CIC-UNION EUROPEENNE INTERNATIONAL ET CIE v. WING SUN AND CO AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The plaintiff (the "French Bank") is a banking company incorporated in France and maintaining a branch in Singapore. One of its customers was Panther Private Limited ("Panther"), a company incorporated in Singapore. In or about July 1985, the French Bank lent Panther US$450,000 to pay for the purchase price of 750 tons of polyethylene.

2. The documents of title to those goods were pledged by Panther to the French Bank as security for the due payment of the sum of US$450,000. That pledge was effected by a Trust Receipt in common form, dated 26th July 1985. That Trust Receipt provided that, in consideration of the French Bank re-delivering the shipping documents to Panther, the latter undertook to store and hold the goods and the proceeds of sale thereof as trustee for the French Bank and, in the event of the goods or any part of them being sold, to hold the proceeds of such sale as trustee for the French Bank.

3. As contemplated by the Trust Receipt, the French Bank re-delivered the shipping documents to Panther which sold 500 tons of the goods to Wing Sun and Company ("Wing Sun"), a Hong Kong firm, at the price of US$375,000. Wing Sun is the first defendant in the present proceedings.

4. On 26th September 1985, lawyers in Singapore, acting on behalf of the French Bank, wrote to Wing Sun in Hong Kong, giving Wing Sun notice that the French Bank were the beneficiaries of the Trust Receipt already described, and contending that the French Bank were the beneficial owners of the 500 tons of polyethylene purchased by Wing Sun. Those Singapore lawyers further contended that the French Bank was entitled to trace for the purchase price of the goods, and required Wing Sun to account to the French Bank for the US$375,000 it had agreed to pay for the goods.

5. Why the French Bank wanted Wing Sun to account to it direct for the purchase money, rather than allow Panther to collect the purchase money, soon became clear. On 3rd October 1985, creditors of Panther obtained an order from the High Court in Singapore for the appointment of provisional liquidators in respect of Panther's affairs, the estimate of the amounts owing by Panther to its creditors being in the region of S$140,000,000.

6. If the facts so far described were the only ones, the rights and liabilities of the various parties I have mentioned would be clear. By re-delivering the documents of title to Panther for the purpose of sale pursuant to the Trust Receipt, the French Bank would not have lost the benefit of the contract of pledge. On the authority of North Western Bank v. Poynter (1895) A.C. 56, the French Bank, rather than Panther, would be regarded as the beneficial owner of the proceeds of sale of the goods. That right of the French Bank, stemming from the pledge under the Trust Receipt, would clearly be of an equitable character so that, to enforce the right against Wing Sun, Panther would have to be joined in any action for procedural reasons. As between the French Bank and the liquidators representing the general body of creditors, the purchase price still in the hands of Wing Sun, as purchasers of the goods, would belong to the French Bank as pledgees.

7. If the facts were within the narrow compass so far described, the French Bank would be home and dry in its claim against Wing Sun, provided, of course, Panther were joined in the action.

8. Unfortunately for the French Bank, there are additional facts which, in my view, serve to defeat its claim. On the 9th July 1985, the 2nd defendant ("The Hong Kong Branch of Kwangtung Provincial Bank") issued an irrevocable letter of credit at the request of Wing Sun in favour of Panther as beneficiary for the sum of US$375,000 in respect of the 500 tons of polyethylene which Panther had agreed to sell to Wing Sun. The expiry date of the letter of credit was 31st July 1985. Under that letter of credit, the Singapore branch of the Kwangtung Provincial Bank played the dual role of advising bank and negotiation bank. In its capacity as advising bank, the Singapore branch of the Kwangtung Provincial Bank was requested to advise through the Singapore branch of the Hong Kong & Shanghai Banking Corporation which had Panther as a customer.

9. In its capacity as negotiation bank, the Singapore branch of the Kwangtung Provincial Bank was given the following instructions by the letter of credit

10. The letter of credit was of the "D/A" variety, the wording being to the following effect:- "Credit available by acceptance against presentation of the documents detailed herein and of your draft(s) at 90 days sight drawn on applicant (Wing Sun) for 100% of the invoice value".

