[COURT OF APPEAL]

HAMZEH MALAS & SONS v. BRITISH IMEX INDUSTRIES LTD.

Sale of Goods - C.I.F. - Letter of credit - Right to stop - Contract for delivery by two instalments - Payment by letter of credit for each instalment - First instalment alleged to be defective - Repudiation of contract by plaintiff purchasers - Application for injunction "freezing" second letter of credit - Jurisdiction of court - Sale of Goods Act, 1893 (56 & 57 Vict. c. 71), s. 31 (2).

Banking - Letter of credit.

Injunction.

The plaintiffs, a Jordanian firm, contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be delivered in two instalments. Payment was to be effected by the opening in favour of the defendants of two confirmed letters of credit with the Midland Bank Ltd., in London, one in respect of each instalment. The letters of credit were duly opened and the first was realized by the defendants on the delivery of the first instalment. The plaintiffs complained that that instalment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Donovan J. refused the application. The plaintiffs appealed:-

Held, that although the court had a wide jurisdiction to grant injunctions, this was not a case in which, in the exercise of its discretion, it ought to do so; an elaborate commercial system had been built up on the footing that a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods, which imposed upon the banker an absolute obligation to pay, irrespective of any dispute there might be between the parties whether or not the goods were up to contract.

APPEAL from Donovan J.

The plaintiffs, Hamzeh Malas and Bochir Hamzeh Malas, a Jordanian firm trading as Hamzeh Malas & Sons, contracted to purchase from the defendants, British Imex Industries Ltd., a large quantity of reinforced steel rods. The goods were to be delivered in two instalments and payment was to be effected by means of two confirmed letters of credit with the Midland Bank in London - one in respect of each instalment. The letters of credit were duly opened and the defendants realized the first one and would shortly be in a position to realize the second payment. Further details of the transaction appear from the report of British Imex Industries Ltd. v. Midland Bank Ltd.¹

On December 9, 1957, the plaintiffs, alleging that the goods of the first instalment were defective, applied ex parte to Donovan J.

1 [1958] 1 Q.B. 542; [1958] 1 All E.R. 264.

asking for an injunction to restrain the defendants, their servants, agents or assigns or anyone deriving title under them, from drawing on the second letter of credit for £23,000 or receiving from the Midland Bank any money under the contract. Donovan J. granted the injunction, to run until 2.30 p.m. on the following day, December 10. The defendants had until 3 p.m. on that day to present the letter of credit to the Midland Bank and to receive payment. On the morning of December 10 the plaintiffs applied to Donovan J. to extend the injunction until the rights of the parties under the contract for the sale of the goods could be ascertained. The judge refused to do so on the ground that he had no jurisdiction. The plaintiffs immediately appealed to the Court of Appeal at 12.30 p.m. against that refusal.

Gerald Gardiner Q.C. and J. Fox-Andrews for the plaintiffs. The court has wide powers, in the exercise of its discretion, to grant an injunction to restrain the defendants from dealing with the amount of this letter of credit: see R.S.C., Ord. 50, r. 6. The defendants have already received some £23,000 under the first letter of credit in respect of worthless goods, under a contract which the plaintiffs are entitled to repudiate and have repudiated. The plaintiffs are not seeking to withdraw money from the Midland Bank, but merely to restrain the defendants from realizing the credit, subject to any terms which the court sees fit to impose. The bank will remain under the same liability. [They referred to section 31 (2) of the Sale of Goods Act, 1893, and cited Maple Flock Co. Ltd. v. Universal Furniture Products (Wembley) Ltd.²]

A. A. Mocatta Q.C. and Mark Littman for the defendants. While not admitting the jurisdiction of the court to grant an injunction, if the application be granted the whole procedure by which, in commercial transactions, letters of credit are used, would be wrecked. The defendants have a contract with the bank that if they present the proper documents the bank will pay. That is the whole basis on which the English exporter agrees to sell to overseas purchasers. The bank has no right to refuse payment on presentation of the proper documents. [Trans Trust S.P.R.L. v. Danubian Trading of Ltd.³ was cited. Davis' Law Relating to Commercial Letters of Credit, 2nd ed., pp. 70 to 76, and Gutteridge's Law of Bankers' Commercial Credits, 2nd ed., pp. 35 to 37, were read.]

2 [1934] 1 K.B. 148; 50 T.L.R. 58.

3 [1952] 1 K.B. 285; [1952] 1 All E.R. 89.

JENKINS L.J. stated the facts and continued: It appears that when the first consignment of steel rods arrived they were, according to the plaintiffs, by no means up to contract quality and many criticisms were made on that score. That is a matter in issue between the parties. In the meantime the plaintiffs wish to secure themselves in respect of any damages they may be found to be entitled to when this dispute is ultimately tried out, by preventing the defendants from dealing with this outstanding letter of credit. Mr. Gardiner, in effect, treats this as no more than part of the price, a sum earmarked to pay for the goods bought under the contract, which the plaintiffs have become entitled to repudiate; and he says that the defendants ought, accordingly, to be restrained from dealing with the amount of this letter of credit. He points out that he is not seeking any order against the bank, but merely against the defendants.

We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice.

There is this to be remembered, too. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling, goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case - to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of "freezing," if I may use that expression, the sum in respect of which the letter of credit was opened.

I agree with Mr. Gardiner that this is not a case where it can be said that the court has no jurisdiction to interfere. The

court's jurisdiction to grant injunctions is wide, but, in my judgment, this is not a case in which the court ought, in the exercise of its discretion, to grant an injunction. Accordingly, I think this application should be refused.

SELLERS L.J. I agree, but I would repeat what my Lord has said on jurisdiction. I would not like it to be taken that I accept, or that the court accepts, the submission if it was made, as I think it was, that the court has no jurisdiction. There may well be cases where the court would exercise jurisdiction as in a case where there is a fraudulent transaction.

PEARCE L.J. I agree.

Solicitors: Simmons & Simmons; Menasse & Tobin.

A. W. G.