Credit Obligations
Cases
Credit Agricole Indosuez v Chailease Finance Corporation
[2000] EWCA Civ 19
LORD JUSTICE POTTER:
INTRODUCTION
1. This is an appeal from an order of Mr Stephen Tomlinson QC sitting as a deputy High Court Judge whereby he dismissed the challenge by the defendant/appellant Credit Agricole Indosuez (“CAI”) to the jurisdiction of the English Court by way of application under RSC Order 12 rule 8 and gave summary judgment under RSC Order 14 for the claimant/respondent Chailease Finance Corporation (“Chailease”) for US$ 556,750 plus interest. CAI appeals both limbs of the judge’s decision. The issues raised are (1) whether England was “the place of performance of the obligation in question” for the purpose of Article 5(1) of the Brussels Convention and (2) whether the bill of sale and acceptance of sale required to be presented by Chailease to CAI under an irrevocable stand-by letter of credit were non-conforming documents by reason of the fact that the date of delivery stated therein was 21 August 1998 when the credit stated that it was in respect of the sale agreement of a vessel for delivery during 17-20 August 1998.
THE FACTS
2. CAI is a French bank with a branch in Geneva. On 19th August 1998 that branch issued the letter of credit in favour of Chailease as beneficiary. The letter of credit was subject to the Uniform Customs & Practice for Documentary Credits (1993 Revison) (“UCP 500”). It was for an amount of US$ 556,750
“covering vessel MV `Mandarin’ sale agreement dated July 31, 1998 for delivery in Taipei during August 17-20, 1998 …. valid until November 30, 1998 at our counters in Geneva … available by payment at sight but not before than ten days of vessel’s delivery for US$ 400,000 and not before than 50 days of vessel’s delivery for US$156,750 against presentation of the following documents …”
The documents required included a bill of sale and
“copy of acceptance of sale (aceptacion de compra) duly signed by Buyer’s representative at Taipei on delivery Mr Panagiotis Stavropoulos, countersigned by Panama Consulate/Mission in Taiwan showing date/time of delivery.”
Presentation of documents was to take place in Geneva, the letter of credit stating:
“Upon receipt at our counters in Geneva of documents in strict conformity with this stand-by letter of credit terms and conditions, we shall pay you as per your instructions, value two Geneva/New York Bank working days”.
3. On 6th October 1998 Chailease presented documents to CAI in Geneva and instructed CAI to make payment of the first tranche of US$ 400,000 to its bank in Taipei. The documents included a bill of sale dated 21 August and an acceptance of sale which stated that delivery had taken place at 1600 hours Taipei time on 21 August. The acceptance of sale was signed by the buyer as required and confirmed the absence of any note of protest. On 12 October, CAI rejected the documents giving four reasons for such rejection.
4. On 30th October 1998 a second presentation was made which included not only the documents earlier presented but also the original bill of sale and acceptance, together with documents relating to the second tranche of US$ 156,750. Again the instructions were for payment to Chailease’s bank in Taipei. Again CAI rejected the documents.
5. A third presentation took place on 24th November by Chailease’s solicitors. It included a certified copy of the bill of sale, absence of which had been one of the grounds given for rejection on first presentation. On this occasion revised payment instructions were given by Chailease, namely that the funds should be paid by transmission to Chailease’s account at the Midland Bank in London. Again the documents were rejected. By this stage CAI were relying upon one only alleged discrepancy in the documents as a reason for rejection, namely that the date of delivery of the vessel was stated in the bill of sale and the signed acceptance of sale to be 21 August 1998 when the letter of credit stated that the vessel “was for delivery … August 17 -20 1998”.
6. Because of an issue raised for the first time on this appeal, it is pertinent to note that at no stage in connection with the three presentations of the documents above referred to, did CAI suggest that Chailease was not entitled to give instructions for payment outside Geneva or, upon the occasion of the third presentation, to change the instructions previously given for payment in Taipei to payment in London. Further, at the hearing before the judge, as recorded in his judgment, it was common ground that Chailease was contractually entitled under the letter of credit both to require payment in London and to make that request on the third presentation, by way of revision of its earlier requirements under the rejected presentations. It was accepted that the letter of credit gave the beneficiary a completely unfettered choice as to the place of payment.
THE FIRST ISSUE
7. It was and is the plaintiff’s contention that its claim is based upon the failure of CAI to pay money and that, for the purposes of Article 5(1) of the Brussels Convention, the place of performance of the obligation in question was London in accordance with the instructions given to CAI upon the third presentation.
8. So far as material, the Convention provides:
“Article 2.
Subject to the provisions of this Convention persons domiciled in a Contracting State shall, whatever their nationality, be sued in the courts of that State
………..
Special Jurisdiction.
Article 5.
A person domiciled in a Contracting State may, in another Contracting State, be sued –
1. In matters relating to a contract in the Courts for the place of performance of the obligation in question ..”
9. Thus, whereas, Article 2 prima facie required that the defendant, as a legal person domiciled in France, should be sued in that country, it was open to Chailease to establish the special jurisdiction of the English court under Article 5 on the basis that England was the place of performance of the obligation in question.
What was the obligation in question?
10. The European Court of Justice has held that, in order to identify the obligation in question, one must identify the obligation
“which corresponds to the contractual right on which the plaintiff’s action is based”
see Custom Made Commercial Limited -v- Stawa Metallbau [1994] ECR I-2913 and 2957 (para 23), affirming de Bloos -v- Bouver [1976] ECR 1947 at p.1508 (paras 11,14); and see generally Kleinwort Benson -v- Glasgow City Council [1997] per Lord Goff of Chieveley at 163H-164G.
11. The judge held that the relevant obligation was the obligation of CAI to pay the plaintiff in London pursuant to its instruction on the occasion of the third presentation. He said:
“It is true that that obligation does not arise unless and until conforming documents are presented to the bank, and that on the facts of this case that presentation had to take place in Geneva. But, provided that conforming documents have been presented to the bank in Geneva, the contractual right on which the beneficiaries’ action is thereafter based is the right to receive payment in London. No doubt the bank has a separate obligation to examine documents presented and to take up only conforming documents, although I should have thought that is likely to be a duty which is owed to the applicant for the credit, rather than to the beneficiaries. The beneficiary has no need to rely upon such a separate obligation. If conforming documents are presented, the bank owes an autonomous duty to the beneficiary to make payment to it at the place designated for payment. The beneficiary’s entitlement is contingent not upon examination of the documents but upon their objective conformity. If the documents are, objectively judged, conforming, then the bank is obliged to pay the beneficiary at the designated place of payment. In the event that it does not do so, then the contractual obligation whose performance is sought in the ensuing judicial proceedings (employing the language used in Shenavai -v- Kreischer [1987] ECR 239 at para 18 on pages 255-6) is the obligation to pay the beneficiary at the designated place of payment.”
12. For CAI, Mr Males QC has attacked those conclusions of the judge on the following basis. He submits that on the true construction of the letter of credit contract, and in accordance with the principles on which Article 5(1) is based, the `obligation in question’ was the bank’s obligation to examine and take up conforming documents, which obligation was to be performed in Switzerland (`at our counters in Geneva’). He submits that the bank’s obligation following receipt of conforming documents in Geneva, to pay `as per your instructions’ was dependent on and no more than secondary to that principal obligation. That being so, he relies upon the judgment of the European Court of Justice in Shenavai -v- Kreischer, para 19:
“… in a particular case of a dispute concerned with a number of obligations arising under the same contract and forming the basis of the proceedings commenced by the plaintiff … it will be the principal obligation which will determine …. [the Court’s] jurisdiction.”
He cites also the approach of the House of Lords in Union Transport -v- Continental Lines [1992] 1 WLR 15 and the references in the judgment of Lord Goff of Chievely to the “more fundamental obligation” and “the real ground of complaint”.
13. Mr Males also submits that such a conclusion gives proper weight and effect to UCP 500 and the various articles within it which condition the bank’s obligation to pay upon the proviso that the stipulated documents are presented, as well as emphasising the need for examination of such documents to ascertain whether they comply with the credit.
14. Mr Males referred us to the decision in Bank of Baroda -v- Vysya Bank [1994] 1 Lloyd’s Rep 87 in which, for the purposes of Article 4 of the Rome Convention on governing law, Mance J held that the performance which is characteristic of the contract of a letter of credit is the acceptance of conforming documents at the place of presentation, observing in that context that the place of payment under the credit is generally insignificant. Whilst acknowledging that the decision in that case was concerned with a different test, Mr Males relies upon it (a) as recognising the importance to banks and beneficiaries of a simple and clear test, a consideration which he submits is also applicable to 5(1) of the Brussels Convention, (b) as demonstrating that the principal matter with which such a contract is concerned is the presentation and acceptance of documents and (c) as demonstrating that to hold that the relevant obligation for the purposes of Article 5(1) is that of payment would mean that in many letter of credit cases there would be no substantial connecting factor between the dispute and the forum of the court called upon to hear it, contrary to the broad principle underlying Article 5(1) that a close connecting factor should be present to establish the special jurisdiction provided for: see Shenavai -v- Kreischer at para 18 and Martin Peters Bauunternehmung GmbH -v- Zuid Nederlandse Aannemers Vereniging [1993] ECR 987 at paras 9-11.
15. Forceful as Mr Males’ submissions have been, I do not consider that they can succeed. In the Kleinwort Benson case at p.164E-G Lord Goff stated:
“(4) It follows that, in order to identify the relevant court, it is necessary first to identify the obligation in question. This was made plain in Ets. A. de Bloos s.p.r.l. -v- Societe en Commandite Par Actions Bouyer … in which the European Court of Justice held, at p.1508, para. 11, that the word “obligation” in article 5(1) refers to “the contractual obligation forming the basis of the legal proceedings.”
16. The Court of Justice subsequently affirmed that “the obligation”
“cannot be interpreted as referring to any obligation whatsoever arising under the contract in question, but is rather that which corresponds to the contractual right on which the plaintiff’s action is based:”
See Custom Made Commercial Limited -v- Stawa Metallbau G.m.b.H. (Case C288/92) [1994] ECR 1-2913 2957 (para 23).”
See also the observation of Lord Clyde at p.181C:
“Moreover the reference is to `the obligation in question’. That is a reference not to the contract but the obligation which is at the heart of the dispute.”