11. The letter of credit went on to stipulate which documents such as invoices, packing list and certificate of quality had to be presented as a pre-condition for payment under the credit.

12. Except so far as otherwise expressly stated, the letter of credit was made subject to the Uniform Customs and Practice for Documentary Credits (1983 revision), ("U.C.P.(1983)") and explicitly engaged the Hong Kong Branch of the Kwangtung Provincial Bank in accordance with the terms of the U.C.P.(1983), especially Article 10 which, so far as relevant, provides as follows -

13. As contemplated by the letter of credit, Panther drew a bill of exchange dated the 24th July 1985 for the sum of US$375,000 in favour of the Hong Kong & Shanghai Banking Corporation which has advanced Panther S$812,200 against the bill. On its face, the bill stated that it was drawn under the letter of credit. There is nothing in the letter of credit to prevent transfer of the proceeds under it. Article 55 of the U.C.P.(1983) provides as follows:

"ASSIGNMENT OF PROCEEDS

 

ARTICLE 55

The fact that a credit is not stated to be transferable shall not affect the beneficiary's right to assign any proceeds to which he may be, or may become, entitled under such credit, in accordance with the provisions of the applicable law."

14. Wing Sun's name appeared on the bill as acceptor.

15. Within the time permitted by the letter of credit, the bill of exchange and all other documents required by the letter of credit were presented to the Singapore Branch of the Kwangtung Provincial Bank, (presumably by the Singapore Branch of the Hong Kong & Shanghai Banking Corporation, on behalf of Panther). The Singapore Branch of the Hong Kong & Shanghai Banking Corporation had indorsed the draft to the order of the Kwangtung Provincial Bank.

16. By a letter dated the 31st July 1985 and copied to the Singapore Branch of the Hong Kong & Shanghai Banking Corporation, the Singapore Branch of the Kwangtung Provincial Bank sent the draft and all the documents under the letter of credit to the Hong Kong Branch of the Kwangtung Provincial Bank for acceptance. That letter asked the Hong Kong Branch of the Kwangtung Provincial Bank to advise the Singapore branch of the same bank to advise the latter of the date of acceptance of the draft and its due date. A further request made by that letter was to the effect that the proceeds of the draft, namely US$375,000, should be credited to the U.S. dollar account of the Singapore Branch of the Kwangtung Provincial Bank with the Bank of China in London.

17. The draft was duly accepted by Wing Sun on the 6th August 1985, and being a 90 day draft, was set to mature on the 4th November 1985.

18. As the result, no doubt, of information communicated to it by the Hong Kong Branch of the Kwangtung Provincial Bank, the Singapore Branch of the Kwangtung Provincial Bank was able to send the Singapore Branch of the Hong Kong & Shanghai Banking Corporation an "Advice of Acceptance" dated 13th August 1985, informing the latter that at maturity of the draft, namely 4th November 1985, and upon receipt of funds, the Singapore Branch of the Kwangtung Provincial Bank would pay the Singapore Branch of the Hong Kong & Shanghai Banking Corporation in accordance with instructions previously received from the latter.

19. Having done everything required of it by the letter of credit on behalf of its customer, Panther, and having submitted a draft for US$350,000 in its own favour which was duly accepted, the Singapore Branch of the Hong Kong & Shanghai Banking Corporation had every reason to suppose that, on or before the 4th November 1985, the Hong Kong Branch of the Kwangtung Provincial Bank would put the Singapore Branch of the Kwangtung Provincial Bank in funds to the extent of US$375,000, so that this money could be paid to the order of the Singapore Branch of the Hong Kong & Shanghai Banking Corporation as payee of the draft.

20. Developments have occurred, however, which have resulted in the Singapore Branch of the Hong Kong & Shanghai Banking Corporation not yet being paid under the draft.

