Lord Brandon of Oakbrook

(delivering the JUDGMENT of the Board): This is an appeal from an order of the Court of Appeal of Singapore (Wee Chong Jin C.J., Chua and Thean JJ.) dated November 6, 1985 allowing, with costs, an appeal from an order of the High Court of Singapore (Lai Kew Chai J.) dated May 16, 1984.

The material facts, as set out in the judgment of the Court of Appeal, are these. The respondents are dealers in commodities, including palm oil. By two agreements dated January 30 and February 15, 1980, they agreed to sell to Bakrie and Brothers (Singapore) Pte. Ltd. ("Bakrie") 3,000 metric tonnes and 2,000 metric tonnes of crude palm oil in bulk unbleached at the prices of US$627 and US$670 per metric tonne respectively. It was a term of both agreements that payment for the palm oil was to be made by means of a transferable irrevocable sight letter of credit to be opened in favour of the respondents, the opening of which was to be advised through the Bank of Canton Ltd. ("Bank of Canton"). In order to fulfil and perform the two agreements made by them with Bakrie, the respondents entered into two agreements with Ban Lee Oil Mill Company (Singapore) Pte. Ltd. ("Ban Lee") for the purchase from Ban Lee of two corresponding quantities of crude palm oil in bulk of the same quality at the lower prices of US$601 and US$645 per metric tonne respectively. Similarly, under these two agreements, payment was to be made by an irrevocable sight letter of credit to be opened in favour of Ban Lee.

On February 20, 1980, the respondents were advised by Bank of Canton that a transferable irrevocable sight letter of credit No. SIN/042/80 dated February 19, 1980 for US$3,315,050 ("the letter of credit") had been opened by the appellants in favour of the respondents for the account of Bakrie. At first, the letter of credit was found to be unacceptable as it was not in accordance with the agreements made between the respondents and Bakrie. However, subsequently multiple amendments were made to the letter of credit as required by the respondents. The respondents then requested the appellants to transfer part of the letter of credit to Ban Lee, but the appellants suggested that the transfer should be effected by Bank of Canton who were the respondents' bankers. Bank of Canton declined to effect the transfer on the ground, inter alia , that the letter of credit was badly drafted and also that they were merely the advising bank without any engagement on their part. The respondents therefore reverted to their request to the appellants for the transfer but the appellants persisted in their refusal to effect it. In the result, the respondents failed to perform their obligations under the agreements made with Ban Lee, and were sued by Ban Lee for damages for breach of contract and judgment was entered against the respondents for damages to be assessed. In the meanwhile, Bakrie had become insolvent and went into liquidation.

On December 8, 1982, the respondents commenced an action against the appellants in the High Court, claiming damages for breach of contract arising from the issuing and opening by the appellants of the letter of credit and a declaration that the respondents were entitled to be indemnified by the appellants in respect of the amount which might be awarded to Ban Lee, whether by way of damages, interest or costs, together with the respondents' costs of defending the action instituted by Ban Lee. The claim was resisted by the appellants who contended that they were not under any obligation to effect the transfer of the letter of credit as requested by the respondents.

Lai Kew Chai J., sitting in the High Court, dismissed the respondents' action with costs, but the Court of Appeal unanimously reversed his decision and gave judgment for the respondents on their claim.

The letter of credit issued by the appellants began:

"We hereby establish divisible and transferable irrevocable letter of credit ... in favour of Lariza (S) Private Ltd. ... on