XING FA (HONG KONG) IMP. & EXP. LTD v. SUNGSAN INTERNATIONAL CO., LTD

bjbj pQB. S gP NAL CO., LIMITED Defendant ____________ Before: Mr Recorder Manzoni SC in Chambers Date of Hearing: 7 December 2018 Date of Decision: 20 December 2018 ______________ DECISION ______________ Introduction In this application the applicant bank applies to vary an injunction order made by Deputy High Court Judge To ( the Injunction ) by permitting the dispute between the plaintiff and the defendant is not an exceptional circumstance unless there is a fraud, in which case what is often known as the Fraud Exception applies. The plaintiff alleges fraud of the defendant (amongst other things), but the applicant says that the Fraud Exception does not apply to the facts of this case. The plaintiff resists the application. The essence of its resistance can be summarised in the following propositions: The applicant bank is not a negotiating bank under the Letters of Credit and therefore cannot take advantage of the ordinary rule that letters of credit should be paid absent the Fraud Exception. A variation of the Injunction of the type sought by the applicant would have the practical effect of rendering the Injunction futile. It amounts, in effect, to an appeal of the Injunction. Deputy High Court Judge To has not yet handed down his reasons for granting the Injunction in the first place, and in any event the matter is under appeal and is due to be heard in t miss the application. There is no real interference with the business of the applicant because the amount at stake is only US$6 million, and in comparison to the overall size of applicant that is insignificant. In any event the plaintiff has offered an undertaking as to damages in the normal way and that should suffice to protect the applicant, particularly as the money remains with the issuing banks under the Letters of Credit, and therefore there is no risk of any real loss to the applicant. The plaintiff can in any event ask the issuing banks not to pay the Letters of Credit because the issuing banks now know of the fraud. Therefore there is no purpose in varying the Injunction to allow payment. The facts The plaintiff is a company incorporated in Hong Kong as a dant using trade financing by way of letters of credit to pay for the goods purchased. The goods were generally due to be delivered to a warehouse in Shanghai run by a company known as Shanghai Pinju International Logistics Co., Ltd. The plaintiff alleges as against the defendant that in relation to at least seven of the contracts for the purchase of goods, the ordered goods were never delivered to the warehouse. I have not been made aware of the details of the case against the defendant, save as set out i e first place. This is expressly confirmed by the Xingshan Police. 8. Thus, it is P s stance that D is liable to return the contract sum is in the value of the 7 LCs, whether on grounds of breach of contract, unjust enrichment, fraud, or deceit, entitling P to damages, equitable compensation, or restitution. Thus it appears that the case is based upon the causes of action of breach of contract, unjust enrichment, or fraud and deceit. I have seen an affirmation sworn by Mr e. In terms of the financing for the various contracts entered into between the plaintiff and defendant, the letters of credit were issued by various banks. The five that are relevant to this application were all addressed initially to KEB Hana Bank, but all expressly make the credit available either to: any bank in South Korea by negotiation Or alternatively to: any bank by negotiation . There is no dispute that the applicant falls within the definition of any bank , and also falls within the definition of any bank in South Korea . The only dispute is whether the applicant is a negotiating bank. In August 2015 the applicant entered into a Forfaiting Agreement with the defendant by which the applicant would purchase, at a discounted price and subject to certain fees being paid, the entitlement to be paid under various letters of credit of which the defendant was the beneficiary. The Forfaiting Agreement set out the terms upon which such purchases were to be governed. The applicant highlights that under Articles 2 and 5 of the Forfaiting Agreement the applicant has no recourse against the Defendant in the event that the issuing bank issues the acceptance note under any relevant letter of credit. When the acceptance note is issued, the applicant becomes obliged to advance the