mr. Ribeiro. May I say in passing that the greatest compliment the Bar can pay to a judge is the care which is put in the presentation of their submissions to him.

17. The only other authority I refer to is United Trading v. Allied Arab 1985 2 L.L.R. at p.554 where Lord Justice Ackner, as he then was, sets out with great clarity the principles governing the type of application before me. Page 559 I find:

"It is common ground that the Court can only interfere by way of injunction in order to prevent the alleged breach of a legal duty owed by the defendant to the plaintiff or by way of ancillary relief required by a party to proceedings who asserts a cause of action against the other party. See the Siskina (1979) A.C. p.256 where Lord Diplock said: 'The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action.'"

18. I therefore have first to examine whether the plaintiffs have a cause of action against the 2nd defendants. Mr. Mills-Owens does not allege fraud. In the absence of fraud affecting the validity of this first demand guarantee, the plaintiffs have no cause of action and no equity arises which justifies the court granting equitable relief. The plaintiffs have no relationship with the guarantee issued by Credit Lyonnais at the request of Mr. Sakhraney who has, as I have said before, his own business agreement with Credit Lyonnais.

19. I can see, no cause of action at all by the plaintiffs against the 2nd defendant. Mr. Mills-Owens, only in his reply suggested and I thought it was with faint-heart, that it might be the tort of negligence if Credit Lyonnais paid out under the guarantee in breach of the terms of the guarantee. I reject that submission.

20. I therefore ask myself following American Cyanamid v. Ethicon have the plaintiffs established on the evidence before me that they have a good arguable case against the 2nd defendants. In my judgment they have none at all. Although it is not necessary therefore to deal with the balance of convenience, on this aspect the plaintiffs have a hopeless case. They are seeking to prevent a bank from paying on a first demand guarantee and debiting the account of Mr. Sakhraney. The 2nd defendants are a substantial bank and paying out to the Chase Manhattan also a substantial bank. In my judgment, the balance of convenience is all one way and is in favour of discharging the injunction.

21. I would only like to add a few words about the ex-parte injunction that was granted. Faced with the mass of exhibits, a long affirmation and being told by Counsel that it was necessary to preserve the status quo the learned judge was persuaded to grant an ex-parte injunction. With the greatest respect to my brother judge I think that no such injunction should have been granted.

22. In Bolivinter v. Chase Manhattan at p.256 of Lloyd's Law Reports (1984) Vol. 1 the Master of the Rolls dealt with the circumstances in which ex-parte. injunctions should be issued which prohibits a bank from paying under an irrevocable letter of credit or purchase bond or guarantee. The learned judge went on:

"The unique value of such a letter bond or guarantee is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank's customers in relation to the performance or indeed existence of the underlying contact, the bank is personally undertaking to pay him provided the specified conditions are met. In requesting his bank to issue such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional cases, he is to be allowed to derogate from the bank's personal and irrevocable undertaking, given be it again noticed at his request, by obtaining an injunction restraining the bank from honouring that undertaking he will undermine what is the bank's greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore if this happens at all frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined.

 

        Judges who are asked often at short notice and ex-parte to issue an injunction restraining payment by a bank under an irrevocable letter of credit or performance bond or guarantee should ask whether there is any challenge to the validity of the letter, or bond or guarantee itself. If there is not, or the challenge is not substantial, prima facie no injunction should be granted and the bank should be left free to honour its contractual obligations, although restrictions may well be imposed upon the freedom of the beneficiary to deal with the money after he has received it. The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent ........"

There should be clear evidence of fraud placed before a Judge and in this case there was none.

23. As I have said, what clearly happened was that the learned judge faced, as he was, with all this mass of exhibits placed before him and being told that it was necessary to preserve some status quo, was persuaded to grant that injunction. The learned judge was not referred to the United Trading case where at p.561 Lord Justice Ackner as he then was, again set out this test:

"A temporary restraining order is made essentially on the basis of suspicion of fraud followed some months later by a further hearing, during which time the applicant has an opportunity of adding to the material which he has first put before the Court."

24. The applicant in this case put no evidence whatsoever of fraud before the Court and in my judgment this ex-parte injunction was improperly obtained. As the plaintiffs gave an undertaking as to damages, I now order an enquiry as to what damages the defendants have suffered as a result of the ex-parte injunction being obtained. I discharge the injunction and dismiss the plaintiffs' summons.

25. After hearing further argument as to costs I consider that the plaintiffs should pay the 2nd defendant costs on an indemnity basis and the 1st defendants on a party and party basis.