XCHRX DG BANK DEUTSCHE GENOSSENSCHSFTS BANK v. BANK OF CREDIT AND COMMERCE HONG KONG LTD. (IN LIQUIDATION)

1995, No.CL 138

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. By this action, the plaintiff is seeking to recover from the defendant the sums of US$976,171.83, US$977,063.95, US$698,975.03 and US$353,174.94, together with interest, less some charges due to the defendant. It has taken out an Order 14 summons seeking final judgment to this end.

2. None of the facts on which the plaintiff bases its case is in dispute. The defendant argues that the facts show that the defendant has a good defence, or, at least, an arguable case that should go to trial.

3. The plaintiff's amended statement of claim alleges that four letters of credit were issued by the Commercial Bank of Ethiopia (CBE) in favour of Gulfeast International Private Limited (Gulfeast) in December 1990. The plaintiff's case, and the defendant's response, in respect of each of the claims relating to these letters is identical.

4. The letters of credit were stated to be subject to the Uniform Customs and Practice for Documentary Credits (1983 Revision) Publication Number 400 (the UCP), were available by "time drafts payable 180 days from bill of lading", stated that stipulated documents were required to be presented upon any drawing, authorised the defendant to reimburse itself for drafts honoured by debiting CBE's account with the defendant's London Office, and requested the defendant to advise the credits to Gulfeast through the plaintiff.

5. The defendant notified the plaintiff of the issue of the letters of credit, requested the plaintiff to advise the credits to Gulfeast, and the plaintiff did so. On 4 January 1991, the defendant added its confirmation to the letters of credit. The endorsement on the letters of credit reads "We confirm that we will honour the bill drawn in strict compliance with the terms of this credit for [the amount of the credit]. Documents must be presented to us for negotiation."

6. In February 1991, the plaintiff presented to the defendant the documents stipulated in the letters of credit and the corresponding time drafts drawn by Gulfeast on CBE payable to the plaintiff at 180 days from the bills of lading dates. The drafts were generally endorsed by the plaintiff.

7. These documents, including the endorsed drafts, were sent by the plaintiff to the defendant under the cover of an advice headed "Remittance for Negotiation/Collection" and saying, amongst other things, that "We enclose [the documents] drawn under the above credit to you for processing subject to the [UCP]. Instructions : Negotiation without recourse ... Documents not checked ... Please do not discount the bill ... Kindly advise us acceptance of the bill with maturity date and effect payment to us at maturity ... Please remit net proceeds [to our account in New York] under advice to us on maturity.".

8. Later in February 1991, the defendant wrote to the plaintiff saying that the drafts had been negotiated by them, that the letters of credit were returned, and that "At maturity, we shall pay you as instructed.". In a separate letter, the defendant said to the plaintiff that the drafts would mature on a given dated and "At maturity, we shall remit the net proceeds to you after deducting [certain charges].".

9. After the defendant had accepted the documents presented under the letters of credit and had undertaken to pay the net proceeds of the drafts to the plaintiff on their maturity, the plaintiff, relying on this, paid to Gulfeast the discounted value of the drafts.

10. As to the legal effect of these events, the plaintiff raises four contentions.

11. Firstly, the plaintiff alleges that, by the operation of Article 10(b) of the UCP, the defendant was bound to pay to the plaintiff the amount of the drafts (with the defendant's charges deducted) on their maturity.

12. Secondly, the plaintiff says that it negotiated the documents from Gulfeast pursuant to an express or implied authority contained in the letters of credit.

13. Thirdly, it also alleged that the plaintiff's presentation of the drafts and documents and the defendant's acceptance constituted a contract under which the defendant promised to pay the amount of the drafts.

14. Fourthly, the plaintiff relies on estoppel. It says, essentially, that both the plaintiff and the defendant proceeded on the basis that the defendant would pay the plaintiff in accordance with its promise, and, in reliance on that, the plaintiff paid Gulfeast.

15. Article 10(b)(iv) of the UCP provides :

"When an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter has added its confirmation, such confirmation constitutes a definite undertaking of such bank (the confirming bank), in addition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with :

(i) ...

(ii) ...

(iii) ...

(iv) if the credit provides for negotiation - to negotiate without recourse to the drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the issuing bank or on the applicant for credit or on any other drawee stipulated in the credit other than the confirming bank itself."

16. In this situation, Article 11 of the UCP provides that the issuing bank undertakes to reimburse the confirming bank.

17. It is common cause between Mr Ma and Mr Bleach that "negotiate" in Article 10(b)(iv) means "pay", or, perhaps, I suggest, "undertake to pay". And if one asks to whom must the payment, or undertaking to pay, be made under the drafts, the answer must be, obviously, in this case, the payee; the plaintiff.

18. But, Mr Bleach says, the plaintiff cannot take advantage of this provision incorporated into the letters of credit because there is no contractual relationship between the plaintiff and the defendant under which the plaintiff can rely on the terms of the letters of credit. In particular, Mr Bleach argues, the letters of credit were not negotiable by the plaintiff, and were not, in fact, negotiated by it. The plaintiff did not, therefore, come into any contractual relationship with the defendant under the letters of credit.

