BANK OF CHINA v. JIAN SING BANK LTD.and XINYUAN TRADING CO. LTD. (Third Party)

HCCL82/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.82 OF 1999

(Transferred from HCA4018 of 1999 pursuant to the
Order of Mr Justice Stone dated 6 May 1999)

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J U D G M E N T

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THE ACTION

1. This is a dispute about payment under a letter of credit. The plaintiff ("BOC") is the Hong Kong branch of the Bank of China, and the defendant ("JSB") is a bank licensed to carry on banking business in Hong Kong. The third party, Xinyuan Trading Company Limited ("Xinyuan"), is a locally incorporated trading company.

2. The plaintiff claims the principal sum of US$1,658,667.80 from the defendant, which sum, it alleges, the defendant has refused to pay consequent upon the endorsement and discounting by BOC of a draft dated 8 July 1998 drawn by the beneficiary, one NPH Petrochemical Limited, upon the defendant, JSB, the draft in question being drawn under a letter of credit issued by JSB and payable at 90 days after sight.

3. The defendant denies liability and in turn says that if such liability to the plaintiff be established, then it has a right of indemnity from its customer, Xinyuan, the applicant, for the letter of credit No.LC80010073 issued by JSB on 3 July 1998 in favour of NPH Petrochemical.

4. This then is the broad shape of these proceedings. How did these events come to pass?

THE FACTUAL BACKGROUND

5. Although by this action the plaintiff seeks to enforce its rights arising under the credit, it may assist to say a little about the underlying commercial transaction in order to understand the manner in which this case has developed.

(a) The underlying transaction

6. By a contract of sale No.NPH/XY/624 dated 25 June 1998 Xinyuan, the third party herein, agreed to buy 20,000MT of 180 CST fuel oil from NPH Petrochemical at a price of US$79/MT FOB Hong Kong (plus or minus 5%). In turn, Xinyuan subsold this fuel oil to one Kaiyuan Industrial (Hong Kong) Limited by a contract dated 25 June 1998, and Kaiyuan further subsold the cargo of oil to one Bao Chang Investment Holding Limited by a contract dated 26 June 1998.

7. The precise details do not, of course, greatly matter, and I will spend no time on them. Suffice to say that what is alleged by Xinyuan is that there has been substantial short delivery under this contract, so that, in broad terms, only some 3,000MT out of the contractual amount of 20,000MT was actually delivered.

8. Such short delivery in turn has spawned a separate set of proceedings in Hong Kong, in HCA No.A18159 of 1998, wherein Xinyuan, as plaintiff in that action, sues NPH Petrochemical, for, inter alia, a declaration that NPH Petrochemical is not entitled to receive payment under the letter of credit in question, and for damages to be assessed for breach of contract.

9. The letter of credit therein referred to, of course, is the very letter of credit issued by JSB on 3 July 1998 which remains the focus of the present action. I note in passing that in this other High Court action an attempt was made by Xinyuan, as plaintiff in that action, to enjoin BOC from demanding payment under this letter of credit on the basis, inter alia, that BOC was no more than an agent of the allegedly fraudulent beneficiary/defendant, NPH Petrochemical. In the event, this restraint application initially was successful, but the Order at first instance granting such interlocutory injunctive relief was discharged by the Court of Appeal in Civil Appeal No.276 of 1998, such injunction proceedings being characterized by that court as "misconceived".

10. Be that as it may. No attempt has been made to 'marry' these two sets of proceedings, the present action having been transferred to the Commercial List on 6 May 1999. Which brings me back to the present action on the documentary credit.

(b) The letter of credit

11. Pursuant to its contract with NPH Petrochemical, Xinyuan caused JSB to issue letter of credit No.LC80010073 in favour of NPH for the sum of US$1,580,000.00. JSB duly issued the credit on 3 July 1998. The applicant was named as Xinyuan, the beneficiary NPH Petrochemical, and the expiry date and place was to be August 1998 "at our counter". The narrative of the credit begins thus :-

"We hereby issue in your favour this documentary credit which is available with ourselves by acceptance of your draft(s) for full invoice value drawn at 90 days after sight on credit issuing bank bearing the clause 'drawn under documentary credit no.LC80010073 of Jian Sing Bank, Ltd.' accompanied by the following documents : ..."

