Article

Factual Summary:

Bank issued a transferable credit available by negotiation in Hong Kong to a steel broker for purchase of rolled steel products. The credit provided for payment of 70% of the total value on presentation of documents and 30% payable at 90 days sight. First beneficiary obtained a partial transfer of the credit to transferee beneficiary, another broker. The contract between the Singapore broker (transferee beneficiary) and the Hong Kong broker (first beneficiary) provided for "off grade" goods. At the request of the first beneficiary, the transferee beneficiary deleted the words "off grade" from its documents. When documents were presented in Hong Kong and forwarded to the Guangxi office of the issuer through the nominated negotiating bank, the issuer paid the 70% after 13 calendar days without any objection and delivered the documents, including negotiable bills of lading, to the applicant which took possession of the goods. Subsequently, the negotiating bank discounted the beneficiary's right to the balance under the issuer's deferred payment obligation without recourse. With the agreement of the negotiating bank, the obligation was further deferred for two additional months with interest at 6% per annum.

When payment of the balance with interest was sought, the issuer refused on the basis of a Chinese court order stopping payment. The transferee beneficiary thereupon brought this action in Singapore for the balance due. The High Court of Singapore awarded judgment to the transferee beneficiary.

Legal Analysis:

1. Choice of Law: Characterizing the credit as a "cross-border credit", the court concluded that the applicable law is:

[T]he law of the country where the beneficiary is entitled to present the documents and become entitled to payment. This is implied by the very nature of cross-border credit. Where a credit provides for negotiation in a country other than the country from which it emanates the beneficiary impliedly intimates that he does not wish to be bound by the law of the country of origin of the credit. The opening bank by agreeing to issue the credit impliedly accepts such an intimation. ... In the present case the proper law of credit was that of Hong Kong and not that of People's Republic of China.

2. Choice of Law; Presumption That It is Identical to That of the Forum: The court noted:

It is common knowledge that at the relevant time the relevant law of Hong Kong and that of Singapore were the same. In any event, as it was not pleaded that the law of Hong Kong was different a Singapore court must assume that the laws of both were the same.

3. Cancellation: The issuer argued that the applicant and first beneficiary had agreed to the cancellation of the LC and that it had been canceled. The court rejected this argument, noting that the credit had been transferred.

As the credit was irrevocable the defendants could not revoke it. In any event, as the [transferred] credit was a contract between the plaintiffs and the defendants neither the Chinese buyers nor [the first beneficiary] acting alone or together could revoke the credit or instruct the defendants to revoke it. It was not their credit. It follows therefore that the defendants could not act on any request or directive from them to revoke what was irrevocable. Further, as the credit had already been negotiated the credit was no longer executory. It had been accomplished by performance. There was therefore no credit to retract, cancel or revoke. The [issuer was] under a new obligation to effect payment ... .

4. Injunction; Effect of Order of Foreign Court:The issuer had sought to excuse non-payment under a Chinese court order stopping payment on the ground of fraud and an arbitral award. The court noted that the issuer "gracefully and readily conceded that the orders of the courts in People's Republic of China were not binding on this court and accepted that the defendants must justify their refusal to honour their undertaking to pay according to the law of Singapore."

5. Injunction; Fraud: The issuer alleged that the second beneficiary had tendered documents that should have described the goods as "OFF GRADE" but, instead, had knowingly omitted the description from the documents. The court stated that the issuer must prove common law fraud, indicating that "its elements are the same as the tort of deceit". The court noted that the transferee beneficiary had deleted the words "OFF GRADE" from the contract at the request of the first beneficiary. The court also noted that the quality of the goods was known to the first beneficiary and was, in any event, apparent from the price being charged by the transferee beneficiary. The court also noted that the transferee beneficiary had no notice of the price being charged by the first beneficiary to the applicants or of the terms of their contract until after litigation was commenced. The court suggested that the first beneficiary had over-charged the applicant for the quality of goods sold.

The court concluded that "there can be no question of the [transferee beneficiary] deceiving anyone" and ruled that there was no fraud on its part.

The omission of the words from the documents presented for negotiation was not a fraudulent act. The credit did not stipulate any particular quality grade of the goods or that they must be prime perfect products. Having not stipulated any requirements regarding grade or quality it was not open to them to complain about quality. Fraud involves an element of gain on the part of the perpetrator. In this case the [transferee beneficiary] believed [it] gave value for the price indicated in the credit. There was unchallenged evidence before me that the market price of prime quality product in perfect condition was much higher, namely between US$330 to US$350 for the cold rolled sheets, US$300 to US$310 for the hot rolled coil and US$310 to US$320 for the hot rolled plates. These were not the [transferee beneficiary's] prices. This is not a case where the goods were worthless rubbish. Value required by the [transferred] credit was given by the [transferee beneficiary].

