GNT OIL CO LTD v. HANA BANK

HCCL 32/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 32 OF 2004

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J U D G M E N T

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The application

1. This is an application by summons dated 28 December 2004 by the plaintiff, GNT Oil Company Limited (‘GNT’) against the defendant, Hana Bank, for summary judgment in the sum of US$1,672,700.64, together with interest and costs.

2. It is said that the defendant bank has wrongfully failed to make payment under an irrevocable letter of credit issued by Hana Bank on 15 September 2003 in favour of GNT as beneficiary.

3. Although several defences are raised, the salient issue in this application is whether the issuing bank is able successfully to invoke the ‘fraud exception’ as the basis of its refusal to make payment under the credit.

The factual background

4. GNT is a trader in the gasoil industry.

5. The underlying transaction relating to the documentary credit in this case was the onsale by GNT to Petaco Petroleum Inc. (‘Petaco’), a Korean company, of a cargo of oil that it had bought from one Paul Oil, another Korean company.

6. This was a purchase afloat, and was part of a chain transaction, Paul Oil having bought the oil from another Korean trader, which in turn had bought it from a Taiwanese refinery.  The gasoil in fact was loaded on board the vessel “Woo Tae” in Taiwan on 17 September 2003 and three days later, on 20 September 2003, was discharged at Pyongtaek, Korea.

7. Petaco was a client of the defendant bank.  At Petaco’s request, Hana Bank had issued an irrevocable letter of credit in the amount of US$1,672,700.64, in favour of GNT as beneficiary.

8. This credit expressly was subject to the UCP 500.  It was amended four times, on 17 September, 23 September, 6 October and 7 October 2003, and was available with any bank by negotiation.

9. Payment was to be made against drafts drawn at sight, and the documentation required was a full set of original bills of lading and a set of commercial invoices.

10. However, Field 47A of the credit provided that if these documents were not available at the time of negotiation, “then payment will be effected against commercial invoice and beneficiary’s Letter of Indemnity”.

11. It is this provision which lies at the root of argument in this case.

12. The letter of credit in question was partially negotiated by GNT with HSBC, and the proceeds of such negotiation were used, in part, to pay to Paul Oil, the seller of this cargo of gasoil to GNT, the purchase price in the sum of US$1,589,977.96.  The difference between that figure and the onsale price to Petaco represented, of course, GNT’s profit on the deal.

13. At the time of negotiation of the credit with HSBC, GNT presented two documents : its commercial invoice and its Letter of Indemnity.

14. This Letter of Indemnity was from GNT to Petaco.  Its substance was that in the event that GNT was unable to provide Petaco with the three original bills of lading relating to the sale of the oil, GNT expressly warranted that it had clean title to the oil and the right to effect delivery, and that it agreed to exercise “utmost efforts” to obtain and surrender to Petaco the original bills of lading and further agreed to hold Petaco harmless against any claims or demands to the oil made by a holder or transferee of the original bills, or by any third party claiming an interest in the cargo or its proceeds.  The Letter of Indemnity provided that it was subject to English law, and would automatically expire upon the tender to Petaco of the three original bills of lading.

15. At the time of the negotiation of the credit, HSBC, as negotiating bank, had examined the documents presented and had found them to be in strict compliance with the credit.  Accordingly, partial payment, in the sum of US$500,000, was made thereunder to GNT.

16. Thereafter HSBC looked to the issuing bank, Hana Bank, for reimbursement.  However, by the defendant’s SWIFT message dated 28 October 2003, Hana Bank purported to reject the documents presented, alleging discrepancies.

17. These allegations were rejected by HSBC, prompting an exchange of SWIFT messages on the subject.

18. In the event of Hana Bank’s refusal to pay, HSBC exercised its right of recourse against its customer, GNT, and for present purposes dropped out of the picture.

19. Petaco went into bankruptcy in Korea on or about 22 October 2003.

20. On 23 June 2004 GNT submitted its case to the ICC for a ruling on the dispute, and on 24 August 2004 this ruling was issued, the panel holding unanimously that the documents presented were not discrepant, and that the issuing bank had no reason to refuse the documents and not to make payment under the credit.  Hana Bank made no submission to the ICC.

21. On 9 June 2004 GNT issued its writ in these proceedings, and some six months later this application for summary judgment.

22. The application originally was argued on 20 April 2005, but at its conclusion was adjourned for additional evidence/argument upon the production by the plaintiff of a letter addressed to it by Petaco, the effect of which appeared to negate one of the principal arguments mounted by the Bank in opposition to such summary judgment.  Accordingly the application was relisted for further submissions on 13 May 2005.

Ambit of the argument

23. Notwithstanding matters variously raised on affidavit, argument by the defendant upon this application has covered four points, of which in my view one only, that relating to the ‘fraud exception’ is worthy of detailed consideration.  I take them in turn.

