LAI TAK ENTERPRISES LTD v. DAILY FINE INDUSTRIAL LTD

DCCJ 5352 / 2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5352 OF 2008

-------------------

BETWEEN

-------------------------------

JUDGMENT

-------------------------------

Introduction

1.  The Plaintiff claims the price of goods sold and delivered to the Defendant in the sum of US$79,932.30 with interest. The Defendant admitted that there was a sale of goods contract between the Plaintiff and the Defendant. However, the Defendant alleged that they were released from the original contract of sales by novation whereby Profit Winning Limited (“Profit Winning”) replaced the Defendant as the buyer of the contract.

2.  The Defendant also alleged that pursuant to the agreement, an irrevocable letter of credit had been issued to the Plaintiff and all the documents that were required by the Plaintiff to obtain payment under the letter of credit including the cargo receipt and inspection certificate, had been delivered to the Plaintiff. Accordingly, the Defendant argued that even if the Court found that there was no novation of contract, due to the default of the Plaintiff in not presenting the documents for payment under the letter of credit, they could no longer claim against the Defendant for the price of the goods sold.

List of witnesses

3.  The Plaintiff called two witnesses at trial and they both adopted their witness statements filed herein as evidence in chief and had been cross-examined :

(1)   Mr. TO Chun (“TO”), Senior Division Manager of the Plaintiff; and

(2)   Ms. TSANG Yuen Sheung (“Tsang”), Merchandising Manager of the Plaintiff who worked under the supervision of TO.

4.  The Defendant called one witness, Mr. Tong Choi Yau (“Tong”), who is also known as Nicky Tong.  Tong was the General Manager of the Defendant. He was also a shareholder and director of Profit Winning at the material times.  Tong adopted his witness statement filed herein as evidence in chief and had been cross-examined.

Issues in this case

5.  The issues in this case are as follows:

(1)   Whether there was any novation of contract among the Plaintiff, the Defendant and Profit Winning. If the contract had been novated, the Plaintiff would have no cause of action against the Defendant;

(2)   Whether the Defendant or Profit Winning had delivered the inspection certificate and cargo receipt to the Plaintiff to enable them to present the documents to the bank for payment under the letter of credit; and

(3)   If the Court found in favor of the Defendant that the cargo receipt and the inspection certificate had been delivered to the Plaintiff, even if the Court found that there was no novation of contract, by reason of the Plaintiff’s failure in presenting the documents for payment under the letter of credit, they were guilty of laches with the result that the Defendant’s liability had been discharged. The Defendant’s Counsel, Mr. Cheung, relied on a passage in Benjamin’s Sale of Goods (7^th Edition) paragraph 23-097 in support of this fall back position.

I shall deal with each of the above issues.

Whether there was a novation of the contract

6.  In early March 2004, CFL Enterprise Limited (“CFL”), the Hong Kong purchasing agent of a brand in the United States contacted the Plaintiff. CFL expressed intention to place orders for various colors of cotton twill fabrics for the purpose of manufacturing certain garments under the brand’s Fall’04 program. It is not disputed that the Defendant was the seller of the garments. TO said the Plaintiff would enter into contract for the supply of fabrics with the company designated by CFL as the seller and in this case, it was the Defendant. It was common ground that the parties had no previous dealings with each other.  

7.  On 1 April 2004, the Defendant placed purchase orders for the fabrics with the Plaintiff (which orders were revised on 2 April 2004). On 14 April 2004, the Plaintiff sent to the Defendant via email a sales contract dated 13 April 2004. Under the contract, payment was stated to be by irrevocable letter of credit at sight. The contract was not signed by the Defendant.

8.  As the Defendant was unable to issue a letter of credit, another party was needed to issue the letter of credit to satisfy the Plaintiff’s requirement for payment. Tong’s evidence is that although the Plaintiff was designated as the fabrics supplier by CFL, the contract between the Defendant and CFL did not prohibit the Defendant from buying the fabrics through another company, namely, Profit Winning. Tong said it was agreed between the Plaintiff, the Defendant and Profit Winning that the latter would replace the Defendant as the purchaser of the fabrics and it would arrange for the issue of a letter of credit. Tong said the fabrics were sold by Profit Winning to the Defendant at a profit of 5% of the price paid to the Plaintiff for the fabrics.

