Habib Bank Ltd & Anor (Respondent) v Bank of South Australia No. Scgrg-96-1565 Judgment No. 6309 Number of Pages 7 Banking and Financial Institutions

[1997] SASC 6309

IN THE SUPREME COURT OF SOUTH AUSTRALIA

WILLIAMS, J

CATCHWORDS:

Banking and financial institutions - banker and customer and business of banking generally - letters of credit - appeal against Master's refusal to order summary judgment in favour of defendant - operation of Letters of Credit discussed - parties to Letters of Credit deal in documents and not goods - purchaser of goods appropriate defendant and not defendant bank - appeal allowed. Supreme Court Rule 25.04, referred to. Ian Stack v Barker Bosby
(1958) 2 QB 130; Equitable Trust Co of New York v Dawson Partners Ltd (1926) 27 Ll L Rep 49, applied.

HEARING:

ADELAIDE, 10 March, 3 April, 22 July 1997 (hearing), 26 September 1997 (decision)

#DATE 26:9:1997

#ADD 7:10:1997

Appearances:

Appellant:

Counsel: Mr M Rice

Solicitors: Thomsons

Respondent:

Counsel: Mr N Morcombe QC

Solicitors: Cowell Clarke

Order: appeal allowed.

WILLIAMS J:

This is an appeal by the defendant against the refusal of a Master to order summary judgment in favour of the defendant (or alternatively to strike out the statement of claim as disclosing no reasonable cause of action).

The first plaintiff Habib Bank is a banker in Pakistan; the second plaintiff Arzoo is its customer and carries on an exporting business in Pakistan. The defendant (a South Australian banker) has been sued upon letters of credit issued on 10 December 1993 and 11 February 1994 to Habib at the request of its customer Arzoo in respect of the supply of goods by Arzoo to the defendant's customer G & R Wills Holdings Ltd, (a South Australian company).

I have reached the conclusion that (on any possible view of the facts and the law) the plaintiff cannot succeed. It is my view that the plaintiff is pursuing the wrong party and in the course of this exercise has sought to spell out of the documents a cause of action which flies in the face of settled commercial practice. I am conscious of the great care needed in any decision to enter summary judgment upon a defendant's application, particularly where there is - as in this case - a degree of complexity to the matter. Nevertheless unless I proceed in this way - where I am convinced as to the inevitability of the eventual outcome - the parties are going to be put to considerable expense without resolving the real dispute. Instead of a claim against the defendant Bank based upon the Letters of Credit, the proper claim (if any) should be upon the underlying transaction by the vendor Arzoo against G & R Wills Holdings Ltd, the buyer of the relevant goods. However, in my view the plaintiffs' present claim is not sustainable.

The essence of the plaintiff's claim is a reliance upon terms which are to be implied in the letters of credit. When one looks beyond the pleading to the nature of a banker's business - to deal in money and in documents - the claimed implication will be seen to be untenable.

The Master confined himself to an examination of the pleading standing alone. He did not subject it to scrutiny in a commercial environment as I am entitled to do in applying Supreme Court Rule 25.04.

The second plaintiff Arzoo (operating out of Pakistan) has exported a shipment of cotton flannelette sheeting to be supplied to G & R Wills Holdings Ltd in Australia. The Bills of Lading are not before me.

Upon the application of Wills, the defendant bank issued irrevocable letters of credit to the first plaintiff in respect of the goods to be supplied by Arzoo. The letters of credit stipulated that payment would not become due under the letters of credit if Wills (within a specified time) gave a notice of rejection to the defendant. The letters of credit also provided for the goods to be released by the defendant Bank to Wills under a "Trust Receipt" to enable Wills to inspect the goods and then to decide whether or not to reject the goods.

The letters of credit set out the list of documents which were required to be tendered to the defendant bank before its financial undertaking became enforceable; these documents included commercial invoices, bills of lading (endorsed in black) in a particular form and certain certificates. The letters of credit also set out the circumstances in which the defendant would honour its financial undertaking to the first plaintiff; the Letters of Credit provide for the defendant to honour its obligation within 90 days after the bill of lading unless notification of rejection of the goods [by Wills] was received by the defendant prior to the expiration of the 90 day period.

It is not in dispute that the defendant bank did receive notification of rejection within this period.

The letters of credit provided as follows:

"documents under this letter of credit are to be presented on a collection basis. Negotiable documents will be released by the opening bank to the applicant and the signed trust receipt to permit inspection of the goods by the applicant prior to reimbursement under the letter of credit."

In accordance with this clause the defendant obtained trust receipts from Wills in the following terms: "In consideration of State Bank of South Australia releasing documents pertaining to the above Letter of Credit, we hereby authorise you to debit our account with the Australian currency equivalent of the Letter of Credit not later than 90 days after date of Bill of Exchange - unless notification of rejection of goods is received prior to the expiration of 90 day period.

Documents are released under this signed Trust Receipt to permit inspection and clearance of goods by ourselves prior to reimbursement under this Letter of Credit."

