Kredietbank NV v Sinotani Pacific Pte Ltd (Agricultural Bank of China, Third Party)
| Judge | Chan Seng Onn JC |
| Judgment Date | 26 January 1999 |
| Neutral Citation | [1999] SGHC 26 |
| Subject Matter | Contract,Choice of law,Whether Chinese law having the 'closest and most real connection with contract',Banking,Conflict of Laws,Whether Chinese law the system of law with 'closest and most real connection' with letter of credit,Governing law for letter of credit,Whether foreign judgment to be given effect to,Letters of credit |
| Published date | 19 September 2003 |
| Defendant Counsel | Joseph Lopez and Lynette Yap (Choy & Lopez),Yang Lih Shyng and Lian Chin Chiang (Khattar Wong & Partners) |
| Court | High Court (Singapore) |
The plaintiffs are a bank with a branch in Singapore. The defendants were customers of the plaintiffs. The third party are a bank with their principal place of business in China and they have a branch in Singapore.
2. Background
By an authenticated swift message dated 31 October 1995, the third party advised that they had issued a letter of credit No 340LC951085 (`the LC`) for US$500,000 in favour of the defendants. The LC was subject to the Uniform Customs and Practice For Documentary Credits (1993 Revision) ICC Publication No 500 (`UCP 500`). The LC had, inter alia, the following terms: (a). form of documentary credit: irrevocable
(b). date and place of expiry: 28 February 1996, Singapore.
(c). currency code and amount: US$500,000
(d). available with: third party by acceptance
(e). drafts at: 180 days after sight for 100% invoice value
(f). drawee: The Agricultural Bank of China, Dalian Branch, The People`s Republic of China
(g). confirmation instructions: without
(h). Each drawing under the LC must be presented to Royal Bank of Canada Singapore branch, which holds special arrangements for negotiation, reimbursement and document forwarding.
(i). `We hereby undertake that all drafts drawn under and in compliance with the terms of this credit will be duly honoured on presentation at our bank and that drafts accepted within the terms of this credit will be duly honoured at maturity.
3.On 1 November 1996, Royal Bank of Canada, Singapore branch (`RBC`), advised the defendants of the issue of the authenticated LC. As the advice was stated to be without any engagement on RBC`s part, RBC had not undertaken any future legal obligations, whether to negotiate the LC or otherwise, for the defendants.
4.RBC was never authorised or requested by the issuing bank to add confirmation to the LC and it never did. Plainly then, RBC never became a confirming bank and was not obliged to negotiate the credit either. In short, it was an unconfirmed LC. This was not disputed.
5.On 2 January 1996, the defendants bypassed RBC and presented instead to the plaintiffs` Singapore branch, the required documents including a bill of exchange No SP/12041/95 dated 2 January 1996 (`BE`) drawn by the defendants on the third party, payable in favour of the plaintiffs for US$500,000. The maturity date of the draft was 11 July 1996. The defendants requested the plaintiffs to purchase the BE subject to acceptance by the third party on, inter alia, the following terms:
(a) The defendants guaranteed that the said bill and documents would be promptly honoured according to the terms thereof, failing which they agreed to make immediate payment to the plaintiffs of the amount of the BE plus all interest and all charges and expenses which the plaintiffs were thereby authorised to recover from the defendants.
(b) The items for negotiation were accepted by the plaintiffs subject to recourse to the defendants.
6.The plaintiffs forwarded the documents to the third party for their acceptance within the time allowed under the UCP 500. By a tested telex dated 17 January 1996, the third party notified the plaintiffs of their acceptance and confirmed that the US$500,000 would be remitted to the plaintiffs on the maturity date.
7.Relying on the third party`s confirmation, the plaintiffs discounted the BE with full recourse to the defendants and paid the defendants in Singapore dollars the equivalent sum of US$480,054.23 on 18 January 1996, being the amount due less the bank charges, commission and interest.
8. Stop payment order from court in China
On 16 May 1996, the third party informed the plaintiffs that they would not be making any payment. The third party stated that pursuant to a suit brought in China by their customer against the defendants, the local law court there had ordered the third party to stop payment.
9.By a tested telex dated 20 May 1996, the plaintiffs claimed payment from the third party on the maturity date. When no payment was received and as recourse to the defendants was available, the plaintiffs demanded re-payment from the defendants pursuant to the terms as agreed between them.
