NANYANG COMMERCIAL BANK LIMITED v. LAM TIM FOOK t/a THE HONG KONG DAILY TRADING COMPANY AND ANOTHER

1987 No.A2665

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. The plaintiff Bank is suing for amounts outstanding under general banking, facilities granted to 1st defendant, which were also guaranteed by 2nd defendant upto a limit of US$9,000.00. the total sum claimed is HK$192,064.39, including $56,373.I9 in interest accrued to 13th April 1987. On 11th June 987 final judgment was entered by consent against 2nd defendant for the amount of the guarantee, but only $13,000.00 (HKD) has so far been paid.

2. On 22nd June 1987, final judgment was entered against 1st defendant in default of filing his defence. By consent, this was set aside and interlocutory judgment entered instead on 14th July 1987.

3. Under a veneer of complexity involving the operation of letters of credit and trust receipt facilities, the central issue is a simple one of credibility.

4. The facilities were to be used by the first defendant to import goods from Taiwan for re-export to Nigeria. The first defendant duly imported and exported the goods with the co-operation of the Bank, but the expected payment from Nigeria failed to materialise. This arose from a shortage of foreign exchange in that country, leading to an embargo on foreign currency payments for imports. The first. defendant then defaulted on his arrangements for repayment under the facilities.

5. None of this is in dispute, neither is the fact that the facilities granted by the, Bank were denominated in US dollars. The issue is the date, and hence the rate, at which the US dollar debt was fixed for repayment in Hong Kong dollars.

6. The relationship between the Bank and the first defendant commenced on 17th May 1982. A fixed deposit account was then opened in the sum of $80,000.00 (HKD) and the Bank granted letter of credit and trust receipt facilities. The latter facility represents an arrangement whereby a bank clears and releases goods to an importer under his indemnity, which goods he then holds in trust for the bank. The fixed deposit of $80,000.00 was to be security for the facilities offered.

7. On 26th May 1982 the first defendant applied for a letter of credit in the sum of US$33,900.00 at 150 days sight to cover goods imported from Taiwan. This was duly issued and when the goods arrived about a month later a trust receipt was issued in his favour in respect of these goods. Under the letter of credit a bill of exchange for US$33,900.00 was issued to first defendant by Manufacturers Hanover Trust Co. on 15th June 1982, Payable on 15th November 1982; it was accepted by plaintiff Bank on 24th June 1982. The elements of the dispute were completed by the increase of first defendant's fixed deposit as security by a further $70,000.00 on 23rd June 1982.

8. These details emerge from the evidence of Mr. Leung Kwok Fu, the Deputy Manager of the plaintiff Bank at the Quarry Bay Branch. Mr. Leung was also attached, to that Branch at the material time and handled first defendant's transaction from the date he first became a customer. So far, his evidence is not disputed.

9. The various documents referred to have been produced under hearsay notice. They are:-

Agreement for Letter of Credit facilities (Pages 3-6 of the bundle). Exhibit P.2.

Agreement for Trust Receipt facilities. (Pages 7 & 8). Exhibit P.3.

Vouchers for 1st fixed deposit of $80,000.00 (Pages 10-14). Exhibits P.18, 19, 20.

Application for Letter of Credit (Page ,20). Exhibit P.6.

Copy of L.C. by way of acknowledgment (Page 22). Exhibit P.7.

Trust Receipt (Page 23). Exhibit P 8.

Bill of Exchange (Pages 24 & 25). Exhibit P.9.

Vouchers for further fixed deposit of $70,000.00 (Pages 29-34). Exhibits P.21, 22, 23.

Guarantees in respect of the fixed deposit (Pages 16-19 & 35-39). Exhibits P.5, 12, 13.

10. Mr. Leung explained his understanding that first defendant would discharge his liabilities to the Bank with the proceeds of sale of the Taiwan goods to Nigeria. The currency of account for the Nigerian transaction was also US dollars.

11. The 150-day period of the bill of exchange expired on 15th November 1982 and first defendant duly defaulted. Mr. Leung interviewed first defendant thereafter and was advised of the problem regarding settlement in Nigeria.

12. Mr. Leung apparently explained his concern over the fluctuating exchange rate between the HK and US dollars. He reports first defendant as choosing to repay in US dollars, rather than to convert his obligation into Hong Kong dollars. This conversation is not precisely dated in the evidence but, must have arisen fairly shortly after the default of 15th November 1982. Mr. Leung later refers to it as happening, in 1983, in which case it must have been early in that year.