12. Within the several 'Special Conditions' attached to the credit appear the following specific provisions:-

"Usance draft(s) drawn under this credit is (are) payable at maturity.

If explicitly requested and instructed by the negotiating/ presenting bank on their covering schedule, we shall discount such draft(s) after our acceptance with discount interest at our prevailing interest rate and related charges, if any, for account of beneficiary. ...

Draft drawn hereunder is payable in Hongkong dollars at our D.D. buying rate prevailing on the date of payment or payable in the currency of this credit with commission in lieu of exchange for account of beneficiary. ...

All documents must be presented in one set via your banker to us at 3/F., Dah Sing Lift Building, 99-105 Des Voeux Road Central, Hong Kong, Attn: I/B Dept."

13. The terms of the credit conclude thus :-

"To be attached to and forming an integral part of documentary credit No.LC80010073.

Except otherwise expressly stated this documentary credit is subject to Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce Publication No.500 and engages us in accordance with the terms thereof, especially in accordance with the terms of Article 9 thereof."

14. On 8 July 1998, BOC received instructions by fax from a Mr Daniel Lo of NPH International (which I take to be an associate company of the named beneficiary) which states :-

"We refer to our conversation today regarding the bills account and the account for negotiation.

Enclosed please find the copy of LC80010073 of Jian Sing Bank Limited for your reference. Kindly confirm your acceptance for negotiation and your most competitive bank rate at your earliest convenience."

15. This fax represents the factual genesis of this case. For on 14 July 1998, BOC received the Collection Order from the beneficiary, NPH, the signified box therein requesting 'Negotiation under Documentary Credit' and specifying Draft No.T803003 dated 8 July 1998 in the amount of US$1,658,067.80 at 90 days sight drawn under LC80010073 issued by JSB, Hong Kong. The draft in question was drawn by NPH Petrochemical on JSB and is stated to be payable "to the Order of Bank of China".

16. On the same day, 14 July 1998, BOC duly presented the documents required under the letter of credit to JSB for payment. Amongst these documents was the Collection Order, the BOC Presentation Form - which, inter alia, described NPH Petrochemical as "Our Client" - the Commercial Invoice, Tanker Bill of Lading, and the draft drawn on JSB payable to the Order of BOC at 90 days after sight.

17. These documents, thus presented, confirmed on their face at least that a total of 20,988.20MT of fuel oil had been shipped under the head contract between Xinyuan and NPH. At this stage, albeit briefly, the issue of discrepant documents raised its head, JSB by a swift message dated 17 July indicating a discrepancy in the stated details of the Bill of Lading. This message, under the heading 'Import Bills Arrivals Notice' set out the discrepancy (which was the omission of the name of the Master of the relevant vessel on the Bill of Lading) and concluded :-

"Please accept the above-mentioned bill by signing on the duplicate of this advice and returning it to us. Please let us have your settlement instructions for this bill on or before due date."

Xinyuan duly countersigned and returned this document to JSB on 22 July 1998.

18. It is at this stage in the sequence of events that two crucial documents came into existence.

19. First, a swift message dated 23 July 1998 from JSB to BOC stated :-

"Attn: Ms. Cheung, Bills Team 3

Re Your Ref. A-01-O-Q-36350

For USD1,658,067.80 under our bill ref. IB80015968 L/C No.LC80010073.

Captioned bill has now been accepted to mature on 981015.

Upon maturity, we shall cover you as instructed."

20. This swift message was followed by a like communication, from JSB to BOC, sent on the same date, in letter form via DHL, entitled 'Advice of Acceptance'. In turn, this read :-

"Our Ref No: A-01-O-Q-36350

Bill amount: USD1,658,067.80

Beneficiary: N P H Petrochemical Limited

Please note that the above-mentioned bill has been accepted to mature on 15-Oct, 1998. Upon maturity we shall cover you as per your payment instructions."

