Agritrade International Pte Ltd v Industrial and Commercial Bank of China

• Jurisdiction: Singapore
• Judge: G P Selvam J
• Judgment Date: 31 January 1998
• Neutral Citation: [1998] SGHC 31
• Docket Number: Suit No 424 of 1995
• Date: 31 January 1998
• Year: 1998
• Published date: 19 September 2003
• Plaintiff Counsel: Herman Jeremiah and Florence Ong (Helen Yeo & Partners)
• Citation: [1998] SGHC 31
• Defendant Counsel: Yang Lih Shyng and Lian Chin Chiang (Khattar Wong & Partners)
• Court: High Court (Singapore)
• Subject Matter: Contract,Letter of credit transaction,General principles governing operation of letters of credit,Whether defendants entitled to revoke letter of credit,Fraud as defence to paying out under letter of credit,Incorporation to be done at front end of transaction and not after beneficiary had taken up credit,Whether proper law of credit in present case law of Hong Kong or law of People's Republic of China,Proper law,Principles applicable,Bills of Exchange and Other Negotiable Instruments,Choice of law,Right of issuing bank to incorporate in letter of credit any essential term of underlying contract which it deemed necessary,Conflict of Laws,Proper law governing cross border banker's letter of credit,Whether defendants entitled to rely on defence of fraud

Judgment:

1.GP SELVAM J

The letter of credit

This case concerns a banker`s documentary letter of credit. It was issued at Guangxi by the defendants, a bank incorporated in the People`s Republic of China. The defendants have a branch in Singapore; but it would appear that they do not have a branch in Hong Kong. The credit was issued in favour of a Hong Kong company, namely Wah Tat Fung (HK) Ltd (Wah Tat). It was an irrevocable credit available by negotiation and its purpose was to pay for steel products which Wah Tat had contracted to sell to the applicants of the credit who were Quinzhou Prefecture Foreign Economic Relations and Trade Corp of Guangxi (the Chinese buyers).

2.Wah Tat, the immediate beneficiaries of the credit, were not the suppliers but the resellers of the products. Wah Tat purchased the goods from Agritrade International Pte Ltd (the plaintiffs), a Singapore company, who in turn had secured the merchandise from Sytco Pte Ltd of Singapore. Wah Tat, however, did not establish a separate back-to-back credit in favour of the plaintiffs. They arranged for a transfer of the credit in favour of the plaintiffs. There was a provision in the credit instrument that it was transferable to the plaintiffs.

3.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 sub-credit. Further the credit was not transferred in its entirety in the sense that Wah Tat, the direct beneficiaries, dropped out of the transaction substituting the transferee in their stead. Wah Tat 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 plaintiffs` to Wah Tat. 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 plaintiffs. The important effect of the transfer was to create a direct contractual relationship between the plaintiffs and the defendants for the amount available to the plaintiffs.

4.I will call the credit to Wah Tat as the `mother credit` and the credit transferred to the plaintiffs as the `sub-credit`.

5. The mother credit

The mother credit was established in the following manner. The defendants communicated the text of the credit to Nanyang Commercial Bank Ltd of Hong Kong who therefore were the advising bank. The credit in its amended form provided, inter alia and in effect, as follows: (i). The credit was available by negotiation at the advising bank in Hong Kong (ie Nanyang Commercial Bank). Negotiation was to be by draft at sight for 70% of the invoice value drawn on the applicants and the 30% of the invoice value by draft at 90 days` at sight. Because of the partial transfer of the credit in reality there were two credits and two beneficiaries namely Wah Tat and the plaintiffs.

(ii). Shipment was from Odessa CIS to Huangpu, Guangzhou partial shipment was not allowed. Transhipment allowed. A special condition provided that the goods would be inspected and would be delivered to the buyer at warehouse of Huangpu Port of Guangzhou, China. This was because the goods had already been discharged at Huangpu Port before the credit was issued.

(iii). The total amount of the credit was US$2,937,384.50 covering a total quantity of 10,557.10 metric tons broken up as follows:

(a). 803 pieces of cold rolled sheets at $320/MT(weight: 4678.60 MT);

(b). 151 coils of hot rolled coil at US$245/MT (weight: 2242.10 MT);

(c). 503 pieces of hot rolled at US$245/MT (weight: 3636.40 MT).

(iv). The delivery date was latest 30 September 1993.

(v). Third party documents were acceptable.

6.The aggregate quantity of cargo was 10,557.10mts. The total amount of the credit was US$2,937,384.50 (5% more or less allowed).

7.The full terms of the mother credit, in particular the price changed by Wah Tat to the buyers, were not revealed to the plaintiffs before the latter negotiated the credit.