17. The claim in this case is based on the contractual right of Chailease to be paid, conditional on presentation of conforming documents prior to expiry of the credit. Where a claim is based upon failure to pay money, the obligation in question is the obligation to pay the money, and the place of payment is the place of performance for the purposes of Article 5(1): see the Custom Made Commercial case referred to by Lord Goff at paras 23 and 29; see also Briggs: Civil Jurisdiction and Judgments (2nd ed) 1997 paras 2.136-137.
18. It seems to me that the attempt of Mr Males to characterise the obligation of CAI to accept the conforming documents as the principal obligation, with payment merely dependent upon (and therefore secondary to) it, must fail. It certainly does not seem to me that he can derive assistance from the Bank of Baroda -v Vysya.. The test for ascertaining the jurisdiction with which the contract has the closest connection for the purposes of the Rome Convention, which was at issue in that case, is a different test for a different purpose from that under Article 5(1) of the Brussels Convention. In the Custom Made Commercial case, the European Court of Justice considered, and expressly rejected, the argument that Article 5(1) does not apply to the place of performance of a payment obligation because so to apply it would confer jurisdiction on a court which otherwise had no connection with the dispute.
19. So far as the obligation of CAI to examine and take up documents is concerned, Chailease do not sue or otherwise base their cause of action upon an allegation of breach of that obligation; they base it simply upon the refusal to pay. As Mr Page put it in argument, provided CAI pays under the letter of credit, it is a matter of complete indifference to Chailease whether it takes up or examines the documents. It is the failure to pay which is `the real ground’, if not the only ground, of Chailease’s complaint.
20. In Shenavai -v- Kreischer the European Court of Justice was concerned with contracts of employment, which it was acknowledged (at para 16 of the judgment) differ from other contracts by virtue of `certain particularities’, on account of which the court best suited to resolve disputes under such contracts is the court of `the place in which the characteristic obligation of such contract is to be performed’. However, the Court stated
“17. When no such particularities exist, it is neither necessary nor appropriate to identify the obligation which characterizes the contract and to centralize at the place of performance thereof jurisdiction, based on place of performance, over disputes concerning all the obligations under the contract. The variety and multiplicity of contracts as a whole are such that the above criterion might in those other cases create uncertainty as to jurisdiction, whereas it is precisely such uncertainty which the Convention is designed to reduce.
18. On the other hand, no such uncertainty exists in most cases if regard is had solely to the contractual obligation whose performance is sought in the judicial proceedings. The place in which that obligation is to be performed usually constitutes the closest connecting factor between the dispute and the court having jurisdiction over it; it is this connecting factor which explains why, in contractual matters, it is the court of the place of performance of the obligation which has jurisdiction.” (emphasis added)
I have emphasised the word `usually’ because it seems to me clear that the Court was there explaining the broad rationale for the special jurisdiction rule in Article 5(1), rather than indicating that it is necessary in all cases that the obligation sued on should be demonstrably the closest connecting factor. Thus, it also seems clear to me that, following the decision in Shenavai -v- Kreischer, in contract cases other than those concerning contracts of employment it is neither necessary nor appropriate to identify the obligation which characterises the contract, but rather to identify the contractual obligation of which performance is sought (in this case payment).
21. Nor do I think that various articles of UCP 500 referred to by Mr Males carry the matter further. Article 9(a) provides:
“An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the credit are complied with:
(i) if the Credit provides for sight payment – to pay at sight;
(ii) if the Credit provides for deferred payment – to pay on the maturity date”
22. Article 10(b)(i) provides:
“Presentation of documents must be made to the Issuing Bank or Conferring Bank, if any, or any other Nominated Bank.”
23. Both articles demonstrate that there is a condition precedent to the beneficiary’s right to payment (namely presentation of the stipulated documents), but neither is framed in terms of an obligation owed to the beneficiary to deal with the documents in a particular way.
24. Article 13(a) provides that:
“Banks must examine all documents stipulated in the credit with reasonable care, whether or not they appear on their face, to be in compliance with the terms and conditions of the Credit.”
25. Insofar as this provision imposes an obligation, it seems to me that it is at least primarily an obligation owed to and protective of the issuing bank’s customer rather than the beneficiary (c.f. the view of Parker J. in “The Lena” [1981] 1 Lloyd’s Rep 68 at 78). Even if it be right to regard it also as an obligation owed to the beneficiary, it is yet one in respect of which the remedy is a claim for payment in accordance with the issuing bank’s undertaking rather than a claim for damages for breach of the obligation properly to examine the documents.
26. Article 14(b) provides:
“Upon receipt of the documents the Issuing Bank … must determine on the basis of the documents alone whether or not they appear on their face to be compliant with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such bank(s) may refuse to take up the documents …”
Subsequent provisions in Article 14 provide for various steps to be taken by the issuing bank, all within the period of seven days from receipt of documents, including the requirement to give notice of refusal to the beneficiary. Again the same comment arises as in respect of Article 13(a).
27. Although it is clear that, in providing a code in respect of the procedures, responsibilities and liabilities of the various parties to a Letter of Credit, UCP 500 lays down a number of detailed requirements for the examination of documents and the determination whether or not they are discrepant, it does nothing to erode the undertaking of the issuing bank to make, and the interest of the beneficiary to claim, payment under the terms of the credit, that being the obligation the performance of which is sought in the proceedings brought by the beneficiary. Accordingly, it seems clear to me that the obligation in question in these proceedings is the obligation to make payment under the credit.
Where was the place of performance of the obligation in question?
28. As already made clear, it was the case for Chailease below that the place of performance was London as the place of payment called for by Chailease upon the occasion of the third presentation, the obligation of CAI being to `pay you as per your instructions’. That point was conceded by CAI, the judge recording in his judgment that:
“It was common ground before me that the Plaintiff was contractually entitled under the letter of credit both to require payment in London and to make that request on the third presentation by way of revision of its requirement under the first two, rejected, presentations. It was accepted that the letter of credit gave to the beneficiary a completely unfettered choice as to the place at which payment should be effected by the defendant.”
29. Upon this appeal, Mr Males for CAI, sought to withdraw that concession and to argue as follows. He submitted that, on a true construction of the credit, the place for performance of the payment obligation was Switzerland. He argued first that the statement that the letter of credit was `available by payment at sight … against presentation of documents ..’ coupled with the later undertaking that `upon receipt at our counters in Geneva of documents … we shall pay you …’ were sufficient to make clear that Geneva was the place for payment; second, that the additional words `as per your instructions, value two Geneva/New York bank working days’ were essentially surplusage so far as payment was concerned or, at best, an indication of willingness to effect payment in whatever precise manner or by whatever route Chailease might request. In the alternative, he submitted that the reference to payment as per Chailease’s instructions meant that the place of the obligation in question could not be ascertained from the terms of the contract itself, and that, since it was dependent on the subsequent conduct of the party seeking to enforce the obligation in question, it was a `floating’ place of performance, unamenable to the application of Article 5.1 of the Brussels Convention.
30. Mr Page, for Chailease, objected to the withdrawal of CAI’s concession before the Judge on the ground that, had the action not proceeded from the start upon the uncontested assertion by Chailease, and later upon concession by CAI, that Chailease were at liberty to choose the place of payment and/or to stipulate for payment in London, Chailease would have proffered evidence of banking practice as to the implication of the provision for `value two Geneva/New York Bank working days’. It does not seem to be necessary in the circumstances of this case to rule upon Mr Page’s objection. I say that for the following reasons.
31. It seems clear to me that the words `available for payment on sight …. against presentation of documents’, represent no more than a compliance with Article 10(a) of UCP 500 which provides that all credits must clearly indicate, inter alia, whether they are available by sight payment or by deferred payment. In the ordinary way, a sight payment credit provides for payment against presentation of documents, whereas a deferred payment credit provides for payment at a future date calculated in accordance with the formula set out in the credit: see generally Brindle and Cox: Law of Bank Payments (2nd Ed.) paras 8-32 to 8-34. The words quoted above, together with the complementary words `upon receipt at our counter in Geneva we shall pay you …..’ are in my view directed to the time at which the obligation of payment arises (i.e. immediately, and not upon a deferred basis), and are not intended to specify the place of payment, as to which the subsequent words `as per your instructions value two Geneva/New York Bank working days’ are apt and intended to apply. In the absence of evidence of banking practice to the contrary, I would construe those words as contemplating that the place for payment (which was to be in dollars) was at the option of Chailease and to be stipulated in their instructions at the time of presentation of documents to CAI at Geneva, the provision for `value two Geneva/New York Bank working days’ being designed to allow for a sufficient time to cover the international transfer of dollar funds from Geneva to the place of payment, bearing in mind that variations in international banking hours and the necessity for an electronic transfer or other instruction to be transmitted across a time zone might well result in the arrival of such an instruction after the close of business of the receiving bank. Thus, I consider that Chailease was contractually entitled to nominate London as the place of payment and that CAI was obliged to make payment there, subject to the presentation by Chailease of conforming documents.
A `floating’ place of performance.
32. Mr Males’ argument that, for Article 5(1) of the Brussels Convention to apply, `the place of performance of the obligation in question’ must be ascertainable from the contract itself is based not upon any words contained in the Article, but on his submission that the general principles underlying the Brussels Convention in a number of respects necessitate such a construction. First, he submitted that, because Article 5(1) is in derogation from the basic principle of jurisdiction set out in Article 2 it should be construed restrictively. Second, he submitted that the construction for which he argued would promote legal certainty in accordance with the general aim of the Convention that the rules for allocation of jurisdiction should be precise and clear. In this respect he quoted the decision in Jakob Handte -v- Traitements Mecano-Chimiques des Surfaces [1992] E.C.R. 1-3967, para 18:
“The objective of strengthening legal protection of persons established in the Community, which is one of the objectives which the Convention is designed to achieve, also requires that the jurisdictional rules which derogate from the general principle of the Convention should be interpreted in such a way as to enable a normally well-informed defendant reasonably to predict before which courts, other than those of the state in which he is domiciled, he may be sued.”
See also Mulox v Geels [1993] E.C.R. 1-4075, para 11. Mr Males submitted that the judge’s decision rendered it impossible for CAI as defendants to ascertain or take advice at the time the contract was made as to where proceedings might be brought for breach of the payment obligation under the contract.