21. Subsequent to receipt of these documents, on the same day BOC duly discounted the draft and paid NPH Petrochemical, as beneficiary under the credit, the sum of US$1,626,555.88. The 'Advice of Acceptance and Due Date' issued to NPH Petrochemical (through BOC's Harbour Road sub-branch) is dated 23 July 1998, whilst the BOC Discount Advice, again addressed to NPH Petrochemical, bears the like date. This latter document indicates that out of the face value draft amount of US$1,658,067.80, the discounted amount of US$1,626,555.88 has been calculated by the deduction of US$31,511.92 representing the interest element charged by BOC for the period 23 July 1998 to 20 October 1998.

22. Having received the swift message and the 'Advice of Acceptance' from JSB, and having discounted the draft in question, BOC no doubt anticipated being placed in funds on maturity by JSB. However, what appears to have occurred is that it was subsequently alleged that the ultimate buyer of the fuel oil under the sub-subcontract, namely Bao Chang, had received only 3,000MT thereof, and that the Bill of Lading and the Commercial Invoice were forged documents. It appears that attempts were made by Xinyuan to extend the maturity date of the draft, which attempts were rejected by BOC by swift message dated 14 October 1998 :-

"We do not agree to extend the mature date to 15 Nov 1998 Pls effect payment to us on the mature 98/10/15 as per our instruction and refer to yr swift MT799 n letter dd 98/07/23"

23. A 'chasing' swift message from BOC to JSB of 19 October 1998 stated, inter alia :-

"According to UCP 500 Art.9(a) yourgoodbank as the accepting bank constitutes a definite undertaking to the L/C that you should effect payment at maturity date (i.e. 98/10/15) pls urgently check n immediately effect payment plus the delay payment interest at 10.00 pct p.a. (on 360 days basis) from 98/10/20 up to the date of our receipt of fund without further delay rgds"

24. The response to this, from JSB, was thus :-

"We refer to the subject documentary credit.

On 10-Oct, 1998, we were informed that the applicant of the subject documentary credit only received about 3,000 MT fuel oil but it was stated in the corresponding bill of lading that 20,998.20 MT fuel oil were shipped. We then subsequently received further communication from the applicant to the effect that they suspected certain documents presented under the letter of credit were inconsistent.

As the matter now develops and pursuant to the legal advice received by us, we have decided to withhold payment on the subject documentary credit and shall be pleased if you could take note of the same accordingly.

Regards

Jian Sing Bank Limited"

25. This latter communication immediately led to a formal letter before action from Messrs Deacons, Graham & James, acting on behalf of BOC, dated 26 October 1998, which in turn led to the onset of the present proceedings by writ issued on 10 March 1999.

THE EVIDENCE

26. The foregoing factual summary attracts no dissension. This matter is well-documented, and the sequence of events giving rise to these proceedings is essentially common ground. One possible subject of dissent, the issue of fraud/forgery, ceased to be an issue upon the helpful intervention of Mr Louis Chan, counsel for Xinyuan, relatively early in the first day of the hearing.

27. Essentially, therefore, this case consisted primarily of legal submission against the background of known facts and documents. I should, however, formally record that a total of six witnesses were called, three for the plaintiff, BOC, and three for JSB. No witnesses were ultimately called on behalf of Xinyuan because, as I understood Mr Chan's explanation, the non-pursuit of forgery/fraud in these proceedings - "not a matter in issue" - rendered redundant the witness statements which had been prepared.

28. There was little, if any, cross-examination of five of the six witnesses, all of whom were called merely to testify formally to the truth of their brief witness statements, which in the circumstances were permitted to be put in and to stand as evidence-in-chief. The exception to this general pattern was the evidence of Miss Lam Pui Ling, the second witness for JSB, who was cross-examined for a short period by Mr Tang SC, leading counsel for BOC. I confess that I was able to garner little from this exchange. Miss Lam kept her eye firmly on the JSB ball, the only point of interest being Miss Lam's view of the effect of the JSB swift message and 'Advice of Acceptance' of 23 July 1998. In this connection, Miss Lam, it seems to me, grudgingly accepted the relevance of these communications :-

"The BOC might use this as one of the factors in its consideration ..."

is how I have recorded one of her responses, but if and in so far as I have understood her to dispute Mr Tang's suggestion that it was clearly within the scope of JSB's contemplation that, in deciding to discount the bill, BOC would take into account the JSB's acceptance of the bill, I accord such evidence the weight it deserves. In my view, to suggest that it was not within the scope of JSB's contemplation is risible.