Wills took physical possession of the goods on the dates shown on the trust account receipts.

After Wills inspected and rejected the goods, the first plaintiff sent a telex to the defendant on 12 May 1994 in the following terms:

"A reasonable period has lapsed, we cannot allow the applicant to hold these goods for indefinate(sic) period. We therefore request you to recall these goods from applicant since these have been delivered under signed trust receipt and arrange storage with our subsidiary, Habib Finance (Australia) Ltd. Sydney to whome(sic) seperate(sic) instructions are being passed on by us. Any demages(sic), interest, other charges due to delay will be on your account."

The plaintiffs plead as follows in the statement of claim: 6. "It was a term of those letters of credit that:-

"documents under this letter of credit are to be presented on a collection basis. Negotiable documents will be released by the opening bank to the applicant and the signed trust receipt to permit inspection of the goods by the applicant prior to reimbursement under the letter of credit."

7. It was, by virtue of the matter appearing in paragraph 6 hereof, an implied term of the letters of credit that:

7.1 the defendant would release the goods to the importer for the purposes of inspection only;

7.2 the defendant would retain ultimate physical control or power over the goods; and

7.3 if, after inspection, the importer rejected the goods, the defendant would retain possession of the goods with a view to their redelivering the goods to the plaintiffs or as they should direct.

15. In breach of the express and implied terms of the letters of credit the defendant has released the goods to the importer otherwise than for the purposes of inspection by the importer.

15.1 The goods have been released by the defendant to the importer and have not been returned by the importer.

15.2 The plaintiffs invite the Court to infer from the fact that, despite repeated requests in that respect, the goods have not been returned to or to the other of either plaintiff, that the defendant relinquished control or power over the goods to the importer in breach of the terms of the letters of credit.

Particulars of Requests and Refusals

1. Telex dated 12/5/94. 2. Telex dated 12/5/94. 3. Telex from defendant to first plaintiff dated 7/6/94. 4. Letter from Dominic Stamfords to defendant dated 11/8/94.

15.3 By virtue of the execution by importer of the trust receipts referred to in paragraph 8 hereof and by virtue of the term of trust receipts, the defendant has:-

15.3.1 a charge over the goods 15.3.2 an immediate right of possession of the goods; and 15.3.3 a charge over the proceeds of any sale of the goods by the importer.

16. The importer by failing to return the goods has accepted delivery of those goods. Payment is due by the defendant to the first plaintiff pursuant to the terms of the letters of credit. Pursuant to the terms of the letters of credit and pursuant to the provisions of the Uniform Customs and Practices ("UCP") for Documentary Credits (1983 Revision) ICC Publication No.400."

The plaintiffs rely upon the alleged failure of Wills to return the goods as equivalent to acceptance of the goods and payment is thereupon sought from the defendant.

In my opinion this pleading misconceives the way in which the Letters of Credit operate.

Bankers in relation to letters of credit do business by reference to documents. In this case the defendant undertook obligations to the first plaintiff upon receipt of the relevant shipping documents but subject to its customer Wills not giving to it a notice of rejection. The Letters of Credit envisaged that the goods in terms of the documents would be released to Wills for inspection purposes upon Trust Receipt. Such receipts were obtained.

Thereafter the defendant Bank has no obligation to secure the return of the goods or the associated documents. The defendant bank holds securities in the form of the Trust receipts and the defendant bank has an equitable charge over the goods for the purposes of the transaction in terms of Trust Receipts. The Trust Receipts provide a security designed to prevent Wills from dealing with the goods except for the limited purpose of inspection. Arzoo remains an unpaid vendor and will be entitled to the security for whose benefit (in the circumstances) the Trust Receipts have been taken. Enforcement of that security will be a matter for the plaintiffs.

As appears from correspondence, a dispute exists between Wills and Arzoo. Depending upon the way in which Arzoo may formulate its claim, the present defendant bank may become a necessary party as the formal holder of the Trust Receipts. However I do not consider that the present defendant has any obligation (as alleged in the statement of claim) to take back or re-establish physical control of the goods. Upon Wills giving the notice of rejection, the dispute becomes one between Arzoo and Wills; although it appears that Arzoo may have the security of the Trust Receipts to reinforce its lien as unpaid vendor. Wills as purchaser has not yet been called upon to formulate its position. The law should take its course between Arzoo and Wills but the present defendant will not be involved therein except insofar as its name may be required in proceedings for enforcement of the security. I have stated the effect of the Trust Receipts in principle only for the purpose of satisfying myself that the defendant Bank should be discharged from the proceedings - except as its presence may be formally required in the course of enforcing a security.

The present case involves the construction by the Court of the contents of Letters of Credit established with the defendant bank who issued the letters of credit upon the request of its customer G & R Wills Holdings Ltd - as the purchaser of goods.