33. Third, he submitted that to require that the place of performance be ascertainable from the contract itself rather than dependent on the unfettered choice of one party, would properly ensure that litigation did not take place in a country having little or no connection with the dispute, contrary to the decision in the Martin Peters case which stated (at para 11) that the principle underlying Article 5(1) is that there exists `a particularly close connecting factor between a dispute and the court which may be called upon to hear it’.
34. Fourth, Mr Males submitted that such a requirement would prevent the vice of a beneficiary seeking to designate a place of payment which would offend the decision in MSG -v- Gravieres Rhenanes [1997] E.C.R. 1-911 para 31 to the effect that:
“Whilst the parties are free to agree on a place of performance for contractual obligations which differs from that which would be determined under the law applicable to the contract without having to comply with specific conditions as to form, they are nevertheless not entitled, having regard to the system established by the Convention, to designate with the sole aim of specifying the courts having jurisdiction, a place of performance having no real connection with the reality of the contract..”
35. Finally, Mr Males relied upon an observation of Lord Clyde in Kleinwort Benson -v- Glasgow City Council [1999] 1 AC 153 at 184F to the effect that, for the purpose of invoking Article 5(1):
“.. there must be an identifiable place of performance.”
36. I shall deal with the last point first. The remark of Lord Clyde referred to was stated to be based on an observation of Lord Maxwell in the case of Bank of Scotland -v- Investment Management Regulatory Organisation Ltd. [1989] S.L.T. 432 at 445 in relation to the provision in paragraph 2(2) of Schedule 8 to the 1982 Act, corresponding to Article 5(1). In that case the Bank of Scotland sought, in the courts of Scotland, judicial review of certain decisions of IMRO, the registered office of which was in London and of which the Bank was a member and therefore bound by its rules. The Bank having submitted to IMRO an application for waiver of one of its rules, such waiver was refused and the Bank sought judicial review and reduction of IMRO’s decisions. The Bank maintained that the rules under which the decisions were made were contractual in nature and the performance of the contractual obligation in question took place in Scotland, so that the Scottish court had jurisdiction under rule 2(2). The court held that rule 2(2) was concerned with contractual obligations for which a particular place or particular places of performance was or were provided expressly or by implication and that in the instant case the contract did not provide for a particular place of performance. Having described the peculiarities of IMRO’s position and modus operandi and observed that, if anywhere, the more probable place of performance was London, Lord Maxwell observed:
“…I did not understand it to be suggested that the Board had in fact considered and decided on the Petitioner’s application in any particular place…If they are unable to identify the place and performance of the obligation in question, in my opinion they cannot rely on rule 2(2).”
37. The context in which that remark was spoken does not seem to me to assist in this case. It is clear, however, that at the outset of his judgment Lord Maxwell made clear that he agreed with the opinion of Lord Dunpark who stated at 442 that:
“The rule requires the contract to specify either expressly or by implication, where the place of the performance is.”
See also the judgment of Lord Morrison at 443:
“Secondly, the wording of rule 2(2) assumes that the proceedings are based on an obligation for which there is provided a place of performance, whether expressly or by implication.”
38. Whenever a question arises under Article 5(1), once the `obligation in question’ has been determined, a question arises as to what law determines its place of performance. Although Article 5(1) is silent on the question, the European court has held on several occasions that the place of performance of the obligation in question is to be determined by the law governing that obligation according to the conflict rules of the National Court seised: see Industrie Tessili Italiano Como – v – Dunlop A.G. [1976] ECR 1473, para 13; also the Custom Made Commercial case (above) at para 26 and Leathertex Divisions Sinetici -v- Bodetex BVBA (Case C-420/97) (1999) CLC 1976 at para 33.
39. It will frequently be the case in international contracts under which payment falls due as between parties who reside in different jurisdictions, that the contract is silent upon the question of the due place of payment e.g. in sale of goods cases, in which the normal English rule applied is that, in the absence of contrary implication, the debtor must seek out his creditor, whereas in countries such as France and Germany the normal rule is that the place of payment is the debtor’s address. In such cases and, as it seems to me, in the instant case which concerns the due place of payment under a documentary credit, the court does not abdicate from its task of ascertaining the due place for payment according to the apparent intention of the contract (i.e. `expressly or by implication’). In the course of that task, the Court may and, in my view, should have regard to any subsidiary agreement by the parties in that respect or to the outcome of any machinery or method for subsequent determination of the place of payment which is anticipated and/or permitted within the terms of the contract. If by those terms, the parties anticipate that the place for payment may be determined at the option of one party and subsequently communicated in instructions to the other, then there seems to me no convincing argument of principle or policy why the rule of jurisdiction in Article 5(1) should be treated as inapplicable, simply because the parties have agreed that the crystallisation of the obligation as to the place of payment be postponed in that manner. That certainly seems to me to be the position under English law. Mr Males pointed out in argument that it is probable that under English Conflict of Law rules the applicable law of the letter of credit contract is not English but Swiss law. That may well be so. However, as there is no evidence before the court that application of Swiss law would give rise to any different result, that point does not require further consideration.
40. Further, I do not think that the statements of principle quoted by Mr Males from various decisions of the European Court are offended by such an interpretation. First, while Article 5(1) is indeed a derogation from the basic principle of jurisdiction in Article 2, it is one which has been clearly and forcefully recognised as desirable and justifiable in the interests of certainty, although it is recognised that in individual cases it may give rise to a result which is contrary to the policy generally underlying Article 5, namely to allot jurisdiction to a court having a close connection with the facts of the dispute: see the Custom Made Commercial case at paras 13-22.
41. Second, whilst I would accept the broad sweep of the passage quoted from the decision of the European Court in Jakob Handte case, its context is important, namely a dispute in which the sub-buyer of goods which he had purchased from an intermediate seller sought to bring an action against the original manufacturer for damages on the grounds that the goods were not in conformity with the purchase contract, the issue being whether (as the sub-buyer asserted) the action involved `matters relating to a contract’ in a situation where there was no contractual relationship between the parties. The court emphasised (at para 16) that the jurisdictional rules which derogate from Article 2 must not lead to an interpretation beyond the situations envisaged by the Convention, prior to making its observation about the need for a normally well-informed defendant reasonably to be able to predict before which court or courts he may be sued. The court then went on to observe (para 19):
“However, in a situation such as that with which the main proceedings are concerned, the application of the special jurisdictional rule laid down by Article 5(1) of the Convention to an action brought by a sub-buyer of goods against the manufacturer, is not foreseeable by the latter and is therefore incompatible with the principle of legal certainty.”
It is thus clear that the Jacob Handte case was concerned with the broad question of whether or not contractual obligations were involved, and hence whether Article 5(1) was applicable at all, and not with a case where (as here) the terms of the contract itself rendered it foreseeable that the place of payment, and hence the locus of any proceedings in respect of non-payment, would be uncertain until receipt of the beneficiary’s instructions.
42. Third, it is true that a requirement that the place of performance be ascertainable from the terms of the contract itself, rather than being dependent upon the subsequent exercise of an option or choice as to place of payment, would generally prevent choice of a place of performance which had no connection with the contract. However, that seems to me no more than another way of putting the argument which did not prevail in the Custom Made Commercial case, i.e. that the criterion of the place of performance may in certain cases have the effect of conferring jurisdiction on a court which has no connection with the dispute.
43. Fourth, I accept that it is in principle correct that a term conferring the choice of place of payment upon the beneficiary may enable him to exercise such choice with an eye to founding jurisdiction in the event of non-payment. Further, it was decided in the case of MSG v Gravieres Rhenanes [1997] E.C.R. 1-911 at 1-946 that:
“The Convention of 27 September 1968 must be interpreted as meaning that an oral agreement on the place of performance which is designed not to determine the place where the person liable is actually to perform the obligations incumbent upon him, but solely to establish that the courts for a particular place have jurisdiction, is not governed by Article 5(1) of the Convention, but by Article 17, and is valid only if the requirements set out therein are complied with.” (emphasis added)
44. However, there is no evidence before the court that the choice by Chailease of London as the place of payment was made solely to establish that the English courts should have jurisdiction in the sense dealt with by the European Court in that case. The key words in the passage quoted which enabled the court to find that the agreement in that case was made solely to establish jurisdiction, was the finding that what was characterised as an oral agreement on the place of performance was designed not to determine the place where the person liable is actually to perform the obligations incumbent upon him. In this case, as the judge held, given that the plaintiff was contractually entitled to nominate London as the place of payment because the contract contemplated payment in accordance with such instructions as Chailease might give, those instructions when given (whatever the motive underlying them), were indeed designed to determine the place where CAI was liable to perform the obligation of payment; thus we are not here concerned with the effect of what was no more than a `deeming’ provision of the kind before the court in the MSG case. In this case, on the nomination of London as the place of payment, an actual or direct connection was created between the dispute and the English court, if called upon to determine it, of a kind that was absent in the MSG case (see para 34). As stated by Saville L.J. in Boss Group Ltd v Boss France S.A [1996] 4 All E.R. 970 at 977:
“The charge of forum shopping can only be made good by assuming that a party which takes advantage of the Convention exceptions to the general rule of domicile is somehow doing something illegitimate; but that assumption cannot be sustained if in truth one of the exceptions is applicable.”
45. In my view, the gravamen of Mr Males’ argument is a charge of forum shopping, which I do not find to be made out. I should add that it was Mr MaIes’ `fallback’ position that, even if the court was inclined to reject his submission that a `floating’ place of performance, in the sense of a place of performance unidentified in the contract but left to the subsequent nomination of one of the parties, renders the provisions of Article 5(1) inapplicable, that question should nonetheless be referred to the decision of the European Court. Since it seems to me clear, for the reasons stated in paragraphs 40-44 above, that Mr Males’ submission is incorrect, I do not consider it necessary or appropriate for the court to make such a reference. I would therefore dismiss the appeal under the First Issue.
THE SECOND ISSUE
46. Having come to his conclusion upon jurisdiction and dismissed the application of CAI under Order 12, r.8, the judge proceeded to give summary judgment upon the application of Chailease under Order 14, on the grounds that CAI had failed to demonstrate that the documents presented did not conform with the terms and conditions of the letter of credit.