29. There being no primary factual issue requiring determination, I turn now, therefore, to consider the particular arguments of law that were presented.

THE HEAD ACTION : BOC AGAINST JSB

30. As originally canvassed, certainly in terms of the excellent skeleton arguments prepared by the parties, it had been anticipated by both sides that there would be argument about whether the letter of credit in issue could properly be construed as a negotiation credit. Mr Tang SC, however, ultimately did not pursue this aspect of the argument, largely, I think, as the result of Mr Chan's clarification that fraud was not going to be an issue in these proceedings.

31. Accordingly, said Mr Tang in an admirably crisp submission, his case was based on this credit being what it clearly was, "an acceptance credit on any view". In effect, therefore, the case turned upon the JSB swift message of 23 July 1998 conveying acceptance of the bill, and the DHL-couriered confirmation thereof in correspondence of the same date, the document entitled 'Advice of Acceptance'. In a nutshell, submitted Mr Tang, this was an acceptance credit, the BOC was clearly a holder for value, and the two JSB communications of 23 July founded a clear estoppel against what were purely technical arguments raised in defence to this claim.

32. For his part, Mr Ma SC did not dispute the broad analysis, albeit he took issue with the result. His submission on the case as now refined was equally brief. It ran thus : the introduction of a bill of exchange into an letter of credit transaction brings into play a separate bundle of rights and obligations arising between the parties to the bill. It followed that no liability accrued upon the drawee of a bill, in this case JSB, unless the bill had been accepted "as required by" the Bills of Exchange Ordinance, Cap.19, and that by virtue of section 17(2)(a) thereof an acceptance of the bill is invalid unless the same is written on the bill and signed by the drawee. In other words, said Mr Ma, the statutory prerequisite for liability of his client under the bill of exchange had not been met in this case.

33. Which brought him to Mr Tang's argument on estoppel. Mr Ma's submission here was simply (and solely) that in the transaction in question, BOC had been acting merely as collecting agent for its principal, NPH Petrochemical, and whilst it was accepted that the swift message and subsequent written confirmation constituted a clear representation - indeed, on the face of these documents, it could hardly be otherwise - the force of this point was that such representation should be regarded as being made not to BOC but to BOC's client, as specified on BOC's Presentation Form, namely NPH Petrochemical. If this was right, it followed that JSB was not estopped qua BOC, whilst of course NPH was not a party to these proceedings.

34. What was also notable about this submission - which was advanced in characteristically even handed fashion - was a point expressly disavowed by Mr Ma, albeit put forward by Mr Chan, namely that absent return of and physical possession of the accepted draft, duly signed, BOC performed any discounting function at its own risk. In so far as this latter point is in play in the head action - and in my view Mr Ma was entirely right specifically to refuse to take it - I reject it as firmly as I may.

35. Which brings me back to the estoppel argument. On a consideration of the papers, it was throughout my view that the true focus of this case was JSB's indicated acceptances of 23 July 1998. The argument advanced to the effect that the representation was made to NPH and not to BOC was nonsense, submitted Mr Tang. Other considerations apart, the very terminology of the first swift message - "Upon maturity, we shall cover you as instructed" - gave the immediate lie to that notion. At the lowest, he submitted, it was manifest that the JSB representation regarding acceptance of the draft was addressed to BOC as a potential discounting bank - indeed, it could hardly be otherwise on the face of the documents, including the credit itself - and that it cannot reasonably have been contemplated or expected but that these representations in these two documents would be relied upon by BOC.

36. It followed, therefore, in these circumstances that JSB must be estopped from asserting the absence of physical signature upon the draft to connote acceptance, and that if this be right, this disposed of the only defence now being put forward by JSB in the head action. Moreover, submitted Mr Tang, even if BOC could be consigned to the role of 'mere agent' - which on the facts it plainly could not - nevertheless in that manifestation it was clearly able to bring itself within the category of relevant representee, Mr Tang citing in this regard the well-known passage in Chitty on Contracts, 28th Ed., Vol.1 at paragraph 6-032. Accordingly, he said, the principal/agent argument which now was advanced to sidestep the obvious estoppel was and could be nothing more than "a red herring".