8. The sub-credit

Nanyang Commercial Bank issued the sub-credit to the plaintiffs by asking its Singapore correspondents, Bank of China`s Singapore office, to advise the plaintiffs` bankers Rabobank Nederland, Singapore Branch. The material communication from Nanyang Commercial Bank to Bank of China, Singapore read as follows:

Pls advise the following transfer credit via Rabo Bank Nederland Singapore Branch 50 Raffles Place 32-01 Shell Tower Singapore 0104

Without any responsibility on our part pls advise transferee that we have transferred the following credit in their favour at the request of the transferor under our transfer ref OBT93/0475

Transferor: Wah Tat Fung (H.K.) Ltd Room 2112 21/F Hoking Comm Ctr 2-16 Fa Yuen St Kowloon Hong Kong

Transferee: Agritrade International Pte Ltd 6 Battery Road 16-06/7 Singapore 0104

Amount: USD2,556,492 (US dollars two million five hundred fifty six thousand four hundred and ninety two only

Expiry Date: 10 January 1994 at our counter

9.The prices, c and f Shanghai, mentioned in the sub-credit were as set out below. The plaintiffs` own purchase price per metric ton are shown in parenthesis. (a). 803 pieces, cold sheets:US$270/MT (USD275)

(b). 151 coils, hot coils:US$220/MT(USD205)

(c). 503 pieces, hot plates:US$220/MT (USD205)

10.The total amount in favour of the plaintiffs was US$2,556,492 (5% more or less allowed). This was the sale price in the contract between Wah Tat and the plaintiffs.

11.The difference in the total value of the mother credit and the sub-credit was US$2,937,384.50-US$2,556,492=US$380,892.50. The difference, of course, was Wah Tat`s gross profits. It must be iterated that the plaintiffs, at the time the sub-credit was established in their favour had no knowledge the huge price difference in Wah Tat`s contract with the Chinese buyers.

12.Special instructions in the mother credit and the sub-credit provided that interest on 30% of invoice was payable by the buyer at 5.4% per month, that is 64.8% per annum.

13.The sub-credit contained the following important provision: `Notwithstanding any instruction to the contrary that appear in the foregoing credit it is essential that all documents must be presented to Nanyang Commercial Bank, Hong Kong, in one lot.` The purpose of this provision was to enable and require the plaintiffs and Wah Tat to effect a negotiation concurrently and so that Nanyang Commercial Bank and subsequently the defendants would have sight of documents of Wah Tat and the plaintiffs and confirm that they were mutually consistent.

14. No contract between plaintiffs and ultimate buyers

The first and foremost feature of the above arrangement was that there was no underlying contract between the plaintiffs and the buyers at Guangxi. There were two relevant contracts: one was the underlying contract between the Chinese buyers and Wah Tat and the other between Wah Tat and the plaintiffs. If there was a breach of any term in the underlying contract between the Chinese buyers and Wah Tat the plaintiffs could not be made liable in contract to the Chinese buyers or the defendants. The contractual position between Wah Tat and the plaintiffs was an entirely independent relationship and it could not in any way influence the rights and obligations of the parties to this case. These conclusions are dictated by the principle of privity of contract.

15. The negotiation

In this situation, on or about 8 October 1993 Rabobank, the plaintiffs` bank in Singapore tendered the documents on behalf of the plaintiffs, to Nanyang Commercial Bank Ltd at Hong Kong claiming immediate payment of 70% of the total value, that is US$1,789,525.50. It was paid to and received by Rabobank, on behalf of the plaintiffs for value 21 October 1993 without any objection or outcry from the defendants. In other words neither the buyers nor the defendants had any objection to the propriety and conformity of the documents tendered by the plaintiffs. It should be observed that between the negotiation and the payment of 70% there was a time lag of 13 days. This means that the defendants and the Chinese buyers had almost two weeks to reject the documents but did not do so.

16. Defendants` promise to pay the balance

The remaining 30% of the price amounting to US$779,363.91 was payable at 90 days sight ie on or about 25 January 1994. Time for payment of this amount was deferred at defendant`s request to 25 March 1994 and interest was agreed on 19 January 1994 to accrue at 6.0% per annum from 25 January 1994 until date of receipt of funds. Subsequent events will show that there was an ulterior motive in asking for extension for payment until 25 March 1994.

17.At this point it should be stated that Rabobank after it presented the documents to Nanyang Commercial Bank and received payment of 70% of the invoice value had discounted the draft without recourse in respect of the balance of 30% and therefore had a lien on the balance due from the defendants.

18. Defendants renege on their promise

On 22 March 1994, the defendants by a telex to the plaintiffs` bank, Rabobank, desired to know the amount of interest payable on maturity date. Rabobank replied on same day stating that the total amount payable inclusive of interest was US$785,837.16. The time for payment came but no payment came from the defendants. Instead Rabobank received a communication on that day from the defendants stating...