9.  Tong said that on or about 14 or 15 April 2004, agreement was made between either May Wong (“Wong”) or Fonda Ma (“Ma”) of the Defendant with the Plaintiff to change the contracting party for the purchase of the fabrics from the Defendant to Profit Winning. Tong admitted that he was not privy to the discussion but the instruction to novate the contract was given by him to Wong or Ma.  Tong said either Wong or Ma told him afterwards that the Plaintiff had agreed to the novation of the contract. However, the Defendant did not call Wong or Ma to testify on this matter.

10.  On 16 April 2004, Profit Winning applied for an irrevocable letter of credit from Bank of China (“Bank”) for the sum of US$82,141.50. The Defendant produced bank statements of Profit Winning and the Defendant and a ledger of the Defendant which showed that on 16 April 2004, a sum of HK$650,000 was paid by the Defendant to Profit Winning. Also, on 21 April 2004, a sum of HK$674,941.28 was deducted from Profit Winning’s bank account, for the issue of the letter of credit.

11.  The Plaintiff denied having agreed to any novation of contract. The Plaintiff’s case is that they agreed with the Defendant that since the Defendant could not provide a letter of credit, the Defendant asked Profit Winning to provide a letter of credit in favor of the Plaintiff. However, the Defendant remained a party to the contract for the sale and purchase of fabrics.

12.  The Defendant relied on the following documentary evidence to support their case that Profit Winning had replaced the Defendant as the buyer of the fabrics:

(a)   The application by Profit Winning for the issue of the letter of credit and the letter of credit itself; and

(b)   The commercial invoice no. 04S-E0354 dated 21 April 2004 issued and signed by the Plaintiff to Profit Winning.

13.  The Plaintiff did not dispute the existence of the above documents. However, both TO and Tsang said the application for a letter of credit by Profit Winning and the commercial invoice were mere payment arrangement and the underlying  transaction was always between the Plaintiff and the Defendant.

14.  There was no dispute that CFL had designated the Defendant to be the seller of the garment and the Plaintiff as the supplier of fabrics. TO said the Plaintiff would enter into contract with the company designated by CFL as the seller of the garments, namely the Defendant. Tong admitted that CFL was not aware that Profit Winning had replaced the Defendant as the purchaser of the fabrics.  This was unusual as CFL’s staff had been involved in the discussion between the Plaintiff and the Defendant regarding the purchase of the fabrics and CFL had designated the Plaintiff as the supplier of specific fabrics in their contract with the Defendant. In none of the emails produced in this case amongst CFL, the Plaintiff and the Defendant showed that CFL was informed of the alleged change in the purchaser of the fabrics.

15.  According to Tong, none of the staff of Profit Winning had any contact with the Plaintiff. It was Wong and Ma of the Defendant who had direct dealings with the Plaintiff. The alleged novation agreement was made by Wong or Ma on behalf of the Defendant and Profit Winning. However, neither Wong nor Ma gave evidence at the trial.  When cross-examined, Tong said since the Defendant was the seller of the garment, it would be more direct for the Defendant’s staff to liaise with the Plaintiff than for Profit Winning to do so. Tong said it would be cumbersome for the Defendant to go through Profit Winning in relation to the sale and purchase of fabrics. 

16.  Having considered the evidence, I find that it is inherently improbable that having novated the contract specifically to Profit Winning, Profit Winning or their staff played no part in dealing with the Plaintiff. The Plaintiff’s written contract dated 13 April 2004 was sent to Wong of the Defendant by email on 14 April 2004. That was around the time when, according to Tong, the contract was novated. However, there was no email or document (apart from the documents referred to in paragraph 12 above), which showed that the Plaintiff knew or was acting on the understanding that the purchaser of the fabrics had been changed to Profit Winning.