37. I agree. Indeed, it seems to me not greatly to matter whether the argument be couched in terms of estoppel, or whether it be advanced also in terms of the other matters pleaded in the plaintiff's reply, namely waiver and/or change of position. In this context, I am bound to observe that in my view an aura of commercial unreality has pervaded this case. Quite how a reputable bank, having duly considered the position and having sent the swift message and Advice of Acceptance of 23 July 1998, then can have sought to decline its express engagement in terms of acceptance and cover "upon maturity" is something which I have found difficult to grasp. I appreciate, of course, that in these proceedings JSB perceived itself as being between the Scylla of the BOC claim and the Charybdis of a potential Xinyuan assertion that any settlement of the present BOC claim would have been unreasonable, and thus not binding in an action by JSB against Xinyuan to recoup funds already paid to BOC. But I am far from convinced, in the clear and obvious circumstances of this case, that there was any real merit in resisting this claim from the plaintiff bank, which claim in my view was absolutely justified.

38. It follows from the foregoing that there will be judgment for the plaintiff against the defendant in the sum of US$1,658,067.80. I will hear counsel in due course on the twin issues of interest and costs.

THE THIRD PARTY PROCEEDINGS : JSB AGAINST XINYUAN

39. I now turn to the other side of this action, the third party proceedings. I will be brief. As with the head action, I have discerned little of substance in these correlative proceedings, which are of course pursued by JSB against its customer, Xinyuan, in the event (as now is the case) that JSB's primary liability to BOC has been established.

40. In this event, submitted Mr Ma, JSB seeks to pass its liability onto Xinyuan, the applicant for the letter of credit.

41. In this context, he submitted, JSB possessed an undoubted contractual right to reimbursement. The 'General Agreement For Commercial Business' dated 7 May 1996, which was in JSB's standard form and which had been accepted by Xinyuan, clearly governed the primary relationship between the parties, and in particular the Indemnity Clause, Clause 23, covered the present situation, reading thus :-

"23. That I/we shall indemnify and hold you harmless from and against any and all consequences which may arise or result from giving credit to me/us or performing any banking service for me/us and shall reimburse you upon demand for any payment, loss and damage which you may make, suffer or sustain by reason or on account thereof and shall upon request appear and defend at my/our own cost and expense any action which may be brought against you in connection therewith."

42. In addition, said Mr Ma, the specific Terms and Conditions underpinning the issuance of the credit by JSB on the instructions of Xinyuan provided, inter alia, at paragraphs 1 and 2 :-

" The following terms and conditions apply to the Documentary Credit (the 'Credit') opened by Jian Sing Bank Limited (the 'Bank') upon this application of the applicant named on the face page hereof (the 'Customer').

1. The Customer shall:

(a) accept and/or pay, all drafts drawn or purporting to be drawn, in accordance with the terms and/or condition of the Credit.

(b) indemnify the Bank against all losses, damages, costs, expenses (including legal fees), penalties, claims and demands which the Bank may incur or sustain by reason of the issuing of the Credit including without limitation any liability to beneficiaries of the Credit or the Bank's agents or correspondents or any liability on any bills drawn or negotiated pursuant to the Credit or in respect of freight, dead freight, demurrage, salvage, sue and labour expenses, general average contributions, storage and handling charges, customs dues, tariffs, VAT, excise or other charges touching or concerning the goods shipped under the Credit or any liability in connection with ascertaining, preserving or exercising any right, powers or remedies in connection with the Credit.

(c) pay charges, commission, disbursements and interest in respect of the Credit (including without limitation charges for the account of the beneficiaries where the Bank or its agents or correspondents is unable to obtain payment thereof from the beneficiaries on first demand), which charges, commission and interest, in the absence of specific agreement to the contrary, shall be at the respective rates customarily imposed by the Bank in like circumstances.