13. Anticipating defendant's version which must have been well known to him, Mr. Leung. denied that defendant had asked to fix the exchange rate on first applying for the letter of credit. He said defendant anticipated collecting the Nigerian proceeds in US dollars, and therefore intended to discharge the debt in its currency of denomination. He said the conversation in 1983 was the first time defendant has been concerned about exchange rates, despite which he apparently chose to keep his obligation in US dollars.

14. Mr. Leung considered Exhibit P.6 at page 20 of the bundle, defendant's application for letter of credit facilities, which contains the optional instruction "please fix/do not fix exchange''. He pointed out that the application contained no deletion or special instruction as to fixing the exchange rate. He also referred to Exhibit P.24 (pages 112 and 113) which he described as a specimen document to be signed by a customer on fixing an exchange rate. He said that defendant did not sign such a document and seemed to accept his explanation as to procedures adopted in fixing exchange rates.

15. This evidence is central to the issue between the parties and differs essentially from that of defendant. The background is of course the weakening Hong Kong dollar which was eventually linked at its current rate of 7.8 to the US, dollar in October 1983. The currency of account being the US dollar the conversion of the debt into HK dollars at a later and lower rate considerably increased defendant's UK dollar liability.

16. Mr. Leung's evidence was that he continued to press defendant for payment, without success. Eventually on 8th February 1984 the Bank advised defendant that they wished to convert the principal into HK dollars. According to Mr. Leung, this was for two reasons; firstly the new linked exchange rate, and secondly defendant could not use the Nigerian proceeds to pay in US dollars. Mr. Leung said defendant agreed to this on the telephone and the conversion was effected at 7.808 on 8th February 1984, giving a. HK dollar principal of $264,571.20 (Exhibits P,25 and P.26 on pages 114 to 117).

17. This crystallized the debt in HK dollars and represents the point on which the defendant takes issue.

18. Although unrepresented, the defendant is a business man of many years experience and clearly understood the nature of the issue. Both his cross-examination of Mr. Leung and his own evidence were to the point. He put to Mr. Leung that the latter should have asked him to make the appropriate deletion on Exhibit P.6 as to fixing the exchange rate or otherwise. Mr. Leung denied this saying that a lack of choice meant an absence of specific instructions. In the context he clearly meant that the burden is on an applicant to request an exchange fixing if be so requires.

19. In his evidence defendant said he requested Mr. Leung to fix the exchange rate on receiving the acknowledgment of opening the letter of credit facility. That document is Exhibit P.7 on page 22 and the date of issue, although blurred appear to be 3rd June 1982. It would anyway have to be before its expiry date of 15th June 1982.

20. Defendant then produced a copy inward bill advice for the bill of exchange for US$33,900.00, as Exhibit D.1. He said be wondered why, the rate had not been fixed when he received this document, dated 24th June 1982. He emphasised that be had asked the Bank, through Mr. Leung, to fix the rate, but they did not do so. The rate defendant sought to apply was 5.778, which he said was the rate effective on 11th June 1982.

21. According to defendant; when be asked to fix the rate, Mr. Leung said he was to receive the money in US dollars and therefore there was no need to fix it. This is an obvious reference to the intended Nigerian proceeds being in the same currency as the debt and not apparently creating an exchange risk.

22. Later, when he could not pet the Nigerian money, the defendant said Mr. Leung told him the rate would be fixed. 'This of course was at the lower rate then obtaining.

23. The defendant maintained his position under cross-examination. He denied the suggestion that his concern with exchange rats arose later, when the HK dollar was weakening and his Nigerian proceeds had not appeared. He said he had always intended to pay in HK dollars; he was a long established businessman and always fixed exchange rates when asking for letter of credit facilities.

24. In evaluating this conflict I dote at the outset that a debt is usually incurred in the currency of its denomination. That is commonly known as the currency of account, as apposed to the currency of payment When an exchange rate is fixed, it is usually because the currency of payment and the currency of account are different. The risk of exchange fluctuation is thus elminated and the currency of payment becomes also the currency of account.

25. Whether or not the exchange rate is fixed must be a matter for agreement between the parties. There is nothing in the nature of duty of care on a party to warn his counterpart of the exchange risk. To that extent I accept the evidence of Mr. Leung that it is the applicant's choice in applying for letter of credit facilities to specify exchange rate instructions. if the fails to do so, the exchange rate applicable, on discharge of the debt will be that obtaining the date of payment.

26. Mr. Leung is emphatic that defendant did not apply to fix, the rate at the time the facilities, were opened. The complete lack of the documentation typical of such a transaction lends support to Mr. Leung's contention. However, it does. not dispose of defendant's evidence that he gave instructions to fix the rate at the outset which were not, followed.