17.  No correspondence or internal documents were disclosed by the Defendant to show the communication between the Defendant and Profit Winning on the sale and purchase of the fabrics between them.  Also, there was no purchase order issued by Profit Winning to the Plaintiff for the purchase of the fabrics. The only purchase order was the one issued by the Defendant to the Plaintiff on 1 April 2004 (and revised on 2 April 2004). I shall deal with the payment record between the Defendant and Profit Winning below.

18.  Despite the alleged novation on or about 14 April 2004, the fabrics were delivered to the Defendant rather than to Profit Winning on 24 April 2004. There was no documentary evidence from Profit Winning to the Defendant or the Plaintiff directing that the fabrics should be delivered to the Defendant rather than to Profit Winning. On the date of delivery of the goods, the Plaintiff also issued an invoice dated 24 April 2004 to the Defendant for the fabrics sold and delivered to the Defendant. That invoice was issued after the commercial invoice dated 21 April 2004 issued by the Plaintiff to Profit Winning.  The quantity and the price of the fabrics were the same in both invoices.

19.  When there were quality issues regarding the fabrics in May 2004, it was the Defendant who communicated the complaints to the Plaintiff. Various letters were written on the Defendant’s letterhead in which no reference was made to Profit Winning being the purchaser of the fabrics. The letters written by the Defendant support the Plaintiff’s case that the contracting party had never been changed to Profit Winning. Pursuant to the Defendant’s demand to the Plaintiff to supply extra fabrics as a result of quality issue, the Plaintiff delivered those extra fabrics (albeit a small quantity) to the Defendant instead of Profit Winning. The relevant delivery note was signed by the Defendant and the invoice was issued to the Defendant and not Profit Winning.

20.  Regarding the outstanding payment, Tsang’s evidence was that the task for demanding payment was left to the account staff of the Plaintiff. As she turned to deal with other purchase orders, she had almost forgotten about this matter. It was not until about September 2006 that Tsang was asked by her colleague in the accounts department to demand payment from the Defendant. Tsang therefore wrote an email on 4 September 2006 to Wong, Ma and Tong of the Defendant demanding payment. As both Wong and Ma were no longer with the Defendant, Tsang continued to make various demands to Tong between end of 2006 until March 2007. Tsang said Tong’s email address at the Defendant appeared to be valid throughout the period.

21.  Tsang also went to see Tong a few times at his former office in Kwun Tong at the beginning of 2007. Tsang said Tong initially asked for more time to check the records and later he asked for time to consult with the other two partners of the Defendant. There were two further meetings on 7 and 10 May 2007 between Tsang and Tong at the new office of Tong. At those meetings, Tsang said Tong never denied the Defendant’s liability. Furthermore, on 10 May 2007, Tong offered to pay 25% of the outstanding amount by installment. Evidence of the offer was contained in an email sent by Tsang to Tong on 11 May 2007.  That offer was rejected by the Plaintiff. Despite further emails from Tsang to Tong demanding payment, the amount remained outstanding. Accordingly, the Plaintiff commenced the present action against the Defendant in November 2007.

22.  Tong did not deny that his email address at the Defendant was a valid email but he maintained that he did not use that email account and therefore did not see Tsang’s emails demanding payment. Tong’s evidence was that he had asked Tsang to recover the money from Profit Winning.  Whilst Tong accepted that he had made an offer to Tsang to settle the matter by paying the Plaintiff 25% of the outstanding amount, Tong said he made the offer in his personal capacity as he was one of the shareholders of Profit Winning and he was willing to take his share of responsibility.

23.  I find it inherently improbable that Tong did not read Tsang’s emails of demand and the email recording the offer to pay 25% of the outstanding amount by instalments. As the General Manager of the Defendant, Tong should have checked his email during a long period of time from September 2006 to November 2007 when Tsang sent him those emails. I also do not accept as credible evidence that the offer was made in by Tong in his personal capacity. No document supports his allegation. Though the matter was raised in Tsang’s witness statement dated 28 August 2009, no supplemental statement was filed by Tong denying such allegation. It was also not dealt with during Tong’s examination in chief. The evidence only came out for the first time during cross-examination.

