Kumagai-Zenecon Construction Pte Ltd (in liquidation) and Another v Arab Bank plc (Low Hua Kin, Third Party)

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 11 February 1997
• Neutral Citation: [1997] SGHC 31
• Docket Number: Originating Summons No 1205 of
• Date: 11 February 1997
• Published date: 19 September 2003
• Year: 1997
• Plaintiff Counsel: Yee Kwok Hon (Bih Li & Lee)
• Citation: [1997] SGHC 31
• Defendant Counsel: Alvin Yeo (Wong Partnership),Harry Elias SC and Lawrence Quahe (Harry Elias & Partners), and Gan Choon Beng and Leo Cheng Suan (Chu Chan Gan & Ooi)
• Court: High Court (Singapore)
• Subject Matter: Letters of credit,Nature and scope of defendants' duty under terms of the credit,Whether defendants can reject demand,Whether credit excludes terms of the Uniform Customs and Practice for Documentary Credit (1993 revision) ICC Publication No 500,Defendants rejecting demand,Defendants issuing standby letter of credit in plaintiffs' favour,Standby letter of credit,Plaintiffs' demanding payment under credit,Banking,Whether demand in compliance with credit,Whether bank can rely on arguments not raised in its original letter of rejection

The facts

The first plaintiff, Kumagai-Zenecon Construction Pte Ltd (KZC), was formed pursuant to a joint venture between Kumagai Gumi Co Ltd, a company incorporated in Japan, and Zenecon Pte Ltd, a company incorporated in Singapore and controlled by the third party (Low). Subsequently, the second plaintiff, Kumagai Investments Pte Ltd (KIP) was incorporated as a wholly owned subsidiary of KZC.

Following a shareholders` dispute, Kumagai Gumi Co Ltd commenced Originating Petition No 9/92 in the High Court (the OP) claiming relief under s 216 of the Companies Act (Cap 50). The plaintiffs and Low were named as three of the respondents to the OP. On 15 July 1994, on giving judgment after hearing the OP, the trial judge made, inter alia, the following orders:

(1) that each of KZC and KIP be wound up and that M/s Peter Chi Man Kwong and Michael Ng Wei Teck be appointed the liquidators of each company;

(2) that Low do pay KIP the sum of $2,982,517.17;

(3) that Low purchase or procure the purchase of the shares which KIP owned in KZ Investments Pte Ltd (another company controlled by Low) `at a fair price to be fixed by independent valuers or at the cost to [KIP] of the purchase, whichever is the higher`;

(4) that Low do pay KIP the whole amount of tender deposits which had been made using the funds of KIP, less such amounts that had already been refunded.

On 1 August 1994, Low filed an appeal against the above and other orders made by the trial judge in the OP. Two weeks later the plaintiffs, who were both then in liquidation, commenced execution proceedings against Low. Low then filed an application to stay all execution proceedings pending the hearing of his appeal. The parties negotiated a settlement and on 24 August 1994 it was ordered, by consent, that unless Low provided a standby letter of credit or guarantee from the defendant herein, Arab Bank plc (the bank), in the amount of $4,316,354.17, the plaintiffs would be at liberty to proceed with execution on the judgment in the OP. It was further ordered that upon provision of the specified security the execution of the court orders would be stayed pending disposition of the appeal.

The terms of the standby letter of credit were settled by the parties before the court. The sum of $4,316,354.17 as the maximum sum payable under the standby letter of credit was agreed upon by adding the sum of $2,982,517.17 ordered to be paid by Low to KIP under the judgment to the sum of $1,333,837 as being the estimated cost to KIP of its purchase of shares in KZ Investments Pte Ltd. On 7 September 1994, the bank issued its standby letter of credit no STBY940035 (the credit) in the agreed terms. The credit was stated to be valid for a period of one year from its issue date or for a period of up to three weeks after the date on which the decision of the Court of Appeal had been entered in the Registry of the Supreme Court.

The Court of Appeal heard Low`s appeal in January 1995. Its reserved judgment was delivered on 24 May 1995. Low`s appeal was allowed in part. The orders that he pay KIP the sum of $2,982,517.17, and that he reimburse KIP with the amount of tender deposits made using its funds, were set aside. On the other hand, the Court of Appeal affirmed the order that Low was to purchase KIP`s shares in KZ Investments Pte Ltd on the terms determined by the trial judge. This decision was entered at the Registry of Supreme Court on 3 November 1995.

