Lau

- vs -

Cooperativa Ceramica D’Imola

Judgment

HT Chao J

1. The plaintiff was a businessman dealing in building materials. Sometime in early March 1990, he attended a ceramic fair at Valencia, Spain. He saw a sample of goods on display in the stand of the defendant. The goods were ceramic tiles with inlaid design in the nature of random veins running on the face of the tiles. The surface of the tiles was smooth with no grooves or holes. The plaintiff said that, in so far as he was concerned, that was a very important consideration because if the tiles were not properly inlaid it would invariably be filled up with cement in the course of laying. According to the plaintiff, on being assured by the defendant’s representative at the stand that all the ceramic tiles of that category were of that quality, he decided to make an order of the same. Accordingly, the plaintiff executed a memorandum of intent (in Italian) to purchase a certain quantity of the tiles.

2. On or about 23 March 1990, after his return from Spain, the plaintiff received a document entitled ‘Sales Contract’ from the defendant’s agent in Singapore, Stork Building Product Pte Ltd. This sales contract described the goods to be sold and the price therefore and also stated that payment was to be by way of a confirmed irrevocable letter of credit in favour of the defendant. Accordingly, on or about 9 April 1990, the plaintiff applied to Banca Commerciale Italiana (Singapore branch) for such a letter of credit against presentation of document 90  days from the date of the bill of lading. The letter of credit was issued by Banca Commerciale Italiana on 11 April 1990 in favour of the defendant, and was duly despatched to the defendant. On 15 May 1990, the defendant confirmed by telex that it had received the letter of credit and that the goods would be sent immediately.

3. On or about 23 June 1990, the plaintiff’s forwarding agent took delivery of a container from the Port of Singapore Authority. On or about 25 June 1990, when the plaintiff unstuffed the container, he discovered that the tiles were not properly inlaid but were covered with grooves and holes. He alleged that they were ‘manufacturers’ reject’. The plaintiff immediately called the defendant’ s agent in Singapore and spoke to one Mike Tan. The plaintiff told him that he could not accept the goods and had to reject them. The plaintiff also asked Mike Tan to arrange for the shipment of the goods back to the defendant. Mike Tan told the plaintiff that he would relay the message to the defendant. All this was oral.

4. According to the plaintiff, subsequently he had a number of further oral conversations with Mike Tan to expedite the matter. Only on 14 August 1990 did the plaintiff send Mike Tan a fax reminder, which fax was also copied to the defendant.

5. Soon after that, the plaintiff consulted his solicitors who on 18 August 1990 wrote to the defendant as well as its Singapore agent. The material part of the letter read as follows:

   .... Upon opportunity to inspect the goods our clients realized that the goods were defective. It is suffice to say that the circumstances and the nature of the defect is such that your principal knows best and that our clients have informed you that they reject the goods and to arrange for the goods to be returned. We reserve our rights to comment further on the merits when the need arises. We are instructed that on 14 August 1990 our clients wrote to your agent Stork Building Product Pte Ltd on this matter and was told that you will check the status during your next visit. We are now instructed to demand that either you or your agent on your behalf provide an undertaking to arrange for the return shipment of the goods within the next 24 hours and reimburse all our clients’ loss and damages. Kindly note also that while the letter of credit matures on 27 August 1990 payment by way of cable transfer may be made earlier. Please note that in the absence of a timely positive response our clients are obliged to take actions before payment of the letter of credit including an injunction to prevent payment of the said letter of credit.

6. Two days later on 20 August 1990, the defendant replied to the plaintiff’s solicitors. The material part was as follows:

   We have just received your above mentioned letter concerning our client Hoe Lat Building Materials Ent. For which we kindly ask you do not act so quickly as stated (within 24 hours) as it would be impossible for us, from Italy, to organize the return of the goods in a such short delay. In any case before proceeding we would like to know which defects the goods present since we have shipped three different kinds of items. We also would like to inform you that our area manager has already planned a trip to Singapore for the first 15 days of next month and he will be available to see defective material during his visit.

7. The plaintiff said that this was his first dealing with the defendant. The plaintiff alleged that the defendant’ s conduct in refusing or neglecting to give a positive response to all oral complaints, until the written letter from the plaintiff’ s solicitors, showed that there was fraud on the part of the defendant. The plaintiff contended that the strategy of the defendant was to delay responding earlier and to wait for the letter of credit to mature. The plaintiff alleged that the tiles were not presentable; they were not fit for the purpose and nobody would buy them.

8. On an ex parte application made by way of summons-in-chambers in this suit, the plaintiff applied to a judge for an interim injunction against the respondent and an order was accordingly obtained in these terms:

   .... that the defendants by their servants or agents or officers or bankers or otherwise howsoever be restrained and an injunction is hereby granted restraining them from removing/disposing/withdrawing/dissipating/transferring or assisting to do the same from the jurisdiction of the court or otherwise disposing of any of their assets including any money forming or forming part of an account otherwise in their name or to their credit and in particular a letter of credit No 12996 opened by the plaintiff with Banca Commerciale Italiana or their claim there to save insofar as such assets exceed S$65,000 with Banca Commerciale Italiana Singapore branch until judgment of the action or until further order in the matter.

9. The plaintiff served the order on Banca Commerciale Italiana. On 3 November 1990, Banca Commerciale Italiana applied by way of summons-in-chambers to have the interim injunction granted on 22 August 1990, in so far as it affected the letter of credit issued by that bank, discharged.