24.  The alleged novation was not apparent from the contemporaneous documents until the filing of the Defence. Before the commencement of the present proceedings, various demands were made by the Plaintiff to the Defendant, for example, the letter of demand issued by the accounts department of the Plaintiff to the Defendant dated 11 December 2006; the emails sent by Tsang to Tong in 2007 demanding payment of the fabrics from the Defendant; and the letter before action issued by the Plaintiff’s solicitors to the Defendant dated 19 November 2008. Despite all those demands, there was no document, email or correspondence from the Defendant denying liability on the ground that the purchaser of the fabrics was Profit Winning rather than the Defendant. When Tong was cross-examined as to why the Defendant did not respond to the demand letter by the Plaintiff’s solicitors dated 19 November 2008, Tong said since his offer to settle the matter had been rejected by the Plaintiff, he did not respond to the demand letter.  I do not find Tong’s explanation credible.  If the contract had been novated to Profit Winning, even though the Plaintiff did not accept Tong’s alleged personal offer to settle the matter, one would expect the Defendant to object to the Plaintiff’s demand on the basis that it was Profit Winning and not the Defendant who should be liable to the Plaintiff.

25.  Mr. Cheung relied on the Court of Final Appeal’s case on Chiu Yu Man and others v HKSAR [2001] 3HKLRD 525 to suggest that the arrangement of allowing Profit Winning to simply apply for a letter of credit for the Defendant without a novation would be a sham as there was no underlying transaction and the parties would not have agreed to anything but genuine business transaction.  However, I do not agree with Mr. Cheung’s submission. The scheme used in the Chiu Yu Man case (which was a criminal appeal) was very different from the present case. In that case, there was no underlying transaction whatsoever and the sham transactions were set up to deceive the bank in granting credit to the defendant’s company. In the present case, there is evidence which support the Plaintiff’s contention that there was no novation of contract and Profit Winning was merely asked to apply for the issue of a letter of credit in favour of the Plaintiff pursuant to the contract between the Plaintiff and the Defendant.

26.  The Defendant relied on some bank statements of the Defendant and Profit Winning and a ledger of Profit Winning to show that the Defendant had paid Profit Winning for the fabrics by transferring the sum of HK$650,000 to Profit Winning’s account on 16 April 2004 and a sum of HK$674,941.28 was deducted from Profit Winning’s bank account for the issue of the letter of credit on 21 April 2004.

27.  Mr. Cheung submitted that based on the quantity of the fabrics delivered, namely 38,063 yards, the unit price of US$2.1 per yard, and Profit Winning’s profit margin of 5%, the amount payable by Profit Winning to the Defendant was about $654,000, an amount very close to the sum of HK$650,000 transferred by the Defendant to the account of Profit Winning. 

28.  There is a fallacy in the Defendant’s submission.  As of 16 April 2004, the amount of fabrics to be supplied was stated to be 39,115 yards, and the amount involved was US$82,141.50.  This was evident by the information contained in the application for letter of credit. The quantity of 38,063 yards were the actual amount of fabrics delivered on 24 April 2004, 8 days after the transfer of HK$650,000 to Profit Winning on 16 April 2004.  Adding 5% profit margin on the sum of US$82,141.50, the amount payable by the Defendant to Profit Winning would be US$86,248.58 (approximately HK$672,000). This is HK$22,000 more than the amount of HK$650,000 allegedly paid by the Defendant to Profit Winning as the price of the fabrics. In any event, no evidence was adduced by the Defendant to show payment by the Defendant to Profit Winning for the balance of the alleged purchase price for the fabrics.  Furthermore, if the fabrics were intended to be sold by Profit Winning to the Defendant, there was no justification for the Defendant to pay for the fabrics on 16 April 2004 before the fabrics had been delivered to the Defendant on 24 April 2004.

29.  In the premises, it is inherently more probable that since the Defendant was unable to issue a letter of credit, they had asked Profit Winning to issue a letter of credit.

30.  The law on novation is well settled. In order to effect a novation of the contract, the consent of all the contracting parties and the third party who would replace one of the contracting parties are required.

31.   Having considered all the evidence before me, I find that, on the balance of probability, there was no novation of contract amongst the Plaintiff, the Defendant and Profit Winning. The Defendant remained a contracting party in relation to the sale and purchase of fabrics.