(i)  Discrepancy

24. One of the discrepancies originally relied on by the defendant bank, and the only one now pursued in this case, is that Field 47A of the credit required that “… price shall be based on Bill of Lading (B/L) Quantity…”.

25. However, the documents presented were a set of commercial invoices and a Letter of Indemnity; thus, says Mr Carolan, there was no bill of lading presented and no reference to ‘quantity’ as stated in a bill of lading, and it follows therefore that the documents presented were discrepant in not containing information as to price “based… on Bill of Lading Quantity”, nor could the quantity stated on the commercial invoice be compared or referred to any bill of lading quantity.

26. I reject this submission, which was but faintly argued.

27. Field 47A of the credit, which is the defendant’s document, expressly provided that in the event that bills of lading are unavailable at the time of negotiation, then payment will be effected against commercial invoice and beneficiary’s Letter of Indemnity.  Accordingly, I fail to understand why, if provision specifically is made for such documentary presentation as was anticipated by amendment to the credit (on 6 October 2003), and as in fact occurred, that this should entitle the bank to raise the argument that it now seeks to press upon this court.

28. I can see nothing in this argument, which transparently is without merit.

(ii)  Locus

29. It is said that as the credit was negotiated and documents presented by HSBC, and that since the plaintiff as beneficiary under the credit has not itself tendered the documents nor offered to do so, it had not founded its cause of action against the defendant qua issuing bank.

30. Indeed, says Mr Carolan, the Points of Claim relied solely upon presentation to HSBC as agent of the plaintiff, whilst the plaintiff asserts in its evidence that it acquired rights against the defendant by reason of HSBC’s recourse against it, and that until the claim is amended to plead tender by plaintiff to defendant, and that plea verified as such, the summary judgment application is “fatally flawed”.

31. This struck me as a highly optimistic submission, and its prospects of success were not improved by the revelation from the bar, later substantiated in evidence, that the documents the defendant says should have been tendered by the plaintiff actually remain in the possession of the defendant bank : on 28 October 2003, in a SWIFT message from Hana Bank to HSBC, Hana Bank confirmed that they were holding the rejected documents “at your risk and disposal”.

32. This point is hopeless.  I reject it.

(iii)  Availability of bill of lading/breach of terms of credit

33. The initial argument under this head was that under the credit, Fields 46A and 47A admitted of presentation of the Letter of Indemnity in lieu of the bill of lading only if the bill of lading was ‘not available’, that, as a matter of construction, this meant that the plaintiff would, if possible, present the bill of lading rather than the Letter of Indemnity, and that it had neither been pleaded nor established that the bill of lading relevant to this cargo was not available.

34. In the event, Mr Carolan did not, I think, choose to pursue this line of argument further when faced with an affidavit in reply from the plaintiff explaining that the plaintiff seller did not have the bill of lading in its possession at the time of negotiation.  Accordingly, he took the view, correctly in my judgment, that he was not in a position to gainsay this sworn evidence, and thus the point could not be used as an independent basis justifying non-payment under the credit.

35. Mr Carolan made it clear, however, that whilst the point in this form was no longer active, elements of this same argument emerged under the ‘fraud exception’ head. 

(iv)  Fraud

36. Mr Carolan recognizes that this is the “most substantial” point in this application.  I agree with this characterization.

37. He maintained that, unlike the position in terms of discrepant presentation, wherein the rejecting bank is bound by the terms of its contemporary notice of rejection, it is entirely legitimate to develop a fraud argument as the evidence comes to light. 

38. In this regard Mr Carolan drew the attention of the court to the observations in Jack, Documentary Credits, 3^rd ed. (2001), at para 9-29 to 9-31, wherein, after reviewing the judgment of Waller LJ in SAFA Ltd v. Banque du Caire [2000] Lloyd’s Rep. 600, the authors suggest that “if a beneficiary is refused payment under a credit, he should be entitled to summary judgment ordering payment without any detailed investigation of the evidence and disclosure of documents, unless on the material available to the bank on the hearing of the application for summary judgment the bank can establish that there is a real prospect of proving that the only realistic inference is that the beneficiary was guilty of fraud.”

39. For present purposes I am content to accept either this formulation or the alternative rubric whereby there must be a ‘real prospect of success’ for the bank in establishing that the demand was fraudulent even if it had no clear evidence of fraud at the time of the demand.

40. In fact, I do not consider that there is much practical difference between these formulations.  Plainly an allegation of fraud is a serious matter and, under our system at least, not one that is lightly made; equally, when made it must be clear to the tribunal that there is a real likelihood of getting home on the point at trial before leave to defend is given on this basis.  In this regard, it is not easy, indeed perhaps not advisable, to say a great deal more about the appropriate benchmark, which is often easier to recognize than to describe.