On 23 November 1995, just one day before the expiry of the credit, the liquidators of KZC demanded payment from the bank of the sum of $3,793,000 under the credit. The demand was accompanied by the two documents specified in cl 2 of the credit, viz legal sealed copies of each of the High Court judgment and the order of the Court of Appeal. The amount demanded was the fair price for KIP`s shares in KZ Investments Pte Ltd as valued by an independent valuer. The next day the bank rejected the liquidators` demand and, three days later, the plaintiffs` solicitors wrote to the defendant demanding payment pursuant to KZC`s original demand. On 28 November 1995, the bank`s solicitors defended their client`s rejection of the plaintiffs` demand and gave their reasons for that rejection.

On 9 December 1995, the plaintiffs commenced the present action against the bank to enforce payment under the credit. Low applied to be added as a third party to the action on the ground that he had an interest in its outcome. I allowed his application and at the hearing of the originating summons proper he was represented and opposed the plaintiffs` application.

Terms of the credit

As the proceedings turned on the true construction of the terms of the credit, it is necessary to set out its provisions in some detail. The credit was dated 7 September 1994 and it was addressed to KZC and/or its liquidators. In cl 1 the bank established the credit in favour of KZC for the account of Low. Clauses 2, 3 and 4 are the significant clauses in the present context and, so far as material, they read as follows:

2 Subject to cll 3 and 4 below, we shall make payment to Kumagai Investments Pte Ltd or their liquidators and to no other party under this [credit] of the sum or sums payable pursuant to or under the judgment debtor`s [ie Low`s] obligations to Kumagai Investments Pte Ltd pursuant to or under the High Court judgment [ie in the OP] as affirmed in whole or in part and/or varied by the decision (as defined in cl 2.2 below) on your written demand or demands for payment when such demand or demands is/are presented to us at 80 Raffles Place [num ]55-01 UOB Plaza 1 Singapore 0104 accompanied by the following documents:

2.1 a legal sealed (LS) copy of the High Court judgment;

2.2 a legal sealed (LS) copy of the order of the Court of Appeal in which orders are made in respect of the appeal (the decision), whether or not any order or orders in respect of any other appeal or matters are included therein.

3 Our maximum aggregate liability under this [credit] in respect of any and all demands made hereunder shall not exceed the sum of Singapore dollars four million three hundred and sixteen thousand three hundred and fifty-four and cents seventeen only (S$4,316,354.17).

4 This [credit] shall be valid for a period of one (1) year from the date hereof (the validity period), or for a period extending up to three weeks after the date the decision has been entered at the Registry of the Supreme Court ... We undertake that all demands made in accordance with this [credit] or any renewal thereof would be met on demand.

5 This [credit] is subject to the Uniform Customs and Practice for Documentary Credit (1993 revision) ICC Publication No 500 (UCP-500).

Basic issue: what did the credit call for?

The plaintiffs` fundamental argument was that in a letter of credit situation, the issuing bank would be concerned only with documents and not with the underlying transaction between the bank`s customer who had applied for the credit and the beneficiary of the same. They contended that this same principle also applied to a standby letter of credit like the credit in this case. They pointed out that whilst, as stated in Documentary Credits (2nd Ed, 1993) by Raymond Jack at p 264, `a standby credit performs the function of a guarantee in that it enables the beneficiary, in accordance with its terms, to obtain money from the issuing bank, or any confirming bank, in relation to the performance, or non-performance, of a contract between the beneficiary and the party who has arranged for the opening of the credit`, as the same author goes on, `the important feature of such a credit is that the bank gives an undertaking to pay against documents which creates a primary obligation on the bank which is independent of the underlying transaction. Thus although the function is different from ordinary credits, the form of the transaction and the substance of the undertakings are the same as ordinary credits`.

The plaintiffs submitted that in the present case there was an arrangement whereby the bank, acting at the request and on the instructions of its customer, Low, was to make payment to a third party, KIP, against stipulated documents ie the orders made in the OP dated 15 July 1994 and by the Court of Appeal in Civil Appeal No 131/94. They asserted that it was clear from cl 2 of the credit that the bank was to pay the liquidators of KIP upon demand being made by the liquidators of KZC accompanied by the two specified documents and subject to the amount demanded not exceeding the prescribed maximum limit (cl 3) and the demand being made within the lifespan of the credit (cl 4).

They pointed out that on the facts, the question of fraud had never been raised and it was not an issue. No attempt was made by Low to restrain the plaintiffs from demanding payment pursuant to the credit nor was any attempt made to seek an injunction against the bank to restrain them from paying on the credit. As KZC`s demand was made within the validity period of the credit and was accompanied by the specified documents, there was absolutely no basis for the bank not to have paid pursuant to the terms of the credit.

It was apparent from the argument as...