Article

Factual Summary: Chinese Buyer contracted to purchase iron ore fines from Indian Seller. To pay, Buyer obtained an LC from Issuing Bank which was available for negotiation at any bank. After the goods were shipped, Seller/Beneficiary presented documents to Negotiating Bank, which, in turn, presented the documents to Issuing Bank. It appears that Issuing Bank did not honor since the opinion refers to proceedings by Negotiating Bank against Issuing Bank in England.

Subsequently, the parties discovered that some of the iron ore owned by Seller/Beneficiary had been attached while on board the vessel in a judgment against Seller/Beneficiary in litigation in China.

Buyer/Applicant then obtained an injunction to prohibit Seller/Beneficiary from drawing on the LC. On Seller/Beneficiary's application to dismiss the injunction, the court discharged it. It was recognized that, absent the injunction, "it is possible that [Issuing Bank] would be obliged to effect payment under the [LC] without further delay and hence the urgency of the present application."

Legal Analysis:

1. Breach of Underlying Contract; UCP500 Article 4; Independence: In discussing the obligation of a confirmer, the court stated that:

If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their fact to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.

2. LC Fraud: The court recognized that there was one exception to the independent character of the LC:

The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, 'fraud unravels all.' The courts will not allow their process to be used by a dishonest person to carry out a fraud.

3. Injunction; Fraud: Noting that enjoining a beneficiary from drawing on an LC is effectively identical to enjoining a bank from paying monies under the LC, the court quoted with approval Group Jose Re v Walbrook Insurance Co. [1996] 1 WLR 1152 at pp. 1160 - 1162: "[t]he effect on the lifeblood of commerce will be precisely the same whether the bank is restrained from paying or the beneficiary is restrained from asking for payment."

4. LC Fraud; Balance: The court noted that even were LC fraud established, the "balance of convenience has to be considered... the court will also have to examine other factors to see whether the balance of convenience is or is not in favor of stopping payment." The court also noted that Issuing Bank was in Shanghai, making the LC proceeds, when paid, "assets outside Hong Kong's jurisdiction."

5. Negotiation; Fraud Exception; Negotiability: Recognizing that the LC was freely negotiable, the court stated that:

The inherent probabilities are that a freely negotiable [LC] would have been negotiated before shipment. [Buyer's] evidence was that [Negotiating Bank] was the negotiating bank. That points to [Negotiating Bank] having given value and being entitled under the credit to be reimbursed by [Issuing Bank]. Even if fraud had been established, I would still have...declined to grant an injunction. I am appalled by the possible ramifications of the granting of an injunction in the circumstances of this case on the innocent third parties, i.e. [Issuing Bank] and [Negotiating Bank]. [Buyer] cannot possibly be entitled to obtain the advantage of an order restraining payment at the expense of the business rights of innocent third parties, merely by proffering him an indemnity in whatever form, cf. Galaxia Maritime S.A. v. Mineralimportexport [1982] 1 WLR 539.

6. Fraud; Dishonesty: Buyer asserted that a draw by Seller on the LC when its title to the goods was in question indicated that Seller had been dishonest or commercially immoral, warranting injunctive relief. The court rejected this contention, stating that:

[T]he parties to the documentary credit dealt with documents, not goods and [Seller] had an assured right to be paid before he parted with the goods. [Seller] has presented a set of documents to [Negotiating Bank]. If they are conforming documents, [Seller] has an assured right to be paid. If they are not and it [Issuing Bank] pays, [Buyer] will have its recourse against [Issuing Bank]. Just as there is nothing dishonest or commercially immoral for a holder of a cheque to prosecute a claim on a dishonored cheque to final judgment and to enforce payment, notwithstanding and despite any dispute in respect of the underlying contract, there is no dishonesty or commercial immorality for [Seller] to obtain it assured right under the documentary...credit. A beneficiary under a documentary credit is entitled to press for payment under the credit for cargo lost in transit. Unless an insurance document forms part of the documents under a credit, the presence or absence of any insurance contract is irrelevant under the credit.

Comment:

1. It is unclear what point there might be to an action to enjoin a beneficiary from drawing on an LC when the beneficiary had already presented documents to a negotiating bank which had apparently already negotiated them. The court noted that that it was unclear "from the terms of the Order whether [Issuing Bank] would be in breach of the Order if it should pay in accordance with the [LC]." The court asked Buyer's counsel whether Buyer was seeking to enjoin Issuing Bank from paying under the LC; it observed that it did not receive "an unequivocal answer."

[JEB/dgd]

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