Whether cargo receipt and inspection certificate had been given to the Plaintiff

32.  This issue is relevant to the fall back argument of the Defendant which I shall deal with below.

33.  Tong said in his witness statement dated 31 August 2009 that Profit Winning had already issued the inspection certificate and cargo receipt to the Plaintiff so that they could produce them to the Bank for payment under the letter of credit. In support, the Defendant disclosed unsigned copy of the inspection certificate dated 20 April 2004 and cargo receipt dated 24 April 2004. Tong was challenged by the Plaintiff’s Counsel, Mr. Lau, in cross-examination that the inspection certificate and cargo receipt were unsigned documents and there was no explanation in Tong’s witness statement or during his examination in chief as to why they could not produce the signed copy of the documents.  It was not until Tong was cross-examined that he said that he could not locate the signed copy of the documents and the one disclosed are merely print out from the Defendant’s computer.

34.  Having considered the evidence in this case, I find it inherently more probable that the inspection certificate and the cargo receipt had never been issued to the Plaintiff.  As of the date of the unsigned inspection certificate on 20 April 2004, the fabrics had not been delivered to the Defendant and thus inspection could not have been made. Although Tong said inspection might have taken place before the delivery of the fabrics, there was no documentary evidence to show that inspection had taken place prior to delivery of the fabrics.  On the other hand, it is undisputed that the quality issue of the fabrics was raised after delivery of the fabrics which resulted in the Plaintiff sending extra fabrics to the Defendant free of charge on 1 June 2004.

35.  The inspection certificate and cargo receipt disclosed by the Defendant were merely blank forms. Tong’s evidence that the signed cargo receipt was given to the Plaintiff on 24 April 2004 when the fabrics were delivered to the Defendant is inconsistent with the contemporaneous document, namely an email from Tsang to Wong dated 4 May 2004 asking Wong to advise as to when the Plaintiff could receive the cargo receipt. This email clearly showed that as of that day, the cargo receipt had not been delivered.

36.  In the cross-examination of Tsang and TO, Mr. Cheung relied heavily on Tsang’s witness statement which stated that the only outstanding document was the cargo receipt, rather than both cargo receipt and inspection certificate as alleged by the Plaintiff. Both TO and Tsang explained that in their industry or at least in the Plaintiff company they would regard the inspection certificate and the cargo receipt as one document called the cargo receipt, since buyers would normally issue both documents at the same.  They also said that for sale of fabrics to a local buyer, the Plaintiff would allow the buyer to inspect the goods after delivery before the buyer issues the cargo receipt and the inspection certificate.

37.  I accept the evidence of TO and Tsang that when Tsang said in her witness statement that the only outstanding document was the cargo receipt, she was referring to both the cargo receipt and the inspection certificate.  Even if the only outstanding document is the cargo receipt, the Plaintiff would not be able to obtain payment under the letter of credit.  It is clear from the email that as of 4 May 2004, the Plaintiff has not received the cargo receipt.  Furthermore, had the Plaintiff received the cargo receipt and the inspection certificate in end of April 2004, they would have immediately presented all those documents to the Bank for payment under the letter of credit.

Defendant’s fall back position

38.  Mr. Cheung accepted that had I found in favor of the Plaintiff that no cargo receipt and inspection certificate had been delivered to the Plaintiff, he could not rely on his fall back position on law. However, for completeness, I shall also deal with this issue.

39.  Mr. Cheung submitted that if the Court found in favor of the Defendant that the cargo receipt and the inspection certificate had been delivered to the Plaintiff, the Defendant would argue that by reason of the Plaintiff’s failure in presenting the documents for payment under the letter of credit, they were guilty of laches with the result that the Defendant’s liability was discharged.  Mr. Cheung relied on paragraph 23-097 of Benjamin’s Sale of Goods (7^th Edition) which says :

“Seller’s duty to claim payment from bank. As it is agreed in the contract of sale that payment should be made by the furnishing of a documentary credit, the seller has to claim payment form the banker in the first instance and only on the banker’s default from the buyer. If the seller fails to present the documents to the banker and, as a consequence, is unable to claim payment under the documentary credit, he is guilty of laches in enforcing his security and the buyer is thereupon discharged.”