agreed financing to the defendant in consideration of its purchase of the relevant letter of credit. The plaintiff highlights various other provisions of the Forfaiting Agreement. It says that the Forfaiting Agreement is gov e relevant documentation necessary to call upon the Letters of Credit. The applicant thereafter submitted those documents to the issuing banks. I have seen the documentary remittances by which this was done exhibited the affirmation of Kim Young Wan. Subsequent to the documentary remittance, the issuing banks confirmed their acceptance by way of swift messages to applicant. The details are set out in paragraph g the assets of the defendant on a worldwide basis up to the value of US$9,276,000, based upon the causes of action I have mentioned above. Under the heading Third Parties at paragraph the Injunction contains the following terms: Payment under Letters of Credit: From the date of this Order, the banks shall not effect any transfer of or continue to payment out any sum of money under the letters of credit subject of this action, namely, the following [sic]: Contract No. Amounts (USD) L/C Number Bank SSI 1806-021 1,290,000 OFPBI1800016 Bank of Communications Co., Ltd SSI 1807-003 1,339,200 LC302NL1802446 Industrial and Commercial Applicant (Asia) limited SSI 1807-017 1,339,200 LC302NL1802638 Industrial and Commercial Applicant (Asia) limited SSI 1807-021 1,382,400 LC302NL180 680 Industrial and Commercial Applicant (Asia) limited SSI 1808-002 1,290,000 110LC1800215 Industrial Bank Co., Ltd SSI 1808-027 1,296,000 110LC18000243 Industrial Bank Co., Ltd SSI 1808-005 1,339,200 110LC18000261 Industrial the order that I have quoted above: Save and except: (i) The Industrial and Commercial Bank of China (Asia) limited shall be allowed to effect payment to Bank of China, Seoul Branch under the letters of credit LC302NL1802638, LC302NL180680; and (ii) The Industrial Bank Co,. Ltd shall be allowed to effect payment to Bank of China, Seoul Branch under the letters of credit 110LC1800215, 110LC18000243, 110LC18000261 The consequence of allowing that variation is that the issuing banks under those five Letters of Credit will no longer be prevented by the Injunction from effecting payment to the applicant. Whether the issuing banks in fact pay may be open to greater question in the light of the submission by the plaintiff that they will be prevented from paying as a result of notice of the alleged fraud. However I make no comment as to that as the matter is not before me and I have no desire to cause any prejudice to any party if such arguments do in fact arise. Is the applicant a negotiating bank The plaintiff suggests that the applicant is not a negotiating bank. In support of this proposition it suggests that there is no evidence of Korean law showing that the applicant is considered to be the negotiating bank, the applicant did not comply with all the various Anti-Money Laundering requirements that the plaintiff says would be required to become a negotiating bank, and the applicant has in reality simply become entitled to money as a result of the Forfaiting Agreement, and not as a result of becoming the nego ation for BOC s claim that they are holding the Subject LCs in bona fide. This issue calls upon the application of Korean law: 41.1 As set out above, whether BOC is even a holder of the Subject LC is dubitable, and there is no basis to say so. 41.2 There is no evidence as to how bona fide is to be determined in Korean law. Whether there is even a concept of bona fide in Korean law is also in question. 41.3 Furthermore, it is unclear how being a bona fide holder is relevant to the present case when there is no conceptualisation of whether BOC is a trustee or owner of chose in action or an agent etc. I do not accept these submissions. A Hong Kong court has issued an injunction order which has the effect of preventing the applicant from collecting upon the Letters of Credit. The Letters of Credit are international documents and are expressly subject to the Uniform Customs and Practice on Documentary Credits (2007 revisions) issued by the ICC. That document is usually known as UCP 600 . It does not require of drafts (drawn on a bank other than the Nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the Nominated bank. Nominated Bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. Presentation means either the delivery of documents under a credit to the issuing bank or Nominated bank all the documents so delivered. Under