21. Earlier, I described how, by a letter dated the 26th September 1985, the lawyers for the French Bank wrote to Wing Sun claiming that their clients were the beneficial owners of the goods Panther had sold, and were thereby entitled to receive the purchase money. Wing Sun, on the 7th October 1985, sent a copy of that letter to the Hong Kong Branch of the Kwangtung Provincial Bank, asking the latter to hold up payment of the draft until further notice. The Hong Kong Branch of the Kwangtung Provincial Bank, by a letter dated 10th October 1985, was quick to point out to its customer, Wing Sun, that it was unable to hold up payment of the draft since Wing Sun had already accepted it.

22. Next, the French Bank sought injunctions from the Hong Kong Supreme Court against Wing Sun and the Hong Kong Branch of the Kwangtung Provincial Bank. For reasons which elude me, the French Bank, through its Hong Kong lawyers, saw fit to make its applications ex-parte. Without any notice to Wing Sun or the Hong Kong Branch of the Kwangtung Provincial Bank, the French Bank went before the Duty Judge on the 1st November 1985 and obtained interlocutory injunctions restraining Wing Sun from making or authorising payment of US$375,000 to Panther, and restraining the Hong Kong Branch of the Kwangtung Provincial Bank from remitting funds to the Singapore Branch of the Kwangtung Provincial Bank for the purpose of making payment on the draft for US$375,000 due on the 4th November 1985. Not having been put in funds by the Hong Kong Branch of the Kwangtung Provincial Bank, the Singapore Branch of the Kwangtung Provincial Bank has so far refused to pay the Singapore Branch of the Hong Kong & Shanghai Banking Corporation.

23. The action has now come before me on an inter-partes basis for the purpose of determining whether the interim injunctions should continue.

24. It is significant that the sole parties to this action are the French Bank as Plaintiff, Wing Sun as 1st Defendant, and the Hong Kong Branch of the Kwangtung Provincial Bank as 2nd Defendant. I am satisfied that Defence Counsel are correct when they take the point that, as the French Bank has at best an equitable interest in its capacity as pledgee, the action is not properly constituted without Panther, the holder of the legal title, being joined either as a co-plaintiff or as a defendant. On this technical ground alone, the defendants are, in my view, bound to succeed in their applications to have the injunctions lifted, since the French Bank simply does not have a cause of action against them.

25. Somewhat unsurprisingly, the French Bank has not filed a statement of claim yet, although it is well out of time. It is difficult to see what claim could be pleaded just against the present defendants.

26. Before me, Counsel for the French Bank indicated that her client wanted to put its house in order by having Panther joined as a defendant. A summons has been issued for that purpose, but has still to be heard. Counsel for the French Bank applied for an adjournment so that Panther could be joined, but that application was strenuously resisted by Counsel for both defendants. On the technical point that Panther, an essential party, was missing from the action, I was prepared, as I have already said, to discharge the injunctions, since I regard it as improper for a defendant to be vexed by proceedings which do not even disclose a cause of action.

27. Perhaps more importantly, the defendants are also entitled to succeed on the merits, in my view.

28. On the face of it, the Singapore Branch of the Hong Kong and Shanghai Banking Corporation would appear to have satisfied all the contractual conditions precedent to payment under the letter of credit. Is there then something special about the position of the French Bank which entitles the defendants to refuse payment under the letter of credit? I do not think there is.

29. There is nothing on the material before the Court to suggest that the Singapore Branch of the Hong Kong & Shanghai Banking Corporation knew before discounting the bill of exchange that Panther had pledged the goods to the French Bank, or that, in some other way, the Singapore Branch of the Hong Kong & Shanghai Banking Corporation had acted in bad faith. In the absence of any suggestion of bad faith on the part of the Singapore Branch of the Hong Kong and Shanghai Banking Corporation, I am satisfied that the Hong Kong Branch of the Kwangtung Provincial Bank is obliged to remit funds to the Singapore Branch of the Kwangtung Provincial Bank, so that the Singapore Branch of the Hong Kong & Shanghai Banking Corporation's claim for US$375,000, arising under the draft, can be satisfied.