The way in which a letter of credit operates is well known. In Ian Stack v Barker Bosby (1958) 2 QB 130 at 139 Diplock J said:

"The commercial purpose of a banker's credit is more than a mere method of payment: it creates a direct liability upon the banker that if the seller presents the required documents in the required time, he will receive payment of the contract price."

The liability of the issuing bank depends upon the presentation of "required documents in the required time". The fundamental rule is that strict compliance is required in order to create liability in the issuing bank (see Equitable Trust Co of New York v Dawson Partners Ltd (1926) 27 Ll L Rep 49 per Viscount Sumner).

The further point is that as a matter of general principle parties to a letter of credit are dealing in documents and not in goods (see Halsbury's Law of Australia par45-5070 and footnote 3).

Of course notwithstanding the principles which I have identified, the Court must be prepared to accommodate the possibility that in a particular situation the parties may have done something out of the ordinary. I will not shut my mind to such a situation but I see nothing in the facts before me to make it in any way special. In the present instance the plaintiffs are endeavouring to read into the letters of credit an extraordinary obligation which (if I were to accept the plaintiffs' argument) may require the issuing bank to sue its own customer of its own initiative and at its own expense. It seems to me that the manner in which the plaintiffs envisage that the issuing bank (the defendant) should act is extraordinary and is not reflected in the documentation.

The terms of the Trust Receipt closely follow the language used in the Letters of Credit. It can hardly be suggested that the Trust Receipt departed from the relevant requirements of the Letters of Credit. In my opinion the allegation set forth in pars 7.2 and 7.3 of the statement cannot be sustained upon my reading of the documents.

It is these allegations which lie at the heart of the plaintiffs' claim against the defendant bank. It may be that the Bank has some responsibility (in a formal sense) as the holder of the Trust receipt to act upon request in the interests of the vendor of the goods but the vendor has not yet formulated any request (nor proffered any indemnity). I am not required to consider the obligations attaching to the holder of the Trust Receipt, the nature of the security associated therewith or the manner of enforcing the same.

On 10 March 1997 I heard argument from counsel and I then reserved my decision. Having examined the matter I called the matter on again on 3 April 1997 and invited counsel for the plaintiffs to consider his position in the light of the argument which had been advanced by the defendant upon the appeal. It seemed to me to be desirable that Wills as customer of the defendant bank should be formally bound by my decision. Counsel for the plaintiffs then sought an opportunity to obtain instructions and the matter was then further adjourned until 22 July 1997 when the plaintiffs sought to join Wills as a second defendant. The draft of a fresh statement of claim was put before me pleading contracts for the sale of a quantity of fabric - which are claimed to be the contracts which lay behind the letters of credit. There is an allegation of acceptance of the goods by Wills and that Wills has wrongly issued instructions for payment upon the letter of credit to be withheld; Arzoo accordingly claims that Wills is liable to it in breach of contract.

Being on notice of this most recent application, Wills appeared by counsel at the resumed hearing on 22 July 1997 and was given an opportunity to be heard upon the issues now canvassed in these reasons. Having heard submissions I consider that the dispute with Wills should continue within the framework of this action in which (subject to any further appeal) the two banks and their respective customers will all be bound by my decision. However the fresh draft statement of claim leaves intact the claim against the defendant Bank of South Australia - a claim which (as I have already observed) I consider to be not sustainable.

In my opinion the appeal should be allowed and I will direct that judgment be entered for the defendant bank but subject to certain undertakings by it to protect the plaintiffs in the event that it be formally required as a party as the holder of the trust receipt.

The defendant bank has intimated that as the holder of the trust receipts it will abide the order of the court.

I have heard argument as to the procedural orders which I should now make. The plaintiffs have sought to keep the defendant bank as a party until discovery has been made in case something new is thereby uncovered. I am not prepared to countenance fishing in this way.

In my opinion, to require the defendant bank to make discovery as a party would be onerous. Insufficient has emerged to require that the defendant bank should remain as a party. In reaching this conclusion I have had regard to the undertakings by the defendant bank recorded below.

The plaintiffs apparently were first informed by Wills during the course of argument that Wills has actually used the goods in question in the course of its business. The plaintiffs may wish to bring this fact to account in the new pleading, and they should now have an opportunity to further consider the proposed new pleading; I am proposing to give the plaintiff leave to file a new statement of claim against Wills generally in the form of the draft produced.

Orders and directions will be as follows: 1. The appeal is allowed and I order that summary judgment be entered in favour of the defendant bank but subject to the matters hereafter set forth.

2. Wills is hereby joined as a defendant to this action which will continue as between the plaintiffs and Wills.

3. I direct that the plaintiffs file a new statement of claim against Wills and that the action continue in accordance with the Rules of Court.

I note the undertaking of Bank of South Australia (given by counsel) as holder of the Trust Receipt: (i) to abide the result of the action and (ii) not to rely upon the summary judgment to resist an application (should it be made) to join the Bank of South Australia as a party as the holder of the Trust Receipt in the event that such course should be necessary.

After hearing the parties I will give further directions as to the content of the new statement of claim and to establish a timetable.