2. The Customer hereby agrees to provide the Bank, forthwith on demand, with funds to meet all its liabilities and obligations, present or future, actual or contingent, in respect of the Credit and to repay all amounts owing by the Customer to the Bank in respect of the Credit and the Customer hereby irrevocably authorizes the Bank to debit its accounts with the Bank for all sums which it is liable to pay hereunder, notwithstanding any import and export restrictions at present in force or subsequently imposed."

43. Accordingly, Mr Ma argued, the contractual position could not be gainsaid.

44. For his part, Mr Louis Chan for Xinyuan did not attempt to confront the formidable commercial 'boilerplate' which was brought to bear upon his client. So far as Mr Chan was concerned, the sole issue remaining alive in the third party proceedings was whether JSB had acted outwith its mandate, and in this connection he requested, and obtained, leave to re-amend the third party defence to plead, as I understood it, that if it be found (as indeed it now has) that JSB had conducted itself in a way that resulted in an estoppel being raised against it by reason of the communication of its acceptance of the draft to BOC qua principal "rather than as agent and collecting bank for the beneficiary", no liability would accrue to Xinyuan, since such acts were outwith the mandate given to the bank "and contrary to the instructions of the third party contained in the application for the irrevocable documentary credit as amended". In effect, therefore, what was being asserted was that JSB had no business in communicating with BOC in the terms that it had by the swift message and subsequent DHL-couriered letter of 23 July 1998.

45. It may be, in principle, that this line of argument founders not least for the reasons adumbrated by Mr Tang in the head action, in characterizing the principal/agent submission ultimately as irrelevant. Nevertheless, Mr Ma SC dealt with this particular attack by refuting it root and branch in terms of the obligations of an issuing bank pursuant to an acceptance letter of credit.

46. There was and could have been no breach of mandate, Mr Ma submitted. This credit could now be taken to be an acceptance credit - indeed, the history of its issuance demonstrated a specific change of instructions in this regard, about which there was no dispute. The position was that his client had been mandated to issue an acceptance credit, and under its terms and conditions it was clearly entitled to an indemnity. There was no breach of mandate by reason of its communications with BOC, the swift message and subsequent confirmation falling well within JSB's entitlement and duties pursuant to such a letter of credit. Indeed, JSB had done exactly what it ought to have done under such a credit, Paget's Law of Banking, 11th Ed., stating (at page 657) :-

" An acceptance credit is one which the issuing ... bank undertakes to accept and pay, or that some other drawee bank will accept and pay, a bill of exchange payable at a future date. ..."

47. The obligations of an issuing bank are also set out in Article 9 of the UCP (1993 Revision), ICC Publication No.500, Article 9a.iii.a. providing thus :-

"a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:

iii. if the Credit provides for acceptance:

a. by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, ..."

Whilst this latter position, said Mr Ma, is further underlined by the speech of Lord Diplock in UCM v. Royal Bank of Canada [1983] AC 168 at 184 :-

" It has, so far as I know, never been disputed that as between confirming bank and issuing bank and as between issuing bank and the buyer the contractual duty of each bank under a confirmed irrevocable credit is to examine with reasonable care all documents presented in order to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit, and, if they do so appear, to pay to the seller/beneficiary by whom the documents have been presented the sum stipulated by the credit, or to accept or negotiate without recourse to drawer drafts drawn by the seller/beneficiary if the credit so provides. It is so stated in the latest edition of the Uniform Customs. ..." (emphasis added)

48. Viewed against this backdrop, in my judgment it is difficult to grasp why that which JSB did in terms of its communications with BOC on 23 July 1998 can be said to have been breach of mandate, and I am in full agreement with Mr Ma's submission in this regard. Which particular argument was also without reference to the fact, as Mr Ma further pointed out, that Xinyuan's signed acceptance of the Import Bills Arrival Notice sent to it by JSB on 17 July 1998, the final sentence of which concluded:-

"Please let us have your settlement instructions for this bill on or before due date. ..."

permitted the additional argument (as pleaded in the Reply to the Amended Third Party Defence) of affirmation, waiver and estoppel.