40.  In support of the proposition stated in the last sentence of the passage quoted above, the learned author cited the following cases: WJ Alan & Co Ltd v El Nasr Export and Import Co. [1972] 2 Q.B.189 at 211; Peacock v Pursell (1863) 14 C.B. (N.S.) 728; Polak v Everett (1876) 1 Q.B.D. 669 at 675-676.

41.  The facts and circumstances of WJ Alan & Co Ltd v El Nasr Export & Import Co case were different from the present case. However, Mr. Cheung relied on what Lord Denning, the Master of the Rolls said at pages 209-212. In that case, some sellers sold coffee to certain buyers who resold the coffee to sub-buyers.  An irrevocable letter of credit was issued by the sub-buyers in favour of the buyers who procured the transfer of the letter of credit in favour of the sellers. One of the issues in the case was whether the letter of credit issued was to be regarded as absolute payment of the price, or as conditional payment of it, or as no payment at all but only a means by which payment may be obtained; that is, as collateral security. Mr. Cheung accepted that in the present case, the letter of credit cannot be construed as absolute payment of the price. Mr. Cheung argued that the issue of letter of credit in favour of the Plaintiff should be construed as no payment at all.  In such case, he relied on what Lord Denning M.R. said at page 211 of the WJ Alan case :

“No payment at all

If the letter of credit is no payment at all, but only a means by which payment may be obtained, i.e., if it is only collateral security, the consequences are these: the seller ought to present the documents to the banker. If the seller does not do so, he will be guilty of laches in enforcing his security and the buyer will be discharged: see Peacock v Pursell (1863) 14 C.B.N.S. 728. But if on the presentation the banker fails or refuses to take up the documents, then (if the letter of credit is only collateral security) the seller will be entitled to take the documents round to the buyer (or send them to him) and demand that he takes them up and pay the price.”

42.  In Peacock v Pursell at p.729, Erle C.J. said:

"I am of opinion that this rule must be discharged. The action is for goods sold and delivered. The plea is, that the defendant delivered and the plaintiffs accepted and received a bill of exchange for and on account of the debt. The evidence is, that the defendant, being indebted to the plaintiffs for goods sold and delivered, offered them the bill in question, which the plaintiffs at first declined to receive, but, being pressed to take it as collateral security, consented to do so. Assuming that the meaning of a bill being received “for and on account of” a debt, would operate as a suspension of the remedy for the debt during the currency of the bill, the evidence here would not support the plea if it were necessary to go to that extent. But, however the bill was received, it clearly would be payment if at maturity the money were obtained for the bill. Now, this case has eventuated in the non-payment of the bill coupled with this fact that, the holders having neglected to present the bill and to give the defendant notice of its dishonour, all remedy upon it is lost. The security is marred by the plaintiffs' own laches. The legal effect of taking a bill as a collateral security is, that if, when the bill arrives at maturity, the holder is guilty of laches, and omits duly to present it and to give notice of its dishonour, if not paid, the bill becomes money in his hands as between him and the person from whom he received it. That being so, the plaintiff's debt is satisfied."

43.  Mr. Cheung submitted that if the Court accepts TO and Tsang’s evidence that the use of Profit Winning to open a letter of credit was merely an arrangement by having another company making the payment by letter of credit, this would fall within the “no payment at all” scenario where it was only a means by which payment may be obtained. Since the Plaintiff was guilty of laches in failing to present the documents for payment under the letter of credit, the Defendant’s liability was thereby discharged.

