Article

Note: Great Trend Ltd. (Seller), a Hong Kong garment products manufacturer, agreed to sell sixteen thousand pairs of girls' glitter canvas shoes to M &M Footwear Ltd. (Buyer), a UK company. As with past dealings, payment was to be by means of commercial letter of credit payable 90 days from shipment date.

Having used its credit facility, Buyer turned to City (Europe) Plc, a company that provided finance to small companies. As explained by Buyer, City" would proceed with the opening of the L/C to purchase customer's specified goods from the relevant overseas seller directly. Upon arrival of the goods from overseas, City would invoice the customer and the customer would have an option either to pay immediately and collect the original shipping/banking documents from City or obtain credit from City." City applied for the LC in the amount US$38,345.93 which was issued by Bank of China (London) Ltd. (Issuer) in favor of Seller. On advice of the LC, Seller shipped the goods and presented documents to Asia Commercial Bank Ltd., its bank, which forwarded them to Issuer.

Issuer notified Seller/Beneficiary of the following discrepancies via telex: "(a) The place of origin was stated as 'Cambondia' instead of 'Cambodia' in the invoice and the packing list; (b) Net weight was not shown in the Bill of Lading; and (c) It is shown in the copy of courier AWB receipt that non-negotiable documents were not sent within 5 days after shipment date." Seller took the position that the quality and quantity of the goods were as agreed and that "(a) The wrong spelling of the place of origin 'Cambodia'as 'Cambondia' in the invoice and the packing lists can be clarified in the certificate of origin which stated the place of origin as 'Cambodia' which had been delivered to the issuing bank; (b) Though the net weight was not shown in the bill of lading, it was shown in the packing lists which were part of the requisite documents supplied to the issuing bank. In any event, gross weight was shown in the packing lists which also appeared in the bill of lading; (c) The timing of the dispatch of the non-negotiable documents being after the shipment date is immaterial so far as the quality and the quantity of the goods was concerned." At Seller's request, Buyer informed Seller that Buyer had given instructions to Issuer to take up the documents.

Prior to that time, City had given a guarantee to the carrier and obtained the goods. On payment, it delivered them to Buyer. Although Buyer passed on Seller's requests for waiver of the alleged discrepancies, City had encountered financial difficulties and was subject to an administrative order. The administrators did not reply to Buyer's request and Issuer did not waive the alleged discrepancies.

After discussions with Buyer's Managing Director, Seller claimed that it withdrew its claim under the LC on Buyer's promise to settle the amount owed by telegraphic transfer. Subsequently, it claimed that there was agreement that payment would be by installments since Buyer was in financial difficulties due to City having been placed in administration. Buyer paid Seller two installments totaling US$1,202.70 by overpaying for subsequent orders via telegraphic transfer.

The relationship deteriorated to the point where Seller sued Buyer for payment of goods sold and delivered. The District Court of the Hong Kong Special Administrative Region, Wong, J., entered judgment in favor of Seller for the unpaid amount due on the sale, US$37,143.23 (US$38,345.93 - US$1,202.70).

The court summarized Buyer's case in the following manner: "It is the [Buyer's] pleaded case that the parties intended to settle payment by an irrevocable letter of credit. This irrevocable letter of credit was therefore regarded as an absolute payment for the goods. The [Buyer] therefore claimed that by accepting the irrevocable letter of credit the [Seller] accepted payment in this form and since the [Buyer]paid City for the goods, and City had applied for a letter of credit, the [Buyer] had discharged its obligation to the [Seller]. It is the [Buyer's] argument that the burden of payment [has]shifted to the Applicant of the L/C i.e. City or the issuing bank of the irrevocable letter of credit, the Bank of China London. "

The judge noted that she found that the testimony given on behalf of Seller was supported by documentary evidence and emails that revealed that Buyer regarded itself as liable to repay for the goods and that the testimony given on behalf of Buyer was unsupported by any documentary evidence. More than two years later even though the relationship had become strained, the court noted that Buyer admitted in an email to Seller that it owed the money to Seller.

The court stated that "[i]t is clear from the authorities [advocated by Counsel] that the opening of the documentary credit does not in itself constituted an unconditional discharge of the buyer. In Lord Denning's own words '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.' The letter of credit was clearly only a conditional payment in the present case. I accept [Seller's] argument that the obligation to pay for the goods did not shift from the [Buyer] to City. In particular, when the [Buyer] took delivery of the goods, the [Buyer] became immediately liable to pay for the goods."

It rejected Buyer's argument that there was a novation by which City took its place as Buyer of the goods, stating that the evidence did not reveal any such relationship between Seller and City. The court observed "[t]he only contract City had in this transaction was with the [Buyer] for payment arrangements in the [Buyer's] business. The fact that the [Buyer] signed an agreement with City for an arrangement of payment by letters of credit of its purchasing transactions, does not mean that whoever the [Buyer] purchased from would automatically have a contractual relationship with City. There was no consideration for the [Seller] to accept City as its buyer whatsoever. So far as the [Seller] is concerned, it was the [Buyer] who requested the [Seller] to accept payment by a letter of credit opened by a third party, it was merely a payment arrangement."

[JEB/jjdd]

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