41. Having thus set the bar, what therefore is the defendant’s contention in this instance, and does it meet the required standard to preclude the grant of summary judgment which otherwise would be forthcoming?

42. It is in this context that the Letter of Indemnity looms into sharper focus : it will be recalled that it was this document, together with the commercial invoice, which was the alternative mode of presentation open to the plaintiff in the negotiation of the credit in the absence of possession of the original bills of lading.

43. In summary, what the defendant bank says is this.  The Letter of Indemnity dated 6 October 2003 stated, in terms, that the plaintiff would “exercise our utmost efforts to obtain and surrender only to you, as soon as possible the 3/3 original Bills of Lading …”.

44. However, it was clear on the evidence that with regard to the like shipment the plaintiff already had issued another Letter of Indemnity to Woolim Shipping, the Korean owner of the vessel “Woo Tae” upon which this cargo of gasoil had been transported from Taiwan to Korea, and that this indemnity had included the conflicting undertaking to the effect that “as soon as all original Bills of Lading for the above cargo have come into our possession to deliver the same to you whereupon our liability hereunder shall cease …”.

45. It was further clear, so the argument went, that it never had attempted to provide the bills of lading either to Petaco or to the defendant bank; instead the bills relating to this cargo had been given to the carrier, Woolim, on 26 October 2003 at the earliest.

46. Thus, it was argued that if the promise in the Letter of Indemnity to Petaco was a statement of intention it was never truly held and was false, as evidenced by the pre-existing letter given to Woolim, that accordingly there was no doubt in the circumstances that the Letter of Indemnity in this case was a ‘dishonest document’ utilized to obtain payment by means of the documentary credit, and that the defendant bank had known of the misrepresentation before it had rejected the documents because a copy of the similar letter of indemnity had been obtained from Woolim on 23 October 2003 prior to the bank having stated in its telex to HSBC of 28 October 2003 that non-acceptance of the documents was due, inter alia, to “fraud by dual issuance of LOI”.

47. It followed, therefore, asserted Mr Carolan, that the ‘fraud exception’ defence had been made out to the required degree, and that the defendant should have the opportunity to examine these matters with the relevant witnesses at trial.

48. For the plaintiff Mr Chua SC took strong issue with this line of argument.  He noted that on the evidence GNT had issued the Letter of Indemnity in its capacity as charterer of the “Woo Tae”, and that the contract of affreightment had been concluded between Woolim and GNT on 14 March 2003.  Moreover, in at least one of the previous similar transactions in which the defendant bank had been involved a similar LOI had been issued by GNT as charterer to the carrier, and the defendant had honoured the credit issued in favour of GNT in that transaction.

49. It was very common in the oil trade, he asserted, that a quick turnaround of a vessel in port was expected, it was not easy to store bulk oil shipments to the order of the carrier, and in transactions such as this, involving purchase afloat, it was often the case that an LOI would be issued in favour of the shipowner absent presentation of the relevant bill of lading.  In this regard, he cited the decisions of Borealis AB v. Stargas Ltd [2002] 2 AC 205, at 229, in which Lord Hobhouse expounded on “the relatively common situation” in which the vessel and cargo arrived at the destination “before the bills of lading have completed their journey down the chain of banks and buyers”, and that the situation is dealt with commercially by means of delivery against a letter of indemnity, and further the observations of this court to similar effect in Abu Dhabi National Tanker Co. v. South View Holdings Ltd, (unrep), HCCL 135 of 1998, judgment dated 21 September 1998.

50. Accordingly, it was submitted that it was common practice in the gasoil trade for the purchaser to issue an LOI in favour of the carrier in situations wherein the consignee named in the bill of lading inevitably would be named as the first buyer in the chain, or to the order of its bank, and given the frequent sale afloat of the same cargo the bill of lading would not and could not possibly be issued in favour of the ultimate purchaser at the end of the chain.

51. Thus, argued Mr Chua, the unequivocal evidence of GNT in this case, supported by the contemporaneous documents, including the Letters of Indemnity to Petaco and Woolim and the tanker bill of lading, demonstrated that that which had occurred was in accordance with common commercial practice, and that there was no credible evidence of any dishonesty on the part of GNT.

52. For my part, in the particular circumstances of this case I am unable to see why a Letter of Indemnity in like terms as given to Woolim should enable the conclusion to be drawn that there has been a fraudulent misrepresentation by GNT either to Petaco, or to the defendant bank, or at all, nor for that matter do I grasp, when the Letter of Indemnity in question undoubtedly was compliant in form for the purpose of the negotiation of the credit, why the defendant bank should now, absent clear and cogent evidence of fraud, be in a position to delve into the circumstances of the underlying transaction for the avowed purpose of vitiating its otherwise clear obligation under its own credit to pay against presentation of compliant documents.