47. In my view the judge was right to do so. The argument of CAI depends simply upon the fact that, whereas the letter of credit stated that it was in respect of a sale agreement for delivery during 17-20 August 1998, the acceptance and bill of sale presented stated that delivery had been made on 21st August 1998. Mr Males’ submitted that, on a true construction of the letter of credit contract, the acceptance of sale document (which was expressly required by the credit to state date and time of actual delivery) was required to state a date within the period 17-20 August, as also was the bill of sale. In my view that submission is incorrect.
48. There are, of course, two broad grounds upon which documents presented under a documentary credit may be rejected on grounds that they are discrepant. The first is that they do not, on their face, comply with the terms and conditions of the credit (as to which a strict test is applied), the Bank, save in cases of fraud, being solely concerned to ensure that the documents correspond with the description required in the letter of credit and not with the details of the underlying transaction between buyer and seller. The second is that, upon examination of the documents presented, they appear to be inconsistent with one another. As provided in Article 13 of UCP 500:
“Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the credit.”
49. So far as the first ground is concerned, it is plain that in this case each of the individual documents presented was on its face compliant with the requirements of the credit. The letter of credit does not state that the documents, and in particular the acceptance of sale and bill of sale, have to show that the vessel has been delivered within any range of dates, in particular the period 17-20 August. As the judge observed, if it had been intended that the Bank was obliged to pay only against documents showing that delivery of the vessel had been effected by a particular date, that could readily have been provided for. Nor, commercially, was there any good reason to require more than was in fact specified. There was, on the other hand, an obvious reason for the credit to provide that the actual date be shown, because payment of the first and second tranches due under the credit was to be 10 and 50 days respectively after delivery. Assuming that the buyers accepted delivery of the vessel pursuant to the sale agreement (demonstration of which was no doubt the substantial reason for requiring presentation of a formal notice of acceptance), the fact that it was a day or so later than the delivery date provided for in the sale agreement would commercially be neither here nor there.
50. Mr Males did not advance any argument that the documents presented were inconsistent as between themselves. However, he sought to rely on Article 37 of UCP 500, which deals with Commercial Invoices, and which in paragraph (c) provides:
“The description of the goods in the commercial invoice must correspond with the description in the Credit. In all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the Credit.”
51. Mr Males did not take any point concerning the commercial invoice which was in fact presented by Chailease; he could not, because the letter of credit did not call for delivery of any such invoice. However, he relied on the second sentence of paragraph (c) and asserted that, by reason of the delivery date given in the documents presented, there was a description of the vessel which was inconsistent with the description of the vessel in the credit. The judge held that, on a true construction of the credit, the words `for delivery in Taipei during 17-20 August 1998′ were not part of the description of the goods. In my view he was right; however, I do not consider that it is necessary to resolve the question. Given that there was ample descriptive information in the acceptance and bill of sale presented which made clear that the vessel delivered and accepted was the vessel the subject of the sale agreement, it does not seem to me that the date of actual delivery stated, i.e. one day beyond the range 17-20 August appearing in the credit, rendered the description of the vessel contained in the documents inconsistent with the description of the goods in the credit. In my opinion, the Judge was right in the decision which he reached on the Second Issue.
52. I would therefore dismiss this appeal.
MR JUSTICE FERRIS: I agree
Order: Appeal dismissed. Counsel to lodge minute of order.
Sirius International Insurance Company (Publ) v FAI General Insurance Ltd. & Ors
[2003] EWCA Civ 470 [2003] 1 WLR 2214, [2003] EWCA Civ 470
May LJ
Tomlin order – discussion and decision
In my judgment, the judge was correct to reject FAI’s extreme submissions based on paragraphs 4 and 5 of the schedule to the Tomlin order. The short point is that paragraphs 4 and 5 cannot, in my view, be read as leaving open for future contention that which paragraph 1 compromised. Paragraph 1 compromised the arbitration proceedings. It did not purport to determine questions arising out of the letter of credit. Available arguments as to the letter of credit were preserved, but the indebtedness of FAI to Sirius under the retrocessions was determined.
The agreed determination of the arbitration proceedings in favour of Sirius necessarily carried with it an acceptance by FAI that Sirius were equivalently liable to Agnew under the reinsurances. That, however, does not without more mean that the first condition of the letter of 3rd September 1999 was fulfilled. For that condition to be fulfilled, paragraph 1 has to be construed, not only as an acknowledgment that FAI were indebted to Sirius in the sum of US$22.5m., but also as an agreement by FAI that Sirius should pay Agnew’s claim notwithstanding the simultaneous settlements clause in the retrocession contract. The simultaneous settlements clause provided that FAI should pay their share of any loss under the retrocession simultaneously with Sirius’ payment to Agnew. I accept Mr Vos’ submission that the court has to construe the schedule to the Tomlin order without reference to the parties’ subjective intentions. I consider that the admissible factual matrix sufficiently appears from the basic relationship between Agnew, Sirius and FAI.
Mr Vos accepted that the second condition of the 3rd September 1999 agreement was not and is not fulfilled. He accepted that the first condition was not fulfilled before the Tomlin order. He accepted that the literal words of paragraph 1 do not express an agreement by FAI that Sirius should pay Agnew’s claim. Creative construction or implication is required to interpret it as doing so. He accepts, I think, that an award in contested arbitration proceedings would not have fulfilled the first condition. But the Tomlin order, he says, embodied an agreement not an award, and the agreement that Sirius should be entitled to prove in FAI’s liquidation or administration for US$22.5m. necessarily carried with it an agreement by FAI that Sirius should pay Agnew’s claim. I do not think so.
The first condition of the 3rd September 1999 agreement diminished as between FAI and Sirius the security which the letter of credit provided. FAI were entitled to withhold their agreement to Sirius paying Agnew. Sirius had an alternative route to drawing on the letter of credit, that is if Agnew obtained judgment or a binding arbitration award against them which Sirius were obliged to pay. If Agnew had disabled themselves from obtaining a judgment or award against Sirius, that was nothing to do with FAI. In the circumstances in which the Tomlin order was made, there was general commercial sense in FAI continuing to withhold consent. The agreement did not say that FAI’s agreement was not to be withheld unreasonably. Mr Vos only suggested the possibility that it might be so read as a complete afterthought. The words of paragraph 1 cannot, in my view, be stretched to say what they do not say. It would be rather surprising if they did. There are other issues than this issue of construction going to the parties claims in respect of the letter of credit. Neither party persuaded me that the resolution of the disputed meaning of paragraph 1 forecloses those claims, if the other party’s submission on the construction issue succeeds. I accept that it is conceivable that paragraph 1 could have itself fulfilled the first condition notwithstanding the terms of paragraphs 4 and 5 (and paragraphs 2 and 3) of the schedule. But the plain general sense of those paragraphs is that the Tomlin order agreement was not affecting the parties’ positions and arguments in respect of the proceeds of the letter of credit.
For these reasons, I consider that the judge’s decision on this issue was wrong. This means that the second issue on which he found against Sirius arises on their cross-appeal.
Cross-appeal – grounds of appeal and submissions
Sirius accept that the second condition of the 3rd September 1999 agreement was not fulfilled when the letter of credit was drawn down and that it is not now fulfilled. The case proceeded before the judge on the basis that it could never have been fulfilled once the terms of the Funding Agreement disabled Agnew from proceeding against Sirius. The cross-appeal arises on a finding by this court that the first condition was not fulfilled either. As between Sirius and FAI, Sirius were not entitled to draw down the letter of credit. To do so would have been a breach of contract. Siriusmaintain nevertheless that they would have been entitled to draw down the letter of credit even though to do so would have been a breach of contract. They point to the autonomous nature of letters of credit and say that the court would not have restrained them by injunction from drawing down, notwithstanding their breach of contract. The judge was wrong to decide otherwise. They say that the terms of the underlying agreement which purport to regulate draw down could at best give rise to a personal obligation sounding in damages. They alternatively say that in the circumstances of this case, the grant of an injunction would have been discretionary only, and that the court would not have granted an injunction because FAI’s damages in the alternative would have been nominal. FAIwere admittedly liable to Sirius. Sirius were liable to Agnew. Payment from each to the other was due. Realising the security of the letter of credit would result in no loss to FAI. I observe parenthetically that it would result in a diminution of any dividend payable to FAI’s creditors in liquidation, if, as this issue has to acknowledge, Sirius were not, as against FAI, entitled to realise their security.
FAI submit that the autonomous nature of letters of credit does not extend to permitting beneficiaries to draw them down in accordance with their terms but in plain breach of a promise to the person who opened the letter of credit not to do so. The court will restrain by injunction breach of a negative covenant of this kind. The remedy is not discretionary. It is acknowledged that no case has gone so far as to decide otherwise. The judge’s decision was correct.
Cross-appeal – discussion and decision
Letters of credit are an important commercial means of providing cash or security for those who in return provide goods or services. Typically a seller agrees to sell goods to a buyer. The buyer establishes a letter of credit with a confirming bank in favour of the seller. The terms of the letter of credit spell out the circumstances in which the beneficiary – the seller – is entitled to draw it down. The terms will typically include presentation to the bank of specified shipping and insurance documents and the like. The bank’s concern is to be satisfied that the terms of the letter of credit are fulfilled, whereupon the bank is obliged to pay the beneficiary. Because the letter of credit is, subject to its terms, the equivalent of cash, the bank is not concerned with any disputed question, not within the terms of the letter of credit itself, which may arise under the underlying sale contract between the seller and the buyer, as for instance, if the goods were said to be defective or to have arrived late – see generally United City Merchants v. Royal Bank of Canada [1983] 1 A.C 168 at 183. This is also the effect of Article 3(a) of the ICC Uniform Customs and Practice for Documentary Credits (1993 Revision) which was incorporated in the letter of credit in this case. Absent fraud by the seller presenting documents to the confirming bank seeking payment, the court will not restrain a bank from paying a letter of credit which is payable according to its terms, nor a beneficiary from seeking payment – see Group Josi Re v. Walbrook Insurance [1996] 1 Lloyd’s R. 345 at 360-1. Nor, again absent fraud, will the court restrain a beneficiary from drawing on a letter of credit which is payable in accordance with its terms on the application of a buyer who is in dispute with the seller as to whether the underlying sale contract has been broken – see for both these propositions the Deutsche Ruckverischerung case at 1030 where Phillips J considered the authorities. This is the autonomous nature of letters of credit. By means of it, banks are protected and the cash nature of letters of credit is maintained. There is no authority extending this autonomy for the benefit of the beneficiary of a letter of credit so as to entitle him as against the seller to draw the letter of credit when he is expressly not entitled to do so.