10.To mitigate their losses, the defendants repaid a principal sum of US$250,000 plus interest of US$47,195.30. Thereafter, the plaintiffs commenced action against the defendants in the present suit for the unpaid balance principal sum of US$250,000 plus interest and succeeded in obtaining final judgment against them.
11.The defendants, having paid the judgment sum plus interest and legal costs to the plaintiffs, now claimed an indemnity from the third party to the extent of US$562,557.56 plus legal costs of S$3,500, and alternatively damages.
12. Defence of third party
The third party`s defence was follows:
(a) It was a condition of the LC that presentment must be to RBC.
(b) However, neither the defendants nor the plaintiffs presented the BE or other documents required for drawing under the LC (hereinafter collectively referred to as `the documents`) to RBC, which was the `nominated bank`.
(c) In receiving the documents from the defendants and in forwarding them to the third party, the plaintiffs were not acting as the agent of the third party. The plaintiffs were never a party to the LC transaction.
(d) The plaintiffs were not the bank nominated or authorised to advise, confirm or negotiate documents under the LC.
(e) The plaintiffs chose to discount the drafts under the LC and purchase the documents subject to their being accepted by the third party.
(f) The LC was not freely negotiable.
(g) Hence the third party would not be liable in accordance with UCP 500 to make payment under the LC to the plaintiffs as the plaintiffs had not duly negotiated the documents by their failure to make presentation to the nominated bank. The same applied to the defendants who failed to present the documents to the nominated bank for negotiation.
(h) Further, the orders of the Chinese court prohibited the third party from making payment under the LC.
(i) The third party contended that the applicable law of the LC transaction was Chinese law. The third party, being a Chinese corporate entity, had to observe Chinese law and the Chinese court orders to stop payment under the LC.
13. Consequences flowing from the proper law of the LC
I am grateful to both counsel and their assisting counsel for providing me with their detailed written submissions accompanied by comprehensive research material and authorities, which were of much assistance to me in deciding the central issue in this case: whether the Chinese court orders should be given effect to, which in turn depended on what the proper law of the letter of credit (`the credit`) was.
14.If the proper law governing the LC was Chinese law, then the Chinese court orders would have to be given effect to and the court here ought not to order the third party to make payment to the defendants under the LC. The court here should not embark on an examination of the legal basis upon which the Chinese court had arrived at its decision to stop the payment, nor would it be competent to question the correctness of that decision made in accordance with Chinese law.
15.However, if the proper law governing the LC was Singapore law, then the court here would have to construe the obligations of the third party under the LC according to our law. If the issuing bank, ie the third party were liable to pay under Singapore law, then the fact that the Chinese court had ordered a stop payment would be irrelevant. The court here would enforce its order against the third party to pay the defendants. It would not be bound by the comity of nations to recognise the Chinese court order. That much was clear to me.
16. Letters of credit
Before dealing with the issue of the proper law of the LC, I felt that I should briefly examine the nature and operations of letters of credit.
17.The rights and obligations of a letter of credit are to be found from its terms. Where the letter of credit is governed by the UCP 500, then regard must be had to the UCP for the proper interpretation of the terms of the credit, especially when some words in the UCP, having their own specialised, technical and legal meaning, are used in the credit.
18.It is trite law that documentary credits are concerned only with the documents and not with the underlying sale contracts or other contracts that give rise to the issuance of those credits. The parties dealing with the credits are not concerned with any dispute that the buyers may have with the sellers. By their nature, these credits are quite separate transactions from their underlying contracts. Article 3 of the UCP reflects that position and makes clear that:
the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
19.There are a few types of letters of credit. A `straight letter of credit` is one where the beneficiary only has the undertaking of the issuing bank to pay, accept or negotiate bills as the case may be. Under art 10(a) of the UCP, the letter of credit must state whether it is available by sight payment, by deferred payment, by acceptance or by negotiation.
20.If the issuing bank is in a country different from the beneficiary, often the issuing bank will appoint a correspondent bank in the beneficiary`s country to deal with the letter of credit, and the documents to be presented by the beneficiary in accordance with it.
21.Depending on the obligations undertaken by the correspondent bank, the bank may act merely as an advising bank without adding any of its own undertaking, or it may act as the confirming bank by adding its own undertaking to pay at sight or on a deferred date, or to accept bills drawn on itself or to negotiate without recourse bills drawn by the beneficiary.
22.Where...
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