Sinotani Pacific Pte Ltd v Agricultural Bank of China

• Judge: Goh Joon Seng J
• Judgment Date: 15 July 1999
• Neutral Citation: [1999] SGCA 53
• Citation: [1999] SGCA 53
• Defendant Counsel: Yang Lih Shyng and Lian Chin Chiang (Khattar Wong & Partners)
• Published date: 19 September 2003
• Plaintiff Counsel: Joseph Lopez and Andy Chong (Choy & Lopez)
• Date: 15 July 1999
• Docket Number: Civil Appeal No 319 of 1998
• Court: Court of Appeal (Singapore)
• Subject Matter: Whether stop payment order should be given effect,Letters of credit,Banking,Whether Chinese law the proper law of contract between issuing bank and beneficiary,Chinese bank issuing unconfirmed straight letter of credit in favour of Singapore beneficiary -Chinese court making stop-payment order,Choice of law,Conflict of Laws,Contract,Whether letter of credit an unconfirmed straight letter of credit

(delivering the grounds of judgment of the court): This was an appeal against the decision of the trial judge dismissing the appellant`s claim against the respondent in respect of a letter of credit. We dismissed the appeal. We now give our reasons.

The parties

The appellant, a company incorporated in Singapore, is the beneficiary of the letter of credit which is at issue in these proceedings (`the letter of credit`); whilst the respondent, a bank incorporated in the People`s Republic of China with a branch in Singapore, is the issuing bank of the letter of credit. The facts giving rise to the litigation between the parties were as follows.

The facts

In September 1995, the appellant entered into an agreement to sell machinery to a company in the People`s Republic of China (`the Chinese buyer`) for US$500,000. Under the agreement, the appellant was to be paid by drafts drawn under an irrevocable letter of credit at 180 days after sight.

By an authenticated swift message dated 31 October 1995, the respondent advised the appellant of the issuance of the letter of credit for the above sum in its favour. The letter of credit which was unconfirmed was governed by the 1993 Revision of the International Chamber of Commerce`s Uniform Customs and Practice for Documentary Credits (`UCP 500`). It included the following terms:

date and place of expiry:	28 February 1996, Singapore (31D)
currency code and amount:	US$500,000 (32B)
available with:	the respondent, by acceptance (41D)
drafts at:	180 days after sight (42C)
drawee:	the respondent`s branch in Dalian, China (42A)

It was expressly stipulated in the letter of credit that:

[e]ach drawing under this L/C must be presented to Royal Bank of Canada Singapore branch, which holds special arrangements for negotiation, reimbursement and document forwarding. (Condition 47A.5)

The respondent also undertook that:

[a]ll drafts drawn under and in compliance with the terms of this credit will be duly honored on presentation at our bank and ... drafts accepted within the terms of this credit will be duly honored at maturity. (Condition 78.)

The appellant did not, however, present the documents required under the letter of credit to the Singapore branch of the Royal Bank of Canada (`RBC`). Instead, it presented them to Kredietbank NV`s Singapore branch (`Kredietbank`). The documents tendered included a bill of exchange drawn by the appellant on the respondent with a face value of US$500,000 and payable to the order of Kredietbank (`the bill of exchange`). The appellant asked Kredietbank to `purchase` these documents `subject to acceptance` by the respondent on, inter alia, the following terms:

(i) the appellant guaranteed that the bill of exchange and other documents would be promptly honoured on the maturity date, failing which it would make immediate payment to Kredietbank for the amount of the draft plus interest, charges and expenses incurred, and

(ii) Kredietbank would accept the documents `subject to recourse` to the appellant.

The appellant also agreed to indemnify Kredietbank against any loss arising from discrepancies between these documents and the terms of the letter of credit.

Kredietbank in turn forwarded the documents to the respondent`s Dalian branch on 5 January 1996 for its acceptance. The respondent replied by way of telex on 17 January 1996. It indicated its acceptance of the documents, and confirmed that the US$500,000 would be remitted to Kredietbank on the maturity date of the bill of exchange. In reliance on the respondent`s telex, Kredietbank discounted the bill of exchange and paid the appellant the equivalent sum of US$480,054.23 in Singapore dollars, being the amount due under the bill of exchange less bank charges, commission and interest.

Subsequently, the respondent informed Kredietbank that owing to an action brought against the appellant in China by the Chinese buyer, the court there had ordered the respondent to stop payment under the letter of credit. Despite repeated requests from Kredietbank for payment, the respondent failed to honour the bill of exchange on the maturity date. Kredietbank thus demanded repayment from the appellant, since recourse to the latter was available.

To mitigate its losses, the appellant repaid Kredietbank part of the principal sum with interest. Kredietbank then sued the appellant for the balance of the principal sum plus interest, and obtained final judgment against the latter. The appellant, having paid the judgment sum plus interest and legal costs to Kredietbank, in turn sought an indemnity from the respondent.

The decision at first instance

At the trial, the respondent conceded that the only reason for its inability to honour its undertakings in the letter of credit was the stop-payment order of the Chinese court. It accepted that it would have paid Kredietbank on the maturity date of the bill of exchange if there had not been such a court order. The respondent also agreed that it was immaterial that the appellant had presented the documents to Kredietbank instead of RBC, since it (the respondent) had already accepted the documents from Kredietbank. The trial judge thus considered the appellant`s claim against the respondent solely from the viewpoint of whether the Chinese court order should be given effect to. This in turn depended on what the proper law of the letter of credit was. The trial judge stated that if the law governing the letter of credit was Chinese law, the parties to the credit transaction would have to comply with the Chinese court order, in which case the Singapore courts ought not to order the respondent to pay the appellant. On the other hand, if the relevant proper law was Singapore law, the respondent`s obligations under the letter of credit would have to be construed in accordance with Singapore law. If the respondent was liable to pay the appellant under Singapore law, the Singapore courts could order the former to make payment, notwithstanding the existence of the Chinese court order.

The trial judge stated that the proper law of a letter of credit is `the system of law at the place where the obligations of the bank(s) to the beneficiary arising under the credit have their closest and most real connection with`. On the facts of the case, he found that the place of presentation of the documents under the letter of credit was China, and that the obligation to make payment under the credit was likewise to be fulfilled in China. Accordingly, Chinese law was held to be the proper law of the letter of credit.

The appeal

Issues arising on appeal

The appellant`s case on appeal was that the trial judge`s finding as to the proper law of the letter of credit was against the weight of evidence, and that there was sufficient evidence to hold that the credit had the closest and most real connection with Singapore, such that it was governed by Singapore law. In reviewing the appellant`s arguments, it is necessary to ascertain the test to be applied in the choice of law rules for determining the proper law of contracts arising under a letter of credit.

There are different kinds of letters of credit. In particular, a letter of credit may be either a straight or a negotiation credit, and it may either be confirmed or unconfirmed. In a straight letter of credit, the undertaking of the issuing bank to pay is directed to the named beneficiary alone, such that only he may rely on this undertaking. The same applies where a straight letter of credit is confirmed, save that the beneficiary would then have the undertakings of both the issuing bank and the confirming bank to make payment under the credit. See arts 9.a and 9.b of UCP 500 which read:

Article 9

Liability of Issuing and Confirming Banks

a An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:

i if the Credit provides for sight payment - to pay at sight;

ii if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;

iii if the Credit provides for acceptance:

a by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,

or

b by another drawee bank - to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;

iv if the Credit provides for negotiation - to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s)...