The present case is in more than one important respect a variant of the more typical. Here the relevant underlying agreement is, not the commercial transaction that the letter of credit was intended to support, as in the typical case the contract of sale or in the present case the retrocession treaties, but a related agreement regulating as between FAI and Sirius terms on which the letter of the credit would be established. The terms included express contractual restrictions on the circumstances in which Sirius would be entitled to draw on the letter of credit. To that extent the letter of credit was less than the equivalent of cash and Sirius’ security was correspondingly restricted. Although those restrictions were not terms of the letter of credit, and although the bank would have been obliged and entitled to honour a request to pay which fulfilled its terms, that does not mean that, as between themselves and FAI, Sirius were entitled to draw on the letter of credit if the express conditions of this underlying agreement were not fulfilled. They were not so entitled. I reject Mr Vos’ submission that in the present case the parties must be taken, as between themselves, to have afforded Sirius the right to draw on the letter of credit in defiance of the conditions of this underlying contract.
In my judgment, this analysis without more answers the question who is now entitled to the money in the escrow account. The letter of credit was drawn down by an agreement – the Tomlin order agreement – which changed the circumstances in which it could be drawn while preserving each party’s position and arguments in relation to it. Sirius are not entitled to the money because the conditions of the 3rd September 1999 agreement have never been fulfilled so as to entitle them to draw the money. They did not draw the money in breach of the agreement and did not try to do so. The question whether the court would have granted FAI an injunction never arose and a hypothetical answer to that hypothetical question is not, I think, determinative of the issue before the court. Whether in other circumstances the bank would have been obliged and entitled to pay is not in point. What determines the issue against Sirius is the fact that, as between themselves and FAI, the protagonists on the issue who is entitled to the proceeds of the letter of credit, they were never entitled to draw the letter of credit. I rather think that strictly the money should revert to the bank, but we were told that, if it did, it would get back to FAI.
I should add that, had it been necessary to do so, I should have been very strongly inclined to agree with the judge’s implicit finding that, had the question arisen out of the facts in the present case, the court would have granted an injunction restraining Sirius from drawing on the letter of credit in breach of conditions of the 3rd September 1999 agreement – see Doherty v. Allman (1878) 3 App. Cas. 709 at 719-20, modified perhaps as explained in Insurance Co. v. Lloyd’s Syndicate [1995] 1 Lloyd’s R. 273 at 277 and see also Equity – Doctrines and Remedies, Third Edition 1992, Meagher and others.
This analysis accords with the judgment of Phillips J in the Deutsche Ruckverischerung case at page 1030. He was concerned that the commercial effectiveness of letters of credit would be eroded if a claimant could prevent a beneficiary from drawing on the letter of credit by doing no more than to persuade the court that there was a seriously arguable case that the claim under the underlying contract was invalid. He did not consider that it was correct to imply a term into the underlying contract that the beneficiary would not draw on the letter of credit unless payment under the underlying contract was due. In the present case there is an unusual underlying contract and an express term restricting the circumstances in which Sirius were entitled to draw on the letter of credit. There is no need for implication. Further, FAI do not have only a seriously arguable case. They have in my judgment positively established that Sirius were not entitled to draw on the letter of credit when its proceeds were placed in the escrow account.
Mr Briggs did not rely strongly on the questionable majority decision of this court in Themehelp Limited v. West [1996] QB 84. He did not, in my view, need to do so. The court there upheld a decision to grant an injunction restraining sellers from giving notice to guarantors where there was a seriously arguable prospect of the buyers satisfying the court at trial that the only realistic inference to draw was that the sale contract had been induced by fraudulent misrepresentation. Mr Vos is equally unable to draw comfort from the dissenting judgment of Evans LJ. He held (at page 102) that the injunction was contrary to legal principle. The buyers undertook that the sellers would have the benefit of the guarantee in accordance with its terms, yet they sought to resile from that undertaking. The injunction was contrary to legal principle essentially because in the circumstances of that case the sale contract remained binding even if the buyers’ allegation of fraudulent misrepresentation were sufficiently proved; and there was no finding or evidence that the fraud exception defence would be available to the banks, who were not parties, if payment were demanded under the guarantees. Evans LJ (at page 104) would have been prepared to agree that in principle, if there was an arguable case that the sale contract was voidable or otherwise invalid, then further performance of the contract might be restrained pending the court’s resolution of that dispute. But in the present case fraud is not alleged. Further, it is not a case where FAI undertook that Sirius would have the benefit of the letter of credit in accordance with its terms. They placed express restrictions on Sirius’ entitlement to draw on the letter of credit and Sirius agreed to them. As to the status of the Themehelp case generally, see Staughton LJ in the Group Josi case at 361 and Rix J (as he then was) in Czarnikow-Rionda v. Standard Bank [1999] 2 Lloyd’s R. 187 at 202.
In my judgment therefore the judge reached the correct conclusion on this issue. As I read his judgment, the judge decided this issue in favour of FAI for the reasons which I have expressed, although he also decided that an injunction could have been granted. He certainly recorded Mr Briggs’ submission that the position was just as if there had been no Tomlin order and that there was non-compliance with the conditions; and that Sirius were not entitled to draw down and the money should be treated as FAI’s. That submission did not depend on arguments relating to a hypothetical injunction.
Conclusion
For these reasons, I would allow the appeal and hold that FAI are entitled to the proceeds of the letter of credit in the escrow account. This result may, as Mr Vos suggested, be contrary to one view of the merits. But another view is that Sirius should not, as between themselves and FAI, be regarded as entitled to do that which they expressly agreed not to do.
Lord Justice Carnwath:
I agree.
Mr Justice Wall:
For the reasons given by May LJ, I agree that this appeal should be allowed on the first issue, namely that as between Sirius and FAI, the latter is entitled to the proceeds of the letter of credit in the escrow account. I also agree with him that the judge reached the correct conclusion on the second issue relating to the autonomy of the letter of credit. I wish only to add a short judgment of my own on the first point.
I have to say that, when first reading the papers, I was attracted by the judge’s conclusion, expressed in the following terms –
Mr. Briggs submitted that FAI had never agreed that Sirius should pay a claim. Mr Vos says that FAI in effect did so by clause 1 of the Tomlin schedule. By that clause, FAIacknowledged that the $22.5 million would inure for Agnew’s benefit. So in substance, submitted Mr. Vos, FAI agreed to payment by Sirius. They knew exactly who was really getting the benefit of clause 1 of the settlement agreement. I think that is right. No one ever thought that the right to the $22.5 million was really that of Sirius. The commercial substance is that FAI had agreed that Sirius should pay a claim ……..
I reach this conclusion without regret. The truth is that FAI got the benefit of Sirius fronting the deal. The price of that was the provision of the letter of credit. The letter of credit was properly drawn down. It was there to meet just the eventualities that happened.
Clause 1 of the Schedule to the Tomlin order contains an acknowledgement that FAI is indebted to Sirius in the sum of $US22.5 million and that Sirius was entitled to prove in FAI’sliquidation or scheme of arrangement in that sum. By clause 1 of the document sent to FAI on 3 September 1999, Sirius agreed that it would not agree or pay any claim presented to Sirius by Agnew without FAI’s prior agreement in writing and would not draw down under the letter of credit unless (1) FAI had agreed that Sirius should pay a claim but had not put Sirius in funds to do so, notwithstanding the simultaneous settlement clause in the retrocession agreement or (2) Agnew obtained a judgment or binding arbitration award against Sirius which Sirius was obliged to pay.
The judge found that Sirius had been brought in because Agnew (rightly as it turned out) was unhappy about FAI’s “solidity” (the judge’s word). The essence of the retrocession agreement was that if Sirius was called upon by Agnew, FAI would reimburse Sirius. On this analysis, the acknowledgement in the Tomlin order that FAI was indebted to Sirius in the sum of $US22.5 million could only mean one thing – namely that Sirius had been called upon by Agnew, and was in those circumstances entitled to be reimbursed by FAI. It could thus legitimately draw down the US$5 million letter of credit in part satisfaction of FAI’s liability .
As I indicated earlier, I find this as an attractive argument, and one which may well reflect the overall merits of the case. The difficulty about it, however, in my judgment, is that it has to be prised out of the documents, and does not reflect what they actually say. I need, I think, to remind myself that these are highly sophisticated arrangements involving large sums of money and made by acute and hard-headed men of business: equally, the terms of the Tomlin order were negotiated by highly competent counsel.
When negotiating the terms of the Tomlin order, the parties were aware of a funding agreement between Agnew, Sirius and Lambert, by means of which Sirius was fully protected by Lambert against any liability which it might have to Agnew. No doubt there are sound commercial reasons for that agreement. Equally, it is apparent that had Sirius wished to have a cast iron claim to the $US5 million represented by the letter of credit, it would have only had to ask Agnew to obtain a default judgment against it pursuant to the second condition set out in the agreement of 3 September 1999.
It is not for us, however, to ask why this course was not taken. Against the background which I have sketched, it seems to me that a court seeking to construe the documents passing between the protagonists in this case must interpret them according to what they say, and should only draw the type of inference which appealed to the judge if it is wholly consistent with the contents of the documents. On this basis, looking at the letter of 3 September 1999 from Sirius to FAI, it is clear that FAI had not given prior agreement in writing to the payment of a claim presented by Agnew; and the terms upon which Sirius undertook not to draw down the letter of credit stood. Clause (2) of the agreement of 3 September is plainly not satisfied in any event, and I have come to the conclusion that I cannot read paragraphs 1 and 4 of the Schedule to the Tomlin order as altering that conclusion or triggering the first condition contained in Sirius’ letter of 3 September 1999.
I am fortified in this construction of the Tomlin order by the fact that it is consistent with the proper wish of recently appointed provisional liquidators not to prejudice any arguments regarding the letter of credit and its proceeds.