6. Transfer; Effect on Claim of Fraud: The court concluded that what had happened between the Chinese buyer/applicant and the first beneficiary "had no bearing on the rights and obligations" of the issuer as to the transferee beneficiary. "This court was pre-cluded from taking cognizance of those events not only by the principle of autonomy of credit but also by the general principle of res actus inter alios."

7. Implied Warranty of Truthfulness: The issuer argued that there was "an implied term of the letter of credit that the statements made in documents tendered by the [transferee beneficiary] should in fact be true and accurate. In breach of such implied term, the [transferee beneficiary] tendered documents which were in fact untrue and inaccurate, by reason whereof the [transferee beneficiary is] not entitled to payment" and that "by an implied term in the credit the [transferee beneficiary] could not claim from the [issuer] more than the amounts it would be 'plainly and obviously dishonest and/or fraudulent' to do so." The court rejected this argument, perceptively noting that:

The true meaning and effect of these assertions was to convert the credit contract into a sale of goods contract and affix to it the fraud label because without it the [issuer] would be out of court.... Conceptually the claims based on fraud and implied term in the context of a banker's commercial letter of credit are tautological. The only implied term in the letter of credit contract is that the beneficiary who tenders documents must not personally be guilty of fraud. In this context the fraud must be in respect of the documents called for by the credit. These must be dishonesty appertaining to the documents. The implied term pleaded in para 14.2 of the defence is part of the law of sale of goods.... It is not part of the law of letters of credit in addition to the exception of fraud. It is to be observed that the [issuer's] counsel in his written submissions accepted the principle of autonomy of credit and conceded that fraud is the only established exception to that general principle.

8. Transfer: Discussing the transferable character of the credit, the court noted:

It would be apt now to say that the word 'transfer' with its cognates in the context of this case does not bear the ordinary meaning of the term. In effect the term meant that the right to draw under the credit could be transferred wholly or partially to another person. In this case the transfer was effected by the issue of a [transferred] credit. Further the credit was not transferred in its entirety in the sense that [the first beneficiary], the direct beneficiaries, dropped out of the transaction substituting the transferee in their stead. [The first beneficiary] retained part of the credit so that they could draw the differential in the sale price they charged to the Chinese buyers and the sale price of the [transferee beneficiary's] to [the first beneficiary]. It was, therefore, a divisible credit. It should be noted that the word 'transferred' was used instead of 'divisible' because art 54(b) of the Uniform Customs and Practice (1985 Revision) (the UCP), which governed the credit, forbade the use of words like 'divisible', 'fractionable', 'assignable' and 'transmissible' because they 'added nothing to the meaning of the term 'transferable". The bankers concerned, however, had no difficulties in understanding the term as a word of art and the mechanism of transferring part of it to the [second beneficiary]. The important effect of the transfer was to create a direct contractual relationship between the [transferee beneficiary] and the [issuer] for the amount available to the [transferee beneficiary].

Comments:

1. This decision is perceptive and sound. It is particularly important in that it requires that the proof of fraud be made in the forum and does not rely on a court order stopping payment without a determination of the existence of letter of credit fraud. This matter is made easier for the court by its decision that Hong Kong law and not Chinese law governs. Ultimately, the only satisfactory answer to the issue of cross border fraud is the widespread adoption of the UN Convention. Its rules on fraudulent or abusive drawing are clear and narrow in scope and provide an excellent international standard.

2. The court's choice of law analysis is flawed to a certain extent by its determination that the applicable law is the place of presentation. The law of the credit as between the beneficiary and the issuer, unless otherwise indicated, is the law of the issuer. That law, however, cannot depart from internationally accepted norms regarding the independence and autonomy of the credit undertaking.

3. The court properly requires proof of fraud. Unfortunately, it suffers under the confused and confusing approach to fraud taken by the UK courts. The court insists on the proof of "common law fraud" whereas the type of fraud necessary to interrupt an independent obligation differs from common law fraud and is sui generis. It is, as the court intuits, a situation "where the goods are worthless rubbish" or its equivalent. Here again, only the adoption of the UN Convention will provide an approach which will remove the matter from the arcane twists of common law jurisprudence and place it on a sound footing which is essential to international commercial law.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.