53. In short, therefore, I do not accept that this was a ‘dishonest document’ enabling invocation of the ‘fraud exception’ to the principle of the autonomy of the credit.

54. There is nothing in these facts which in my view is “remotely approaching true evidence of fraud or anything which makes fraud obvious or clear to the bank”, to quote from the judgment of Lane LJ in Edward Owen v. Barclays Bank [1978] 1 QB 159 (CA).  Nor do I consider that the case of Rafsanjan Pistachio Producers Co-operative v. Bank Leumi (UK) Plc. [1992] 1 Lloyd’s LR 513, upon which Mr Carolan relies, is of particular assistance – that case was very different upon its facts, wherein there had been a clear fraud in the making of the applications for the four L/C’s there in question, each of which was inconsistent with the underlying transaction.

55. The short and ineluctable point is that this cargo of oil was supplied to Petaco by the plaintiff, GNT, which remains unpaid, and I am unable to discern any justifiable basis upon which the defendant bank can rely in order to relieve itself from its obligation to pay the beneficiary under the credit upon presentation of compliant documents.

56. The instinctive reaction of the court to the merit of this proposed ‘fraud’ defence was to some extent buttressed by the eleventh hour production, by the plaintiff, of a copy of an undated letter obtained by the defendant bank from its customer, Petaco.

57. This document, which is purportedly signed by one Mr W.S. Lee, General Manager of the Trading Division of Petaco, for and on behalf of the Buyer, and is addressed to GNT, the seller, cites the relevant sale and purchase contract number and bill of lading date, together with reference to the “Woo Tae”, and reads :

“With reference to the above-mentioned contract, The Buyer hereby agrees that if The Seller chooses to negotiate the relevant L/C with L.O.I (LETTER OF INDEMNITY), then The Buyer agree and authorize The Seller to return the relevant original bills of lading and other shipping documents directly to the Owners of the Vessel.

The L.O.I. (LETTER OF INDEMNITY) shall expire automatically and simultaneously upon The Seller’s returning of the original bills of lading and other shipping documents to the Owners of the Vessel.”

58. It was the sudden emergence of this document, at the conclusion of the plaintiff’s argument, that caused the adjournment of this application for evidence to be filed in terms of how it had come to the attention of the plaintiff, and why it had not emerged sooner.  Accordingly, new affidavit evidence was filed relating to its late discovery which I am prepared to accept on its face, which is that the document was provided to the plaintiff by Petaco during the same business trip by the plaintiff’s Mr Choi in October or November 2003 at the same time as he had obtained the original bill of lading from Paul Oil, the vendor of this cargo of gasoil to GNT.

59. Although it is said in reply that the defendant bank has “reasonable grounds to believe” that the letter in question had been signed by Mr W.S. Lee without Petaco’s approval, I do not believe that this issue (or, for that matter, this letter) in itself is of great significance, and certainly, in the absence of strong evidence of fraud, which I have been signally unable to discern in this case, cannot justify proceeding to trial in this action, notwithstanding Mr Carolan’s efforts to cast doubt upon the provenance and content of this letter, and in particular the fact that it appears to have been created after the bankruptcy of Petaco on 22 October 2003.

60. Accordingly, at bottom I regard this letter, and its late production, to be little more than a sideshow to the main event.

61. And in so far as the ‘main event’ is concerned, namely the argument as it revolved around the ‘fraud exception’, I hold that the defendant has not succeeded in hitting the evidential benchmark required to raise a case of fraud sufficient at this stage to obtain an order for leave to defend, whether conditional or unconditional.

62. At the end of the day it appears tolerably clear that the commercial reason for the reluctance of Hana Bank to honour its obligations to the plaintiff, the beneficiary under the credit, and within the underlying transaction the seller of the gasoil to Petaco, is that the defendant finds itself unsecured in terms of its financial relationship with Petaco, which now has been placed into bankruptcy in Korea.  That fact no doubt reflects upon the defendant’s risk management, but it is a matter of no consequence in terms of the current legal analysis : on the evidence the defendant either is entitled to surmount this summary judgment hurdle, or it is not.

63. For the reasons outlined above, I have found that it is not.

Order

64. The plaintiff is to have judgment against the defendant in the sum of US$1, 672,700.64.

65. There is to be an order nisi that there be interest upon the said sum at the rate of 1% over prime from the date of rejection of the documents, that is, 28 October 2003 until the date of judgment herein, and thereafter upon the principal sum at the judgment rate from time to time prevailing until payment.

66. As to costs, I make an order nisi that the plaintiff is to have the costs of this action and of this application, save that the defendant is to have the costs of the additional hearing on 13 May 2005, such costs to be taxed if not agreed.

67. I decline to certify this case as fit for two counsel.