For these reasons, in addition to those given by May LJ I would respectfully part company from the judge on the first issue. As I agree with both May LJ and the judge on the second issue, I do not wish to add anything in relation to it.
Order: Appeal Allowed. Cross appeal dismissed. Order as amended and approved with counsel.
Montrod Ltd. v Grundkotter Fleischvertriebs GmbH & Ors
[2001] EWCA Civ 1954 [2002] CLC 499, [2001] EWCA Civ 1954, [2002] WLR 1975, [2002] 3 All ER 697, [2002] 1 All ER (Comm) 257, [2002] 1 WLR 1975
Porter LJ
THE BACKGROUND FACTS
GK had prior experience of export business but this was its first letter of credit transaction. It opened a new account with Commerzbank which it used as its advisor in connection with the credit. In the course of its communications with Ballaris when negotiating the contract of sale and the putting in place of the letter of credit, GK (who never had direct contact with Montrod) dealt with Ballaris in good faith on the basis that Ballaris could speak as to Montrod’s intentions so far as signature of the inspection certificate was concerned. GK were led to understand that Mr Wieler, an employee of GK, should sign the inspection certificates on behalf of Montrod and GK agreed that he would do so, receiving through the post a Montrod company stamp as proof of Montrod’sauthorisation of GK. GK acted accordingly. The full circumstances in which that unusual situation came about, and the judge’s reasons for accepting that GK, who at all times acted on the advice of Commerzbank, were entirely innocent of fraud, appear in the report of the judge’s decision at [2001] 1 All ER (Comm) 368 at 377b-378f and 379b-d. As already indicated there is no appeal against those findings.
Unknown to GK, Ballaris were not entitled to speak for Montrod as to the contents of the credit. The negotiations between Montrod and Ballaris were conducted entirely between Mr Hoory on behalf of Montrod and a Mr Bernard Choo of Frankfort Trade Credit Agencies of Singapore who (as apparent agent/intermediary for Ballaris) had approached Mr Hoory to provide the credit. Mr Hoory had no direct contact with either Ballaris or GK. The precise relationship and the contact of any communications between Mr Choo and Ballaris or GK remain to be determined. However, it was in fact the case (and it is not in dispute) that Montrod did not wish or intend to inspect the goods. So far as Mr Hoory was concerned, the requirement for presentation of a signed certificate was no more than a device, or ‘locking’ clause, intended to ensure that, by withholding its signature, Montrod could ensure that the credit would not be operable until it had been put in funds by Ballaris. That purpose was never disclosed to GK who were unaware of it and would never have agreed to the inclusion of such a term had it been so aware. GK duly despatched the goods by means of twenty lorry shipments to Moscow where they were delivered to Ballaris without any subsequent complaint. GK did so on the understanding that it was entitled to sign the inspection certificates for each truck load on behalf of Montrod and believing that, in any event, the goods were also to be inspected by an agency on arrival in Moscow. Having signed the certificates in those circumstances, GK duly presented twenty sets of documents under the credit to SCB in London, which accepted them as conforming with the credit.
THE RELEVANT CHRONOLOGY
In February 2000, Montrod requested Fibi to obtain a letter of credit to be issued by the London branch of SCB in respect of the price of the goods agreed to be sold by GK which was to be named as the beneficiary. On 17 February 2000 Fibi wrote to SCB forwarding Montrod’s request and stating that:
“[Fibi] shall reimburse you two working days after receipt of your tested Telex/Swift claim confirming that documents have been presented to yourselves strictly in accordance with the LC terms and are being forwarded to us”
In fact, since the letter of credit was ‘45 days sight’, the notice period for reimbursement was considerably longer. However nothing turns upon that.
Upon 21 February 2000 SCB issued the letter of credit in accordance with Fibi’s instructions, stating that Montrod was the applicant. SCB then requested Commerzbank to advise the letter of credit to GK, Commerzbank acknowledging receipt by Swift message on 24 February 2000.
On 20 March 2000 two sets of documents were presented to SCB by Commerzbank and were followed by a further four sets on 22 March 2000. Between 23 and 27 March, SCB sent notification to Fibi that six sets of conforming documents had been received, together with the documents themselves. On 27 March 2000, Montrod informed Fibi that the certificates of inspection ‘are not issued by the applicant Montrod Ltd [and] no payment is to be executed ..’. Fibi in turn passed a Swift message to SCB, adding later that day that ‘Montrod Ltd has informed us that they have not issued any certificates of inspection and that the certificates of inspection presented are apparently forgeries’.
On 28 March 2000, SCB contacted Fibi and confirmed that the documents complied on their face with the terms of the letter of credit. On the same day Fibi confirmed that SCB was obliged to pay against the documents at their maturity date. Thereafter, fourteen further sets of documents were presented to SCB by Commerzbank on 31 March 2000 (four sets) and 6 April 2000 (ten sets). They were accepted by SCB as conforming on their face to the terms of the letter of credit and were duly forwarded to Fibi who were informed that the documents had been checked and found in order, SCB requesting reimbursement on an appropriate date.
By a Swift message of 29 March 2000 Fibi, in acknowledging the documents received to date, confirmed that the documents appeared on their face to be in strict conformity with the terms of the letter of credit and confirmed that they would remit to SCB the relevant amounts on the value dates shown. Fibi added however:
“However, as the applicants claim that certificates of origin presented were not issued by themselves, we have informed them that we shall require either instructions from the beneficiary’s bank, or a court order if payment is not to be effected. In the absence of either of these, we shall effect payments of all 6 drawings as stated above.”
On 7 April 2000 Fibi acknowledged four sets of documents recently received and confirmed that payment would be made in due course without qualification.
On 10 April 2000, SCB presented a further 10 sets of documents to Fibi, but Fibi was not prepared to confirm that payment would be made in due course.
On 11 April 2000, solicitors for Montrod sent a fax letter to GK asserting that the signature attached to the certificate of inspection delivered to SCB was a forgery. They requested confirmation that GK would not seek payment failing which they would apply to the High Court for an injunction and, on the same date, commenced proceedings against GK, Fibi and SCB for an injunction until trial or further order to prevent them from paying according to the terms of the letter of credit, supported by an affidavit from Mr Hoory.
On 13 April 2000, Fibi accepted the 10 sets of documents recently presented.
Montrod’s application was heard inter partes before David Steel J, who dismissed it for reasons set out in his judgment dated 19 April 2000. He found that, upon the evidence then before him, Montrod fell ‘miserably short’ of establishing a case of fraud on the part of GK as seller/beneficiary, or of notice of such fraud on the part of SCB, while acknowledging the right of Montrod to renew the application before a Commercial Judge if and when further evidence became available.
By the end of May a further witness statement by Mr Hoory had expanded on his allegations. On various dates between 4 May and 22 May 2000 inclusive, the maturity dates for payment in respect of the various sets of documents matured. At the end of May, witness statements for GK were served to the effect that GK had at all relevant times dealt with persons whom they believed to be acting on behalf of Ballaris as buyers, that they believed Montrod had been involved in the transaction by Ballaris in relation to the opening of the credit, and that Montrod had appropriate funds or security from Ballaris. They had been unaware that the requirement for a certificate inspection was intended to act as a ‘locking clause’ which was not an arrangement they would have accepted had they known of it. They believed that, as a result of communications between Ballaris and GK, one of GK’s employees could properly sign the inspection certificates. The consignments of pork had been despatched and delivered to the Russian buyers between 7 and 24 March 2000 and no complaints had been raised by the buyer. In respect of half the deliveries, GK had sold its right to payment under the credit to Commerzbank in accordance with the discount arrangement.
On 7 June SCB made payment to Commerzbank of US$ 498,311.51 in the light of the failure of Montrod’s application before David Steel J and the absence of any renewed application upon the basis of such further evidence which had become available. In relation to that evidence, it was the evidence of Mr Thompson, SCB’s Operations manager, that he considered on any view it could not be said that it was clear and established fraud, having concluded that there was no evidence of any dishonesty on the part of GK and Commerzbank.
THE NULLITY ISSUE
Following his judgment, the judge made an order by which he (i) struck out Montrod’s Particulars of Claim in which Montrod sought a declaration against SCB and Fibi that no certificates of inspection had been issued and signed which were capable of satisfying the relevant condition in the letter of credit (ii) gave judgment for SCB against Fibi for US$ 498311.51 plus interest (to date of judgment) of US$ 18196.92 (iii) gave judgment for Fibi against Montrod in the like sums. That result inevitably followed from his finding that there was no proof of fraud on the part of GK and that the so-called ‘nullity exception’ argued for by Montrod was not an exception recognised by English law as entitling a bank to refuse payment under a letter of credit in the face of documents conforming ‘on their face’ with those stipulated for under the terms of the credit. As already indicated, the judge’s finding of ‘no fraud’ on the part of GK is not challenged on this appeal; the sole issue before us in respect of paragraphs 1-3 of the judge’s order is whether or not he was correct in his understanding and application of the law so far as the nullity exception is concerned.
The formulation of the so-called ‘nullity exception’ as advanced before the judge was as follows:
If, by the time of full payment (or the time when a bank irrevocably commits itself to a third party who has taken in good faith, if earlier), the only reasonable inference is that one (or more) of the documents […] presented under the credit is not what it appears on its face to be, but is a nullity, then the bank is not obliged to make payment under the credit.
Mr Jones QC, on behalf of Montrod, has acknowledged that, if the court regards that formulation as unnecessarily wide to do justice in the instant case, his purpose would be equally well served if there were inserted within the square brackets indicated in the quotation above the additional words ‘created by the beneficiary and’. Mr Jones submits that the broad issue of importance is whether a beneficiary should be entitled to insist upon payment under a letter of credit in circumstances where he has presented a document which, prior to payment, he knows is not a genuine document issued under the authority of the person purporting to make it. On the alternative formulation, the issue narrows to the question whether a beneficiary who is himself responsible for the (albeit bona fide) presentation of a false document should nevertheless be able to insist on payment once he is aware of its falsity and/or unauthorised nature.