UCP 600 the notion of the bank with which the credit is available is not defined. However as a matter of general usage and practice it is the bank that would accept drafts drawn by a beneficiary. In this case by reference to the terms of the Letters of Credit, Clause nd it has purchased drafts and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the Nominated bank. In my mind therefore there can be no doubt that the applicant is indeed a negotiating bank under the Letters of Credit. As a result the applicant has an interest in the Letters of Credit that it is entitled to enforce, subject only to operation of the Fraud Exception. In this context, as indicated above I note that the way in which the plaintiff puts its case as against the defendant is not only in respect of fraud, but also in respect of breach of contract and unjust enrichment. A claim for breach of contract and unjust enrichment cannot invoke the fraud exception to undermine the unequivocal obligation to pay on presentation of compliant documents. However I shall proceed to address the Fraud Exception in any event because the claim is also said to be put in fraud. It is appropriate to articulate the well known general principle that documentary credits are autonomous contracts whose operation is not to be interfered with by the court on grounds extraneous to the credit itself. In the textbook Jack: Documentary Credits, the authors quote Bank of Novia Scotia v Angelica-Whitewear [1987] SCR 59 at 81 per Le hen it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued. Dispute between the parties to the underlying contract concerning its performance cannot as a general rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. This principle is referred to as the autonomy of documentary Credits. In order to satisfy a court that an interlocutory injunction should be granted to restrain payment of a valid letter of credit the plaintiff must show clear and cogent evidence both of the fact of the fraud and of the banks knowledge of the fraud. The same is true when a plaintiff has obtained an interlocutory injunction and a third party bank seeks to have it varied so as to allow payment under a letter of credit. There must be strong and compelling corroborative evidence of the fraud. As stated by Ackn t case of fraud I note in this case that the same facts are alleged to give rise to the causes of action of breach of contract and unjust enrichment as well as to fraud. It seems to me in such circumstances to be difficult to reach the conclusion that the only realistic inference to draw from the facts is that of fraud. However I leave that point aside at this stage, because the other matter which must be proved is the clear knowledge of bank of the alleged fraud. First it is clear that the knowledge of the bank needs to arise prior to the negotiation of the Letter of Credit. Any fraud on the part of the original beneficiary which comes to light after negotiation but before the date of payment does not affect the issuing bank s liability to reimburse the negotiating bank: DCD Factors Plc & Anor v Ramada Trading Ltd & Ors [2007] EWHC 2820 (QB). In this case there is no evidence at all of the applicant having nd are entitled to not pay out under the LCs; and P has the right to object to payment being made. Even if BOC was not a conspirator to the fraudulent scheme, paying out under the LCs to BOC would be to give effect to LCs procured by fraud. I should state that there is no evidence at all of the applicant being a conspirator to the fraudulent scheme. I therefore dismiss this suggestion, based upon the evidence before me. The plaintiff then goes on to allege that there were numerous red flags available to the applicant by which it appears to be being suggested that the applicant obtained knowledge of the fraud: the transactions carried out by the D were not in line with its normal line of business The industrial product was manufactured in Taiwan but stored in China. There is no connection with the Republic of Korea. There is also an unusual transactions structure. The supplier of the industrial products to D and the ultimate purchaser of the same are based in China, and the industrial products are stored in China. There is no apparent reason why the supplier and the ultimate purchaser needs to go through a detour via a company based in Korea. D s role is superfluous and added no value to the transactions There is no basis upon which it is said that the applicant knew about