30. Once payment to the Singapore Branch of the Hong Kong & Shanghai Banking Corporation has been honoured under the letter of credit, Wing Sun's liability for the purchase price will be discharged. See W.J. Alan & Co. Ltd. v. Lel Nasr Export & Import Co. (1972) 1 Lloyd's Rep. 313.

31. The pledge arrangements between the French Bank and Panther need be of no concern to the Singapore Branch of the Hong Kong & Shanghai Banking Corporation, provided it had no knowledge of them before discounting the draft drawn by Panther. The position is made clear by Article 3 of the U.C.P.(1983) which provides:-

"Credits by their nature; are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit."

32. That the rights arising under letter of credit transactions are separate from the rights of the parties under the underlying contracts (in this case a contract of pledge) has been firmly established by the courts. (See United City Merchants (Investments) Ltd. v. Royal Bank of Canada (1981) 1 Lloyd's Rep. 604; and Bolivinter Oil S.A. v. Chase Manhattan Bank & Others (1984) 1 Lloyd's Rep. 251)

33. Already I have set out Article 10 of the U.C.P. (1983), paragraph (a) of which reveals the unmistakable obligation of an issuing bank (which is the position of the Hong Kong Branch of the Kwangtung Provincial Bank) to honour the draft. Another part of the U.C.P. (1983), germane to the position of the Hong Kong Branch of the Kwangtung Provincial Bank, is Article 11, which provides as follows:-

"(a)    All credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.

(b)    All credits must nominate the bank (nominated bank) which is authorized to pay (paying bank), or to accept drafts (accepting bank), or to negotiate (negotiating bank), unless the credit allows negotiation by any bank (negotiating bank).

(c)   Unless the nominated bank is the issuing bank or the confirming bank, its nomination by the issuing bank does not constitute any undertaking by the nominated bank to pay, to accept, or to negotiate.

(d)   By nominating a bank other than itself, or by allowing for negotiation by any bank, or by authorizing or requesting a bank to add its confirmation, the issuing bank authorizes such bank to pay, accept or negotiate, as the case may be, against documents which appear on their face to be in accordance with the terms and conditions of the credit, and undertakes to reimburse such bank in accordance with the provisions of these articles."

In particular paragraphs (b) and (d) leave no doubt that the Hong Kong Branch of the Kwangtung Provincial Bank must put the Singapore Branch of the Kwangtung Provincial Bank as negotiation bank in funds to enable the latter to honour the draft.

34. Courts of the highest authority have consistently emphasised that no impediment, other than fraud, is to be placed in the way of banks which have undertaken obligations under letters of credit. To quote Stephenson, L.J. in the United City Merchants Investments Limited v. Royal Bank of Canada case at page 612

"Such irrevocable obligations assumed by banks as irrevocable confirmed letters of credit, guarantees and performance bonds are -

.... the lifeblood of international commerce, .... collateral to the underlying rights and obligations between the merchants at either end of the banking chain ....

and are to be honoured by banks free from interference by the Courts -

....if the documents are in order and the terms of the credit are satisfied ....

except in cases of fraud - an exception to be considered later: R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Limited and Others, [1978] Q.B. 146 at p. 155 per Mr. Justice Kerr, and Edward Owen Limited v. Barclays Bank, [1978] 1 Lloyd's Rep.166; [1978] Q.B. 159, especially per Lord Denning, M.R., at pp. 172 and 169."

35. Were I to accede to the submissions made on behalf of the French Bank, I would be introducing a new peril for those banks and other business houses which discount bills of exchange in reliance on the letters of credit under which they are drawn. Discounting banks might become inhibited in their activities if they were put in a position where it was only safe for them to discount a bill after making inquiries whether the seller of goods was holding them as trustee for a pledgee. Such a state of affairs would not be conducive to the free flow of business, and could only serve to discourage international trade.

36. In view of the foregoing, I unhesitatingly hold that the injunction against each defendant must be discharged forthwith, so I order accordingly.