27. The defendant intended to repay his indebtedness with the US dollar proceeds of his Nigerian sale. The debt and the anticipated proceeds were therefore into he same currency. This is not apparently a situation where fluctuations in exchange rates are relevant, at least not until the possibility arises that the proceeds may not arrive. From Exhibit P.15 at page 45, a document handed by defendant to the Bank according to, Mr. Leung, it appears that Nigerian foreign currency payments, became a problem in early 1983. It is at this point that defendant has a reason for anxiety about exchange rates, and it is around this time that he bad his conversation on that. subject with Mr. Leung.

28. Examining defendant's evidence in chief I find an important inconsistency in his version of events. He alleges initially that Mr. Leung simply forgot to fix the rate on his instructions because he (Mr. Wing) had so many things to do. Shortly after that evidence he says Mr. Leung told him there was no need to fix the rate as he would be paid in US dollars anyway. These versions cannot both be correct as the one indicates an omission to follow instructions and the other involves had advice which was nonetheless accepted.

29. I find Mt. Leung's evidence consistent and in accordance with the commercial and banking probabilities. He said he did not at the outset doubt defendant's ability to repay and I doubt that the parties even considered fixing the exchange rate in the initial stapes. The debt was to he repaid from proceeds of sale, in the same currency and the situation did not appear to demand the protection of a fixed rate. I accept Mr. Leung's evidence that defendant neither asked to fix the rate at the outset nor chose to fix it later when the matter was raised with him.

30. In the circumstances I find that the debt was a US dollar debt until fixed in HK dollars on 8th February 1984 at the, rate of 7.808 to l.

31. This finding disposes of the issue between the parties as the defendant disputes neither interest rates nor the date of application to the debt of his fixed deposit security. The conversion to a HK dollar debt was effected on 8th February 1984 in the sum of $264,691.20. This is supported by Exhibits P. 25 and P.26 (pages 114-117). On the same date defendant's fixed deposit was transferred to his current account, the total sum including interest being $153,324.41. Exhibits P.36 and P.37 are the vouchers in support of this transaction (pages 122-125).

32. Interest on the letter of credit was applied from 27th June 1983 to 8th February 1984. According to Mr. Leung, the June date was used instead of the date of default on 15th November 1982 as a concession to the difficulties defendant was experiencing. The vouchers in support of this interest show a figure of HK$21,395.30 and are Exhibits P.27, 28 and 29 (pages 126-129). They were sent to the defendant.

33. Interest on the trust receipt facility, is established by Exhibits P.30 and 31 and commenced 23rd August 1982, the date of expiry of the trust receipt credit period. This interest ran at 1% per month until 8th February 1984, when the time deposit was applied, and totalled HK$2,287.60 plus $5.00 charges.

34. According to Mr. Leung, the defendant's time deposit was applied first to outstanding trust receipt and letter of credit interest. After this, 8129,436.51 was left in the time deposit of which $129,000.00 was applied in reduction of, the principal debt, and $436.51 was left in current account. Exhibit P. 30 at page 131 is relevant in this regard. Mr. Leung's evidence is that the originals of all vouchers were sent to defendant and none of them were disputed. Neither were they disputed in court.

35. The balance of principal remaining due at this stage was $135,691.20. Mr. Leung referred to Exhibit P.33 (pages 136/7), an extract from the Bank's maturity file, in support of this. He drew the court's attention to the annotation "8th February 1984 14% per annum and related this to the HK dollar conversion and the interest rate then applicable.

36. For purposes of the writ, the bank calculated the further interest due on the letter of credit to 13th April 1987. Mr. Leung gave evidence to this effect and referred to Exhibit P.34 (pages 138-140), which discloses outstanding interest in the sum of $48,826.53. A similar exercise as to trust receipt interest produced the figure of $7,546.66 as supported by Exhibit P.35 (page 142).

37. The total outstanding interest therefore amounts to $56,373.19 to which is added the sum of $135,691.20 as outstanding principal. The sum of these two figure is $192,064.39 as claimed in the writ. There will he judgment in this amount against the first defendant.

38. Mr. Leung said that the Bank's usual rate on long default at the point of issuing proceedings is 5.5% over Hong Kong prime. Interest is therefore awarded at this rate on the principal sum of $135,641.20 with effect from 14th April 1987.

39. In address the court was advised of the receipt of $13,000.00 from the second defendant guarantor. Credit will he given for that amount as from the date of its receipt and the judgment creditor will adjust its interest figures accordingly.

40. Costs are awarded to the plaintiff with a certificate for counsel.