44.  Mr. Cheung further submitted that if the letter of credit was a “conditional payment” of the price, he would rely on Lord Denning M.R.’s judgment at page 210 in the WJ Alan case:

“Conditional payment

If the letter of credit is conditional payment of the price, the consequences are these: the seller looks in the first instance to the banker for payment: but, if the banker does not meet his obligations when the time comes for him to do so, the seller can have recourse to the buyer. The seller must present the documents to the banker. One of two things may then happen: (1) the banker may fail or refuse to pay or accept drafts in exchange for the documents. The seller then, of course, does not hand over the documents. He retains dominion over the goods. He can resell them and claim damages from the buyer. He can also sue the banker for not honouring the credit: see Urquhart Lindsay & Co. Ltd. v. Eastern Bank Ltd. [1922] 1 K.B. 318. But he cannot, of course, get damages twice over. (2) The bank may accept time drafts in exchange for the documents, but may fail to honour the drafts when the time comes. In that case the banker will have the documents and will usually have passed them on to the buyer, who will have paid the bank for them. The seller can then sue the banker on the drafts: or if the banker fails or is insolvent, the seller can sue the buyer. The banker's drafts are like any ordinary payment for goods by a bill of exchange. They are conditional payment, but not absolute payment. It may mean that the buyer (if he has already paid the bank) will have to pay twice over. So be it. He ought to have made sure that he employed a "reliable and solvent paymaster."

45.  In the WJ Alan case, the Master of the Rolls reached the following conclusion at page 212:

“As a result of this analysis, I am of the opinion that in the ordinary way, when the contract of sale stipulates for payment to be made by confirmed irrevocable letter of credit, then, when the letter of credit is issued and accepted by the seller, it operates as conditional payment of the price. It does not operate as absolute payment.

It is analogous to the case where, under a contract of sale, the buyer gives a bill of exchange or a cheque for the price. It is presumed to be given, not as absolute payment, nor as collateral security, but as conditional payment. If the letter of credit is honoured by the bank when the documents are presented to it, the debt is discharged. If it is not honoured, the debt is not discharged: and the seller has a remedy in damages against both banker and buyer.”

46.  Mr. Cheung argued that if the Plaintiff had obtained the full set of documents which entitled them to present the documents for payment under the letter of credit, the Plaintiff must first look to the bank for payment.

47.  The first issue is whether when the irrevocable letter of credit was issued by the Bank to the Plaintiff, it should be regarded as absolute payment of the price, as conditional payment of it, or as no payment at all but only a means by which payment may be obtained; that is collateral security (see W.J. Alan & Co v. El Nasr Export, at 209D, Lord Denning M.R.).

48.  If the letter of credit was “absolute payment” of the price, the seller could only look to the bank for payment. Even if the bank refused to pay or went into liquidation, the seller could not recover the price from the buyer.  In this case, such effect was never intended by the parties.  The Plaintiff required an irrevocable letter of credit as they had never done any business with the Defendant and they did not trust the Defendant in making payment of the fabrics. However, the Plaintiff never intended or agreed to treat the letter of credit as absolute payment of the price.

49.  If the letter of credit was intended to be “conditional payment” of the price, the seller would look in the first instance to the bank for payment. If the bank does not meet their obligations when the time comes for them to do so, the seller can have recourse to the buyer (see W.J. Alan & Co v. El Nasr Export, at 210C, Lord Denning M.R.). In other words, if the seller (the Plaintiff) does not receive payment under the letter of credit, it is presumed that the buyer (the Defendant) is still liable to pay the price. 

50.  The difference between conditional payment and absolute payment is that in the case of the conditional payment, the debt is still due by the buyer to the seller, though the seller’s remedy is suspended during the currency of the letter of credit. Therefore, if the bank fails to pay upon presentation of all the requisite documents under the letter of credit or the bank is insolvent, the seller can sue the buyer for the price of goods sold and delivered.

51.  If the letter of credit was intended to be “no payment at all”, but only a means by which payment may be obtained, i.e. if it is only collateral security, the effect of it is that the seller ought to present the documents to the bank for payment under the letter of credit. If the seller does not do so, he will be guilty of laches in enforcing his security and the buyer will be discharged. (see W.J. Alan & Co v. El Nasr Export, at 211D, Lord Denning M.R., referring to the case of Peacock v. Pursell). 

52.  The difference between “conditional payment” and “no payment at all” is that in the latter case, during the currency of the letter of credit, the existing remedies for the debt are unaffected.