49. Looked at in the round, it is not easy to see why it should have been thought that Xinyuan was able to assume the position that it did in terms of declining to place JSB in funds to meet the obligations incurred by JSB arising from the issuance of the credit and acceptance of the draft. This unfortunate situation is exacerbated because, on any view, it is clear that Xinyuan received at least a partial benefit under the letter of credit, and it is difficult not to conclude, on the evidence before this court, that this case may represent yet another instance of a failure to recognise (or perhaps fully to accept) the cardinal principle in international commerce that a letter of credit is independent from the underlying transaction, that once issued such instruments are to be honoured, absent clear and cogent evidence of fraud, and that to do otherwise is to undermine a vital element within the financing of modern international trade.

50. I have no hesitation in deciding that JSB, the defendant herein, must succeed in its claim for indemnification by Xinyuan against the claim of BOC, JSB's liability to BOC having been earlier established. I so order. I will hear counsel on the precise form of the Order, together with argument on interest and costs.

[Submissions from counsel]

51. I have now had the opportunity to hear from all parties on the question of interest and costs.

52. I take the head action first. As to interest on the judgment sum for the period from the issue of proceedings to judgment, Mr Tang asks for 3% over US prime, alternatively interest at judgment rate, although he recognised the difficulty in this argument given that judgment interest rates, as fixed by the Chief Justice from time to time, are referable to Hong Kong dollars. For her part, Ms Cruden strongly argues for 1% over prime, as indeed does Mr Chan for the third party, doubtless with an eye upon what his client ultimately may be required to pay. I have been referred, also, to the useful, albeit now somewhat dated, Court of Appeal decision in Komala Deccof & Co. S.A. and Others v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219, and the comments in particular with Cons JA.

53. At the end of the day, of course, the matter is solely within the discretion of the trial judge. None of the parties disputes that proposition. The question is what the court considers fair and just, having regarded to the circumstances of the case and also bearing in mind the status of the plaintiff.

54. Putting that all into the discretionary 'mix', I have concluded that the plaintiff is to have interest upon the judgment sum at the rate of 2% over US prime from time to time prevailing for the period from 15 October 1998 to today's date, that is, 14 April 2000. Interest on the principal sum will thereafter accrue at the judgment rate from time to time prevailing until payment. That deals with interest.

55. Turning now to the issue of costs in the head action, Mr Tang submits that in the special circumstances of this case, he should have his costs, but that these should be ordered not on the usual party-and-party basis, but on a common fund basis. The implication of this, he pointed out, is that his client is not restricted to recovery of costs which are merely 'necessary or proper', but would be able to recover all costs which are 'reasonably incurred'. He says in this context, and I may note that this is a matter that has been at the forefront of my mind during this trial, that JSB should not have refused to pay his client BOC simply because, for some reason unknown to this court, JSB failed to take the precaution of being placed in funds by its applicant/customer prior to issuance of the letter of credit. BOC trusted JSB and not its customers, said Mr Tang. BOC had not been paid, and this situation in itself merited costs on a higher than normal basis. I think that this is right, and I am prepared to accede to Mr Tang's submission in this regard.

56. Accordingly, the plaintiff is to have the costs of this action, to be paid by the defendant on a common fund basis, such costs to be taxed if not agreed. It is also quite clear, although there appears to be some disagreement between counsel as to whether a specific order is necessary, that this case is fit for leading counsel, and indeed two counsel. I do not apprehend that this is opposed by any of the parties before the court, but I refer to this aspect for the avoidance of doubt so that the taxing master can take this into account. That, therefore, deals with all outstanding matters under the head action.

57. I now turn to the third party proceedings. In this context, having determined the question of interest, only the issue of costs remains to be decided. I have heard interesting arguments from Ms Cruden and Mr Chan as to the basis of such costs, and I have also heard arguments as to how this action came to assume the form it did, and what issues were or were not in dispute.

58. After considering all relevant matters, I have come to the conclusion that the appropriate order is that the costs of the defendant in these proceedings (such costs to include the costs of the plaintiff which have been ordered to be paid by the defendant) are to be paid by the third party to the defendant, such costs to be taxed if not agreed.

Once again, for the purpose of the record, I note that no point will be taken at taxation disputing the appearance in this case of two counsel on behalf of the defendant.

59. It remains only to thank all counsel for the considerable assistance which was rendered to the court.