THE DECISION BELOW
The judge rejected Montrod’s arguments. He held that there was no authority which supported the existence of such a nullity exception, apart from certain dicta of Lord Diplock in United City Merchants (Investments) Limited –v-Royal Bank of Canada [1983] 1 AC 168 which he described as ‘very slender support’ for the proposition advanced. He also made clear that the ‘nullity exception’ was not supported by UCP 500, the terms of which were imported into the letter of credit. Finally he stated that it did not form part of English law, observing that:
“It is unsupported by authority. It provides a further complication where simplicity and clarity are needed. There are problems in defining when a document is a nullity. The exception could have unfortunate consequences in relation to rights of third parties.”
UCP 500
Before turning to the submissions of the parties, it is convenient to set out the relevant provisions of UCP500 which, by their incorporation into the credit became binding upon all the parties.
Article 3 (Credits v Contracts) spells out the principle of autonomy whereby a documentary credit operates independently of the underlying transaction. It provides:
“a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s), or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
b. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank.”
Article 4 (Documents v. Goods/Services/Performances) provides that the parties concerned deal with documents and not with goods services or other performances to which the documents may relate.
Article 9 (Liability of Issuing and Confirming Banks) provides that:
“a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:
(i) if the Credit provides for sight payment to pay at sight:
(ii) if the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit …
b. A confirmation of an irrevocable Credit by another bank (the ‘Confirming Bank’) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
(i) if the Credit provides for sight payment – to pay at sight;
(ii) if the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit …”
Article 13 (Standard for Examination of Documents) provides:
“a. Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit…
b. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly …
c. If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them”
Article 14 (Discrepant Documents and Notice) provides by paragraph a that an Issuing Bank must reimburse any other bank which it has authorised to pay ‘against documents which appear on their face to be in compliance with the terms and conditions of the Credit’.
Article 14b provides that:
“Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents.”
Article 14c provides that:
“If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy (ies). This does not, however, extend the period mentioned in sub-Article 13b.”
Article 14d provides that:
“i If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.
ii Such notice must state all discrepancies in respect of which the bank refuses the documents …”
Article 14e provides that:
“If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this article …. [it] … shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.”
Article 15 (Disclaimer on Effectiveness of Documents) provides that banks assume ‘no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document … or for the good faith or acts or omissions, solvency, performance or standing of .. any other person whomsoever’.
The combination of the autonomy principle and the rule that the banks concerned deal in documents and not in goods (Articles 3 and 4), together with the issuing bank’s undertaking of payment if the stipulated documents presented conform with the terms of the credit (see Article 9) plainly entitled GK as beneficiary to obtain, and obliged SCB as issuing bank to make, payment against the documents presented, provided that they complied ‘on their face’ with the requirements of the credit (see Articles 13a. 14a. 14b and 14c). It has not been, and plainly could not be, argued on this appeal that the documents presented and, in particular, the inspection certificates were other than compliant on their face with the requirements of the credit. Leaving aside for a moment the exception of fraud on the part of the beneficiary (which the judge held not to exist) the liability of SCB to make payment under the UCP 500 terms is clear.
Neither as a matter of general principle, nor under UCP 500, is an issuing bank obliged to question or investigate the genuineness of documents which appear on their face to be documents the nature and content of which comply with the requirements of the credit. So far as the common law is concerned, the position has been clearly stated in the House of Lords in Gian Singh & Co Ltd –v-Banque de L’Indochine [1974] 1 WLR 1234 per Lord Diplock at 1238:
“The fact that a document presented by the beneficiary under a documentary credit, which otherwise conforms to the requirements of the credit, is in fact a forgery does not of itself, prevent the issuing bank from recovering from its customer money paid under the credit. The duty of the issuing bank, which it may perform either by itself, or by its agent, the notifying bank, is to examine documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. The express provision to this effect in Article 7 of the Uniform Customs and Practice for Documentary Credits does no more than re-state the duty of the bank at common law.”
Article 7 referred to by Lord Diplock is now Article 13 of UCP 500. Not only is the necessity to examine the documents presented by the beneficiary limited to an examination of the documents alone (Article 14b) but, under Article 15, the bank assumes no liability or responsibility for the genuineness or legal effect of any such document. Finally, it is clear that there is a timetable laid down (a reasonable time not to exceed seven banking days following receipt of documents: see Article 13b and 14d) in which the issuing bank must examine the documents and indicate to the party submitting them whether it accepts or refuses them: see Article 14dii. If it does not refuse the documents within the seven days specified, then it is precluded from claiming that the documents are not in compliance with the terms and conditions of the credit (Article 14e). Thus, in this case, once the documents had been presented and accepted, or at any rate no intimation of rejection for discrepancy had been given within seven days of receipt, SCB were prima facie liable to pay under the credit on its maturity date. Accordingly, upon a straightforward application of the provisions of UCP 500, the liability of SCB as issuing bank to pay on maturity accrued seven days after presentation of the various sets of documents, well before the end of April 2000, such payments falling due on variousdates in May 2000 (see paragraph 20 above).
As already made clear, Montrod’s original allegation of fraud on the part of GK as beneficiary has not been pursued before us. There is no issue between the parties that, so far as the state of the authorities is concerned, no English court has yet held an issuing bank entitled to withhold payment under a letter of credit, against documents which on their face conform with the requirements of the credit, save on the ground of fraud of the beneficiary himself, or the person seeking payment. Nor is it in dispute that in England the fraud exception is part of the common law and that it is apt to apply despite the fact that UCP 500 makes no reference to, nor makes allowance for, such an exception. As was made clear by Lord Diplock in United City Merchant Bank (Investments) Limited –v- Royal Bank of Canada [1983] 1 AC 168:
“The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, ‘fraud unravels all’. The courts will not allow their process to be used by a dishonest person to carry out a fraud.”
The rationale of the fraud exception was more recently considered by Rix J in Czarnikow-Rionda –v- Standard Bank [1999] 2 Lloyds Rep 197 at 213. In that case in the course of his consideration of the claim for the grant of an injunction against an issuing bank and the prima facie need to find a substantive cause of action against the party enjoined, he put the basis of the fraud exception, at least as between the issuing bank and its customer, on the basis of an implied contractual term. He stated:
“The fact that the rationale of the fraud exception is the law’s prohibition on the use of its process to carry out fraud (per Lord Diplock in United City Merchant (Investments) Ltd –v-Royal Bank of Canada) may appropriately be viewed as an authoritative expression of the source of law of the implied limitation on a bank’s mandate … if the source of the power to injunct were purely the law’s interest in preventing the beneficiary from benefiting from his own fraud, I do not see why there should be the added requirement that the fraud be patent to the bank.”
Finally, it is not in dispute in respect of the fraud exception that:
“… it is nothing to the point that at the time of trial the beneficiary knows, and the bank knows, that the documents presented under the letter of credit were not truthful in a material respect. It is the time of presentation that is critical.” (emphasis added)
see Group Josie Re –v- Walbrook Insurance Co Ltd [1996] 1 WLR 1152 at 1161C per Staughton LJ.
The argument for Montrod that, where fraud on the part of the beneficiary cannot be established, there should nonetheless be room for a nullity exception in the case of a document which is worthless in the sense that it is not genuine and has no commercial value, whether as a security for the goods or otherwise), involves an undoubted extension of the fraud exception as hitherto propounded in the English authorities. If the basis of a fraud exception is that the court will only intervene in breach of the autonomy principle for the purpose of preventing or discouraging the perpetration of fraud on the part of the beneficiary or other presenting party, it is a clear extension to hold that presentation of a document which is itself a nullity for reasons which are not known to the beneficiary or issuing bank at the time of presentation, are nonetheless to be similarly treated.
The leading authority on the question is the United City Merchant case in which the court was concerned with a bill of lading which showed that shipment of the goods had been made on 15 December 1976, when it had in fact been made on 16 December, the last date for shipment provided by the credit being 15 December. That date had been inserted by an employee of the loading brokers to the carriers who acted fraudulently, knowing that the date inserted was false. Neither the sellers, nor their bankers (to whom they had assigned their interest under the credit), were aware of the fraud. Mocatta J found in favour of the seller’s assignees at first instance, having found no fraud on the part of the plaintiffs in the documents. Having considered, inter alia, the decision in Sztejn –v- J Henry Schroder Banking Corp 31 NYS 2nd 631 (1941) which authority is historically the foundation stone of English law in this regard (see Edward Owen Engineering Limited -v- Barclays Bank International Limited [1978] QB 159 at 169) he observed:
“The case is, therefore, vitally different from the Sztejn –v Schroder case approved by the Court of Appeal in the recent Edward Owen –v- Barclays Bank case. Where there has been personal fraud or unscrupulous conduct by the seller presenting the documents under the letter of credit, it is right that a bank should be entitled to refuse payment against apparently conforming documents on the principle ex turpi causa non oritur actio. But here I have held that there was no fraud on the part of the plaintiffs, nor can I, as a matter of fact, find that they knew the date on the bills of lading to be false when they presented the documents.”