these matters, or why, even if the applicant did know of them, these matters would give rise to the knowledge necessary to trigger the Fraud Exception. There is certainly no suggestion that they knew about such matters prior to the completion of the negotiation of the Letters of Credit, which in the relevant time. I do not accept the submission that the Fraud Exception applies. In all the circumstances I cannot see any legitimate basis, arising from the legal relationships that exist, upon which the applicant should be denied the variation which it seeks. Is this application an appeal of the Injunction However I must go on to address, albeit more briefly, the other grounds of opposition raised by the plaintiff. I do not accept t herent within any injunction order that a third party that is affected by the terms of the injunction has a right to apply to discharge or vary that order insofar as it affects his business. This is a standard provision contained within any injunction, and express provision is made within this Injunction for anyone notified of it to apply to the court to vary or discharge it (or so much of it as affects that person) provided they inform the plaintiff s solicitors. Accordingly it is clear that the a ~zqh hl]# hMRt gd(C gd~3 gd~3 gdq} hH:N hH:N hl]# gd8v gd. gdH:N hun, hun, hun, hun, hH:N hH:N hH:N hun, hun, gd8v gd8v gd8v gd8v gd8v gd8v gd8v hun, hun, hS7T yt8v yt8v yt8v yt8v yt8v yt8v yt8v yt8v gd8v hS7T gd8v gd8v Applicant has an absolute and unfettered right to apply to this court to vary the Injunction insofar as it affects its business. The fact that the judge who granted the Injunction has not handed down reasons cannot, as a matter of principle, be a reason to refuse a variation. Neither can the fact that the Injunction is under appeal. I can see that such matters may be relevant to the ultimate discretion to be exercised, but I do not accept, as was suggested by the plaintiff, that I must inevitably refuse the application on these grounds. As a matter of discretion, I do not accept that these factors should prevent me from granting the application. The Injunction is a freezing injunction over the assets of the defendant, who is alleged to be the fraudster. On the facts, it would appear that the price of the alleged goods was transferred by the applicant to KEB Hana Bank for the benefit of the defendant on various dates between 1 redit to the applicant. In any event the Injunction freezes the assets of the defendant with effect from that date wherever those assets are located. As a result, it is clear to me that the Injunction will not be rendered futile in the event that I allow the variation. What is likely to happen is that the issuing banks will make the payment and then call upon the plaintiff for reimbursement of the amounts that they have so paid. There is no evidence before me of the terms as between the plaintiff and the issuing banks upon which the issuing banks issued the Letters of Credit, but assuming normal commercial terms it is likely that as soon as those issuing banks are required to make payment (or at least within the credit limits agreed) they will seek reimbursement from the plaintiff. Therefore in reality what the plaintiff is seeking is to avoid having to pay the issuing banks, and thereby it is seeking to transfer the risk of non-payment by the defendant from itself to the applicant. That is consistent with its submissions that the applicant has a cause of action against the defendant under the Forfaiting Agreement. In my view that makes it clear that the granting of the variation will not render the Injunction futile, will not affect the appeal in any way, and should not be dependent upon the reasons of the Deputy Judge for his decision to grant the Injunction in the first place. The effect of granting the variation will simply be to cause the plaintiff to be out of pocket as a result of any fraud by the defendant rather than the applicant being out of pocket (as is currently the case). Whichever party is out of pocket will take the risk of non-payment by the defendant. That non-payment risk is currently ameliorated by the Injunction, and that amelioration will continue irrespective of any discharge. So the variation will not change the position at all save to transfer the risk from the applicant to the plaintiff. Absent the fraud exception it is appropriate that the risk is taken by the plaintiff and not the applicant. Indeed, it may be said that the applicant is in fact not