Article

Note: In connection with an exclusive agreement for the distribution of animal feed/nutrients in parts of Southeast Asia, Good Earth (Distributor/Applicant), a Hong Kong trading company, secured an irrevocable standby letter of credit in favor of Novus International (Supplier/Beneficiary), a Singapore company.

When Supplier/Beneficiary requested a reduction in the commission rate from 8% to 5%, Distributor/ Applicant refused. The parties were unable to reach an agreement, and after several months, Supplier/ Beneficiary terminated the distributorship agreement without notice, and drew on standby letter of credit to reimburse itself for the disputed difference in commission rates.

The Hong Kong Court of First Instance, Stone, J., granted judgment in favor of Distributor/ Applicant. The court ruled Supplier/Beneficiary had wrongfully terminated its distributorship agreement without notice, and accordingly wrongfully drew upon this letter of credit. The court inquired whether "the rubric of the credit encompass a drawdown in order to rectify the commission shortfall." Supplier/Beneficiary argued that the reference to 'in respect of goods' was sufficiently broad to cover the... debit notes which the [Distributor/Applicant] had refused to pay." The court declined to accept that "the phrase 'in respect of goods' was applicable to the attempt by the [Supplier/Beneficiary] to recoup the commission differential it considered it was owed by the plaintiff by the stratagem of drawing down upon the standby latter of credit. It seems clear, both as a matter of primary construction, and in light of the evidence as to the provenance of the credit, that this was not its purpose at all.

The court concluded that the drawing represented no more than a piece of calculated commercial selfhelp, part and parcel of such calculation presumably being that having drawn down upon the credit, and the disputed funds thus having been secured, the onus then would lie upon the plaintiff to attempt to redress the issue by instituting legal proceedings, with all the concomitant disruption and costs' implications thereby arising.

[JEB/jlb]

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