Presentation of future documents under a letter of credit
A recent Hong Kong case, Rudolph Robinson Steel v Nissho Iwai Hong Kong & Anor , demonstrates that the parties to a letter of credit must show a clear intention if the presentation of a future document is to constitute a binding arrangement under the letter of credit.
The plaintiff entered into a contract to supply goods to A, who financed the purchase by letter of credit. The letter of credit was opened by the first defendant, who in return was paid a fee by A. The second defendant was the issuing bank. Documents under the letter of credit were presented but the second defendant refused to pay P due to alleged discrepancies with the documents. Through the second defendant, the first defendant offered to pay 80% of the purchase price for the documents originally presented under the letter of credit and the balance on receipt of a draft survey report. P accepted this arrangement and was paid 80% of the purchase price. P duly submitted a draft report to the second defendant but the first defendant refused to authorize the second defendant to pay P the balance because of an alleged quality problem in respect of the goods.
P successfully sued the first defendant for breach of contract. The court concluded that the first defendant's failure to pay the balance on P's presentation of the report was a breach of the arrangement. What is more interesting is P's claim against the second defendant. P argued that the second defendant was liable for the balance on the basis that the presentation of the draft report was in compliance with the letter of credit and the second defendant had accepted the report and failed to pay. The second defendant, however, argued that the presentation of the draft survey report was made 'on a collection basis' and not under the letter of credit.
The court confirmed that the phrase 'on a collection basis' could mean collection under a letter of credit (in which case the opener accepts the documents and waives the discrepancies) or outside a letter of credit. The court referred to the English case Harlow & Jones v American Express Bank .
By refusing to accept the discrepant documents, the second defendant had no obligation to pay P and the letter of credit came to an end. The parties to the sale contract might negotiate a solution, though to justify the subsequent presentation of the report as a renegotiation of the letter of credit, the intention of the parties must be clear. Because the report was a new document, namely a document which had not existed under the letter of credit, its presentation could hardly imply a renegotiation of the letter of credit. Also, it is rare in letter of credit practice that part of the price is paid on presentation of all existing documents and the balance is paid on presentation of future documents. Therefore, the presentation of the report fell outside the letter of credit and the second defendant was not liable for the balance.
Quantum meruit implied
In Happy Dynasty v Wai Kee (Zens) Construction & Transportation & Others  the defendants subcontracted certain work to the plaintiffs. The plaintiffs offered to undertake the work at a rate of about US$1.75 million on the assumption that the work could be completed within 13 months and the defendants accepted this offer. No rate had been agreed if the work went beyond 13 months. By no fault of the plaintiffs, the work was prolonged and finished after 31 months. The plaintiffs argued that there was an implied term entitling them a fair and reasonable remuneration for the additional 18 months in circumstances where the contract was silent on the rate after 13 months. The plaintiffs claimed against the defendants for the work undertaken from the fourteenth month until the end of the work.
In determining whether or not a term should be implied as to the remuneration for the extra months, the court adopted the test laid down by the privy council in DP Refinery (Warterport) Pty v The Shire of Hastings [July 27 1977]. The term to be implied must:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
- be obvious in that it goes without saying;
- be capable of clear expression; and
- not contradict any express terms of the contract.
The court held that an implied term as to reasonable remuneration for the extra months existed in this case, commenting that the difference between this case and most other quantum meruit cases was that this had a rate of work to start with. In deciding the quantum, the court held that where there was an agreed rate from the beginning, it was appropriate to use this rate unless the rate was unreasonable or excessive.
Stephenson Harwood & Lo
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