protected by the Injunction at all, because the applicant is not a defendant. Hence, as a matter of the overall discretion, as between the plaintiff and the applicant, in my view the balance weighs in favour of the variation. The applicant has a legitimate interest to protect by a variation The plaintiff contends that the applicant has no interest in, and protecting its business and if, all other things being equal, it would be entitled to a variation of the Injunction I can see no basis upon which the amount of the commercial interest affects its entitlement. The undertaking as to damages The plaintiff suggests that the undertaking as to damages which it offered in the normal way when obtaining the Injunction is der preventing the disposal of assets of the Defendant, cannot possibly be entitled to obtain the advantage of such an order for himself at the expense of the business rights of an innocent third party, nearly by proffering him an indemnity in whatever form. If the applicant is otherwise entitled to a variation, the offering of an undertaking does not alter that position. The plaintiff can ask the issuing banks not to pay anyway The plaintiff suggests that it can in any event ask the issuing banks not to pay the Letters of Credit because the issuing banks now know of the fraud. It therefore suggests that there is no purpose in varying the injunction to allow payment. I have touched upon this issue above. I will not address in detail whether the plaintiff s proposition is correct or not. That will have to be addressed if and to the extent that the issuing banks refused to pay on this basis and there is subsequent argument about it. gd8v gd8v gd8v gd8v gd8v hMLB Suffice to say at this stage that I do not consider this to be a valid reason to refuse the variation. Conclusion and disposition In all the circumstances I grant the variation sought. Paragraph (5) under the heading of Third Parties in the Injunction Order shall be varied to include the following words: Save and except: (i) The Industrial and Commercial Bank of China (Asia) Limited shall be allowed to effect payment to Bank of Costs There shall be a costs order nisi that the plaintiff is to pay the costs of the applicant to be taxed on a standard basis if not agreed. Mr Lawrence Hui , Mr Keith Tam instructed by and Mr Frederick Hui of Zhong Lun Law Firm, for the plaintiff Mr Kevin Hon, instructed by F Zimmern & Co, for the defendant Mr Jonathan Wong, instructed by ONC Lawyers, for the applicant (Charles Manzoni SC) Recorder of the High Court PAGE - PAGE - A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V zvzvzvzv hpqr hPlS h!hd hA{o hMLB &`#$ gdLu9 gd8v &`#$ gd!y gdLu9 :p8v yt8v yt8v yt8v yt8v yt8v yt8v yt8v yt8v & #$ & #$ & #$ [Content_Types].xml _rels/.rels theme/theme/themeManager.xml K Y, sQ}# theme/theme/theme1.xml $O}) Xp90 +PHI| PP yu 9xu5 fs+W VF7H q=. 8}d- qyI@ j!Q_ jyV` |PZ+ T ""p < 4V O&x$ A8>v ;EUC n 8r *~P(5 .}x E /,EE\} theme/theme/_rels/themeManager.xml.rels 5 6?$Q K(M&$R(.1 [Content_Types].xmlPK _rels/.relsPK theme/theme/themeManager.xmlPK theme/theme/theme1.xmlPK theme/theme/_rels/themeManager.xml.relsPK <?xml version="1.0" encoding="UTF-8" standalone="yes"?> <a:clrMap xmlns:a="http://schemas.openxmlformats.org/drawingml/2006/main" bg1="lt1" tx1="dk1" bg2="lt2" tx2="dk2" accent1="accent1" accent2="accent2" accent3="accent3" accent4="accent4" accent5="accent5" accent6="accent6" hlink="hlink" folHlink="folHlink"/> [Content_Types].xml dlyLho ;d]6 yJ.; _rels/.rels fLV:* ]m@= T;GI b9`5 drs/e2oDoc.xml I&hoE}0$ A m!4A A`x-:f ]( \ CF5 E#Yv 9.s( drs/downrev.xmlL l{q3 m*wG|\ [Content_Types].xmlPK _rels/.relsPK drs/e2oDoc.xmlPK drs/downrev.xmlPK }3]! i$&J3 LIiZ ZF0+ }3]! LIiZ setup Normal.dotm Windows User Microsoft Office Word Judiciary Hong Kong Title pQB. pQB. <?xml version="1.0" encoding="UTF-8" standalone="no"?><b:Sources SelectedStyle="\APASixthEditionOfficeOnline.xsl" StyleName="APA" Version="6" xmlns:b="http://schemas.openxmlformats.org/officeDocument/2006/bibliography" xmlns="http://schemas.openxmlformats.org/officeDocument/2006/bibliography"></b:Sources> <?xml version="1.0" encoding="UTF-8" standalone="no"?> <ds:datastoreItem ds:itemID="{D38BB514-9386-4E15-968A-8C275EA2F0C9}" xmlns:ds="http://schemas.openxmlformats.org/officeDocument/2006/customXml"><ds:schemaRefs><ds:schemaRef ds:uri="http://schemas.openxmlformats.org/officeDocument/2006/bibliography"/></ds:schemaRefs></ds:datastoreItem> Microsoft Word 97-2003 Document MSWordDoc Word.Document.8