10. When the matter came up for hearing before me on 10 November 1990, I directed that a further affidavit be filed by the plaintiff stating whether the defendant’ s representative did, as promised, come to Singapore to inspect the goods under complaint and exhibiting all subsequent correspondence. In the affidavit filed pursuant to that direction, the plaintiff deposed that the representative was in Singapore on 9 and 10 of September 1990. A joint inspection was carried out. The plaintiff then went on to say that ‘it was apparent that the goods sent to us were rejects. However, the defendant’s representative absolutely refused to accept service of the writ and left Singapore.’

11. I note, however, that on 11 September 1990, the defendant faxed a reply to the plaintiff as follows:

    Following our meeting in your offices on 10 September 1990, we hereby confirm the absolute first quality of our materials shipped to you by our Invoice No 43435 dated 21  May 1990. We want to stress once again the fact that the materials you received are according to the samples you saw in Valencia last March and on which you placed your order with us. You are kindly requested therefore to pay in full the amount showed by L/C No 12996. Anyway, as a gesture of goodwill and favour in your respect, we will do our best to try and find another customer who is willing to purchase the material you have in stock now. It is understood, as you stated, that all freight charges from Singapore to the final destination (whatever it is), will be at your expenses.

12. Counsel for Banca Commerciale Italiana argued for the discharge of the injunction, insofar as it affected the letter of credit, on two grounds.

    • First, he submitted that there was no evidence of fraud. If at all, this was a simple case of a breach of contract.

    • Secondly, on a balance of convenience that part of the injunction in so far as it affected the letter of credit should be discharged because if it were subsequently shown that the allegation of fraud was not made out at the trial the bank would have suffered damage to its reputation which would be both irreparable and incapable of precise quantification. However, if the injunction were refused and the plaintiff should eventually succeed to prove fraud at the trial, he would have suffered no loss because the bank’ s claim against him for reimbursement would have failed. My attention was drawn particularly to pp 651– 652 of Paget’s Law of Banking (10th Ed).

13. The law on this subject was recently pronounced upon in a local case Korea Industry Co Ltd v Andoll Ltd [1989] 3 MLJ 449 . There the Court of Appeal stated the law as follows (at p 450):

    First, in the ordinary course of events, the court will not restrain the payment of funds due under an irrevocable letter of credit. It will not do so simply because a dispute exists between the buyer and seller with regard to the contract underlining the letter of credit. Second, the court may, exceptionally, enjoin payment under an irrevocable letter of credit where there has been or is likely to be a fraudulent demand under the contract and the bank is aware that the demand, made or to be made, is fraudulent.

14. In United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 Lloyd’ s Rep 1, Lord Diplock explained the law and the rationale for it, in these terms (at p 6):

    If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods; that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment

    and later he said:

    To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.

15. On the facts of the present case that I have outlined above, it was quite clear to me that what was in dispute was as to the performance of the contract, i.e. the quality of the goods shipped by the defendant to the plaintiff. What were shipped were ceramic tiles, though not of the quality or standard the plaintiff alleged he saw at Valencia, Spain. It might well be a case where the plaintiff was entitled to reject the goods and refuse to pay the defendant. While my sympathies were with the plaintiff, I did not think that any real evidence of fraud was shown. To adopt the words of Ackner LJ in United Trading Corp S A v Allied Arab Bank [1985] 2 Lloyd’ s Rep 554, on the facts before me I could not say that the ‘only realistic inference to draw’ was that of fraud. As the Court of Appeal stated in Korea Industry at p 452, ‘where fraud is alleged at an interlocutory stage in an action, there must be clear evidence to support the allegation.’ Just as instructive is the case Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 All ER 976 which concerned a confirmed performance guarantee. There, Browne LJ said at p 984, ‘it is certainly not enough to allege fraud; it must be established, and in such circumstances I should say very clearly established’.

16. On this ground alone, it should suffice to discharge the injunction in so far as it affected the letter of credit.

17. Turning to the second ground, it seemed to me clear that the balance of convenience is in favour of Banca Commerciale Italiana. I accepted the submission of counsel for Banca Commerciale Italiana on this point. By making this application, Banca Commerciale Italiana directly assumed responsibility for its act. I propose to cite only the following passage in the judgment of Kerr J in RD Harbottle v National Westminster Bank [1977] 2 All ER 862 (at p 869):

    The plaintiffs then still face what seems to be an insuperable difficulty. They are seeking to prevent the bank from paying and debiting their account. It must then follow that if the bank pays and debits the plaintiffs’ account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank’ s contract with the plaintiffs or a breach of it. If it is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract, which the plaintiffs’ writs do not even allege and as to which they claim no declaratory relief, then the plaintiffs would have good claims for damages against the bank. In that event the injunctions would be inappropriate, because they interfere with the bank’ s obligations to the Egyptian banks, because they might cause greater damage to the bank than the plaintiffs could pay on their understanding as to damages, and because the plaintiffs would then have an adequate remedy in damages. The balance of convenience would in that event be hopelessly weighted against the plaintiffs.

18. I therefore was of the view that the bank also succeeded on the second ground.

Cases

Edward Owen Engineering v Barclays Bank International [1978] 1 All ER 976; Korea Industry Co v Andoll [1989] 3 MLJ 449; RD Harbottle v National Westminster Bank [1977] 2 All ER 862; United City Merchants (Investments) v Royal Bank of Canada [1982] 2 Lloyd’ s Rep 1; United Trading Corp SA v Allied Arab Bank [1985] 2 Lloyd’s Rep 554

Authors and other references

Paget’s Law of Banking (10th Ed)

Representations

Jacqueline Loh (Cheow Hin & Partners) for the plaintiff.

Jonathan Patel (Rodyk & Davidson) for the bank.

Notes:-

This decision is also reported at [1991] 1 MLJ 393