19. I am not sure that this is so. It is probably the case that the letters of credit did not provide for them to be negotiated by the plaintiff by their terms, but the letters clearly contemplated that Gulfeast would present drafts drawn under the letters. It did so, making the drafts payable to the plaintiff. The plaintiff then purported to act under the letters by sending the documents, including the endorsed drafts, to the defendant, asking the defendant to process them. When it did so, the plaintiff expressly asked the defendant to process the documents subject to the UCP. The defendant processed the documents according to the instructions of the plaintiff, and, presumably, subject to the UCP. That, to my mind, resulted in the defendant accepting the plaintiff as being entitled to do this, and entered into a contractual relationship with the plaintiff under the letters entitling the plaintiff to rely on the terms of the letters, including Article 10(b)(iv) of the UCP.

20. But even if this is not the case, there can be no denying that the defendant entered into a relationship with the plaintiff. If it was not a contractual relationship under the letters of credit, what was its nature, and how did it arise? What happened here is that the defendant was told by CBE that it had issued letters of credit in favour of Gulfeast, and that the defendant was authorised to negotiate documents under them. The plaintiff asked the defendant to negotiate the letters of credit, to accept liability to pay the plaintiff, and to pay the plaintiff the net proceeds of the drafts endorsed over to the defendant by the plaintiff on maturity date. The defendant agreed to do this quite unequivocally. The defendant was then in a position to recover under the drafts. On the strength of this arrangement, the plaintiff then paid Gulfeast. In my view, this is as clear an enforceable contract in law as one can imagine.

21. Mr Bleach asks, rhetorically, where is the offer and where is the acceptance. That, I believe, is clear enough. The plaintiff asked the defendant to do something, and the defendant agreed to do it.

22. But, Mr Bleach says, there was no consideration for the defendant's undertaking to pay the net proceeds of the drafts. This is not so. The plaintiff held drafts in its favour. It endorsed them over to the defendant in anticipation of the defendant agreeing to pay. It would not have done this if it did not expect the defendant to reciprocate. If the defendant did not wish to pay the plaintiff as the plaintiff had instructed, it should have endorsed the drafts back to the plaintiff. It did not do that. It kept them, and agreed to do what the plaintiff requested. I do not think there could be clearer consideration.

23. In this situation, I do not think one has to decide if the letters of credit were negotiable by the plaintiff, or in fact negotiated by it. The letters of credit were the catalyst for the plaintiff asking the defendant to do something, and tendering consideration in return, and the defendant agreeing to do that something for that consideration. That, to my mind, constitutes a binding contract outside the terms of the letters of credit.

24. The only possible answer to this is that the plaintiff, in entering into this contract, did not do so on its own behalf, but as agent for Gulfeast. But there is no evidence at all that the plaintiff's relationship with Gulfeast was anything other than that between a banker and customer. There is no evidence whatsoever on which it could be argued that the plaintiff was merely Gulfeast's agent. The plaintiff was rendering its facilities to Gulfeast so that Gulfeast could receive early payment for goods. When the plaintiff had agreement from the defendant that the defendant would pay the net proceeds of the bills on maturity, the plaintiff paid the discounted value of the drafts to Gulfeast without recourse. Plainly, the plaintiff took the risk that it would not be paid by the defendant. It had no right to, and did not attempt to, pass that risk onto Gulfeast as one would expect would happen if the plaintiff was nothing more than Gulfeast's agent. What happened here is the clearest possible example of a banker going about its normal business; enabling a businessman to get early payment, taking a risk, and hoping to make a profit by paying only the discounted value of the price.

25. It may be so that the defendant did not know at the time that the plaintiff was to pay Gulfeast without recourse, but that does not alter the fact of the matter. The plaintiff never suggested to the defendant that it was acting as anything other than a banker in the ordinary course of banking business. It seems to me that, at the relevant time, the defendant did not believe that the plaintiff was acting merely at Gulfeast's agent. The defendant knew of the existence of Gulfeast, and its part in the business. If it thought that the plaintiff was simply collecting for Gulfeast, it would have expected to pay the plaintiff for the account of Gulfeast. The plaintiff did not ask for this, and the defendant did not raise any question as whether the payment by it would be for the account of Gulfeast. The undertaking or promise by the defendant to pay the plaintiff was unqualified, and there is, in my view, no reason why it should not be held to it.

26. In the result, on one or more of the grounds suggested by the plaintiff, I find that the defendant is bound to pay the plaintiff as it undertook to do. I find that the defendant has no arguable defence to the action. Accordingly, the plaintiff is entitled to final judgment as claimed in the statement of claim (less such deductions and adjustments as the defendant is entitled to make), and I grant this.

27. As to costs, it seems to me, on the face of it, that the plaintiff is entitled to its costs, and I make an order nisi accordingly. Mr Bleach indicated that he wanted to be heard on costs, but he will not be available for a month or so. I indicated that, if the defendant was unhappy with the order nisi, arrangements could be made to hear him when he was available. Mr Ma seemed to see no difficulty with that.