53.  In re Charge Card Services Ltd [1989] 1 Ch 497, at 511, Sir Nicholas Browne-Wilkinson V.-C. said that similar to the case of payment by cheque or bill of exchange, in the case of letter payment by means of a letter of credit, there is a presumption of conditional payment, i.e. it is presumed that the buyer is still liable to pay the price if the seller does not receive payment under the letter of credit. In W.J. Alan & Co v. El Nasr Export, Lord Denning M.R. found that the letter of credit in that case was intended to be a conditional payment.

54.  In the present case, I find that the irrevocable letter of credit required by the Plaintiff in the terms of payment was intended to be conditional payment. If the letter of credit is honoured by the Bank upon presentation of the requisite documents, the debt of the Defendant is discharged.  If the Bank failed to pay, the debt is not discharged and the Plaintiff would have a remedy against both the Bank and the Defendant.

55.  Having found that the payment in this case was a conditional payment, what would be the effect of the failure by the seller to present all the requisite documents under the letter of credit for payment (assuming that the buyer has given the seller the relevant documents required under the letter of credit)? 

56.  Lord Denning M.R. referred to the case of Peacock v. Pursell in the WJ Alan case. Peacock v. Pursell was about a bill of exchange rather than a letter of credit. In that case, a bill of exchange for 30 l., payable two months after the date of the bill, was drawn by one Perry upon and accepted by one Angerstein. It was then endorsed by Perry to Pursell, and by Pursell to Peacock.  Erle C.J. held that the payment was intended to be “no payment at all” and the bill was taken as a collateral security. The consequence was that when the bill of exchange arrived at maturity, the holder (Peacock) is guilty of laches by omitting duly to present the bill for payment and to give notice of its dishonour, the bill of exchange becomes money in his hands as between him (Peacock) and the person from whom he received it (Pursell). Willes J, who was of the same opinion as Erle C.J., said that if holder of the bill is guilty of laches by failing to present the bill for payment whereby the security becomes deteriorated or valueless, it becomes equivalent to actual payment.  

57.  There was very good reasons for the decision in Peacock v. Pursell.  The holder of the bill (or the security) must do all that is necessary to obtain payment of the bill, in that case by presenting the bill for payment. As the holder of the bill (Peacock) failed to do so, the buyer (Pursell) was thereby prejudiced.  Accordingly, the holder of the bill cannot hold the buyer liable on the debt for which the bill was given. 

58.  However, the case of letter of credit was very different in nature and in the parties’ relationship from the case of bill of exchange.  It is well established that documents must be presented to the banker before the expiry of the credit (see para. 23-210 Benjamin’s Sale of Goods 7^th edition).  Both the bank and the applicant of the letter of credit are under no obligation to effect payment if the documents were presented after the expiration of the credit. Though the issuing bank might have deducted the credit or payment from the applicant’s account when they issued the letter of credit, if the letter of credit had long expired (as in this case) and no payment was made under the letter of credit, the applicant of the letter of credit would be entitled to recover the amount from the bank. 

59.  Accordingly, the failure to present the documents for payment would not, in the case of letter of credit, prejudice the buyer as in the case of being a holder and endorsee of the bill of exchange such as what happened in Peacock v. Pursell.

60.  In the circumstances, even where the Plaintiff failed to present all the requisite documents for payment under the letter of credit, the debt would not be extinguished and it would not stop the Plaintiff from pursuing the Defendant for payment of the price of goods sold and delivered.

61.  However, since I have decided that the Defendant had never given the Plaintiff the cargo receipt and the inspection certificate, the Defendant’s fall back argument must fail.

Order

62.  The Plaintiff succeeds in their claims and is entitled to judgment. I order that judgment be given in favour of the Plaintiff for :

(a)   the sum of US$79,932.30;

(b)   Interest on the sum of US$79,932.30 from the date of the issue of the Writ of Summons on 27 November 2008 to the date of judgment at the rate of 8.25% per annum and thereafter at judgment rate until payment.

63.  I make an order nisi that the costs of the action be to the Plaintiff, to be taxed if not agreed. Unless an application is made to vary the cost order nisi, it shall become absolute after 14 days from today.