In the House of Lords, the argument against the sellers was ‘that a confirming bank is not under any obligation legally enforceable against it by the seller/beneficiary of a documentary credit, to pay to him the sum stipulated in the credit against presentation of documents, if the documents presented, although conforming on their face with the terms of the credit, nevertheless contain some statement of material facts that is not accurate’. This argument was rejected by Lord Diplock. He resoundingly affirmed the autonomous nature of the contracts arising in connection with the letter of credit and their independence of any dispute in relation to the underlying contract as affecting the right of a seller/beneficiary to payment under the letter of credit on presentation of conforming documents and stated:
“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.” (183G)
He went on to state the ‘ex turpi causa’ basis of the exception, as already quoted at paragraph 39 above and stated that acceptance of a proposition:
“which does not call for knowledge on the part of the seller/beneficiary of the existence of any inaccuracy would embrace the fraud exception and render it superfluous.” (184D)
For reasons which he subsequently elaborated, Lord Diplock stated:
“to assent to it would, in my view, undermine the whole system of financing international trade by means of documentary credits.” (184D)
Having referred to Article 9 of the Uniform Customs (now to be found in Article 15 of UCP 500) he observed:
“It would be strange from the commercial point of view, although not theoretically impossible in law, if the contractual duty owed by confirming and issuing banks to the buyer to honour the credit on presentation of apparently conforming documents despite the fact that they contain inaccuracies or even are forged, were not matched by a corresponding contractual liability of the confirming bank to the seller/beneficiary (in the absence of course of any fraud on his part) to pay the sum stipulated in the credit upon presentation of apparently conforming documents.” (184H)
Lord Diplock went on to deal with what he characterised as the ‘half-way house’ involved in the proposition accepted by the Court of Appeal which he said lay:
“… not only half-way between the unqualified liability of the confirming bank to honour a documentary credit on presentation of documents which upon reasonably careful examination appear to conform to the terms and conditions of the credit, and what I have referred to as the fraud exception to this unqualified liability which is available to the confirming bank where the seller/beneficiary presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his own knowledge are untrue; but it also lies halfway between the fraud exception and the broad proposition favoured by the confirming bank with which I have hitherto been dealing. The half-way house is erected upon the narrower proposition that if any of the documents presented under the credit by the seller/beneficiary contain a material misrepresentation of fact that was false to the knowledge of the person who issued the document and intended by him to deceive persons into whose hands the document might come, the confirming bank is under no liability to honour the credit, even though, as in the instant case, the persons whom the issuer of the document intended to, and did, deceive included the seller/beneficiary himself … what rational ground can there be for drawing any distinction between apparently conforming documents that, unknown to the seller, in fact contain a statement of fact that is inaccurate where the inaccuracy was due to inadvertence by the maker of the document, and the like documents where the same inaccuracy had been inserted by the maker of the document with intent to deceive, amongst others, the seller/beneficiary himself?” (186H-187C)
Lord Diplock observed that the Court of Appeal had reached its halfway house by starting from the premise that a confirming bank could refuse to pay against a document that it knew to be forged even though the seller/beneficiary had no knowledge of that fact, and by reasoning from that premise that, if forgery by a third party relieved the confirming bank of liability to pay the seller/beneficiary, then fraud by a third party ought to have the same consequence. He went on to state:
“I would not wish to be taken as accepting that the premiss as to forged documents is correct, even where the fact that the document is forged deprives it of all legal effect and makes it a nullity, and so worthless to the confirming bank as security for its advances to the buyer. This is certainly not so under the Uniform Commercial Code as against a person who has taken a draft drawn under the credit in circumstances that would make him a holder in due course, and I see no reason why, and there is nothing in the Uniform Commercial Code to suggest that, a seller/beneficiary who is ignorant of the forgery should be in any worse position because he has not negotiated the draft before presentation. I would prefer to leave open the question of the rights of an innocent seller/beneficiary against the confirming bank when a document presented by him is a nullity because unknown to him it was forged by some third party; for that question does not arise in the instant case. The bill of lading with the wrong date of loading placed on it by the carrier’s agent was far from being a nullity. It was a valid transferable receipt for the goods giving the holder a right to claim them at their destination, Callao, and was evidence of the terms of the contract under which they were being carried.” (emphasis added) (187G-188B)
In addition to the passage emphasised in italics above, which Mr Jones relies on in support of Montrod’s argument, he cites also various dicta culled from the authorities. In particular he relies upon the observation of Ackner LJ in the United City Merchants case at [1982] 1 QB 246G:
“A banker cannot be compelled to honour a credit unless all the conditions precedent have been performed, and he ought not to be under an obligation to accept or pay against documents which he knows to be wastepaper. To hold otherwise would be to deprive the banker of that security for his advances which is a cardinal feature of the process of financing carried out by means of the credit: see Gutteridge and Megrah, the Law of Bankers’ Commercial Credits, 6th ed (1979) p.142”
Mr Jones has also referred us to the observation of Parker LJ in GKN Contractors Limited –v- Lloyds Bank PLC (1985) 30 BLR 48 at 63:
“There can, however, clearly be cases where, albeit the ultimate beneficiary was not fraudulent, the bank itself may have been fraudulent. The claim presented by the ultimate beneficiary may have been presented in good faith and honesty albeit owing to some mistake [it] was an invalid claim. In such a case, if the invalidity of the claim was known to the bank which received it, it appears to me that, if that bank were to pass on the claim as a valid claim and demand payment, it would be guilty of fraud which would justify non-payment of the demand, notwithstanding that the demand on its face appeared to be valid.”
Finally, in the recent unreported case of Consolidated Oil Limited –v- American Express Bank (C.A. 21 January 2000), a case in which the validity of a demand made under a performance guarantee was in issue on the basis that the Committee in whose name the demand was made was no longer in existence, Clarke LJ observed:
“In addition, it (the bank) could not properly pay if the only realistic inference on the material available was that M. Brou could not honestly have believed in the validity of the demand or that the Committee no longer existed, or that M Brou no longer had the authority of the Committee even if it did exist.”
It is also to be noted that, immediately following the passage quoted, Clarke LJ added:
“However, as I have already indicated, the claimant cannot show that that is the only realistic inference. It is well settled in cases of this kind that a bank is under no duty to investigate whether there is fraud. To impose such a duty upon a bank in the position of the bank here would, as I see it, deal a serious blow to the ordinary processes of international banking and international commerce. In all the circumstances, I have reached the conclusion that the claimant has not established a sufficiently arguable case that the bank would be in breach of any duty owed to it if it were to pay.”
In the context in which they were uttered, it does not seem to me that the dicta relied on in those cases other than the United City Merchants case, provide any assistance in relation to the argument placed before us. All arise in cases where the argument raised and considered related to the fraud exception; no nullity exception, as such, was under discussion. In the GKN case, Parker LJ was considering fraud by a bank rather than by a beneficiary and was envisaging the case of a demand made under a performance guarantee by a party whom the bank knew not to be the party named as the beneficiary entitled to make the demand. He was thus not considering the case of a document which, at the time it was tendered and accepted was, unknown to the bank, false or made without authority, but a case involving fraudulent conduct by the bank itself in accepting a claim known to be made by a person not entitled to make it and passing it on as a valid claim without disclosing the position to the bank’s principal. In the Consolidated Oil case, Clarke LJ was, in the passage relied on, dealing with a not dissimilar point going to the existence and entitlement of the named beneficiary at the time of making his demand and was in any event propounding an exception where the only realistic inference was one of fraud on the part of the beneficiary.
I consider that the judge was correct in the decision to which he came. The fraud exception to the autonomy principle recognised in English law has hitherto been restricted to, and it is in my viewdesirable that it should remain based upon, the fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment under and in accordance with the terms of the letter of credit. It should not be avoided or extended by the argument that a document presented, which conforms on its face with the terms of the letter of the credit, is nonetheless of a character which disentitles the person making the demand to payment because it is fraudulent in itself, independently of the knowledge and bona fides of the demanding party. In my view, that is the clear import of Lord Diplock’s observations in Gian Singh and in the United City Merchants case, in which all their Lordships concurred. As I understand it, Lord Diplock was of the view that a seller/beneficiary who was ignorant of forgery by a third party of one of the documents presented, or of the fact that the document contained a representation false to the knowledge of the person who created it, should not be in a worse position than someone who has taken a draft drawn under a letter of credit in circumstances which rendered him a holder in due course. While he left open the position in relation to a forged document where the effect of the forgery was to render the document a ‘nullity’, there is nothing to suggest that he would have recognised any nullity exception as extending to a document which was not forged (i.e. fraudulently produced) but was signed by the creator in honest error as to his authority; nor do I consider that such an exception should be recognised.
That being so, I do not consider that the fact that in this case it was the seller/beneficiary himself who created the document said to be a nullity, should of itself disentitle him to payment, assuming (as the judge found) that such creation was devoid of any fraudulent intent and was effected in the belief that GK enjoyed the authority of Montrod, as applicant for the credit, to sign and issue the certificate. Although the circumstances were highly unusual, they may nonetheless be regarded as no more than an illustration of the wide variety of circumstances in which documents come into existence in a commercial context which do not necessarily reflect the factual situation but which parties may nonetheless employ as a convenient means of progressing a particular transaction. If, in the circumstances of a multipartite transaction, a seller/beneficiary is indeed led to believe that he has authority to create and present a certificate of inspection for the purpose of triggering payment by letter of credit, I do not see why he should be regarded as any less entitled to payment in accordance with UCP 500 than in a case where he receives from a third party a document regular on its face which has, unknown to him, been created without authority.
In my view there are sound policy reasons for not extending the law by creation of a general nullity exception. Most documentary credits issued in the United Kingdom incorporate the UCP by reference. Various revisions of the UCP have been widely adopted in the USA and by United Kingdom and Commonwealth banks. They are intended to embody international banking practice and to create certainty in an area of law where the need for precision and certainty are paramount. The creation of a general nullity exception, the formulation of which does not seem to me susceptible of precision, involves making undesirable inroads into the principles of autonomy and negotiability universally recognised in relation to letter of credit transactions. In the context of the fraud exception, the courts have made clear how difficult it is to invoke the exception and have been at pains to point out that banks deal in documents and questions of apparent conformity. In that context they have made clear that it is not for a bank to make its own enquiries about allegations of fraud brought to its notice; if a party wishes to establish that a demand is fraudulent it must place before the bank evidence of clear and obvious fraud (see Edward Owen –v- Barclays Bank International Ltd [1978] QB 159 c.f. Turkiye Is Bankasi A.S. –v- Bank of China [1996] 2 Lloyd’s Rep 611 per Waller J at 617). If a general nullity exception were to be introduced as part of English law it would place banks in a further dilemma as to the necessity to investigate facts which they are not competent to do and from which UCP 500 is plainly concerned to exempt them. Further such an exception would be likely to act unfairly upon beneficiaries participating in a chain of contracts in cases where their good faith is not in question. Such a development would thus undermine the system of financing international trade by means of documentary credits.
I have concluded that there is and should be no general nullity exception based upon the concept of a document being fraudulent in itself or devoid of commercial value. I would only add, with reference to Lord Diplock’s reservation, that I would not seek to exclude the possibility that, in an individual case, the conduct of a beneficiary in connection with the creation and/or presentation of a document forged by a third party might, though itself not amounting to fraud, be of such character as not to deserve the protection available to a holder in due course. In this connection, I note the reference by Mocatta J in the United City Merchants case to ‘personal fraud’ or ‘unscrupulous conduct’ on the part of the seller presenting documents for payment, a remark upon which Lord Diplock made no adverse comment when approving the original judgment on the documentary credit point. In this connection, we have had brought to our attention the decision of the High Court of Singapore in Lambias (Importers and Exporters) Co PTE Limited –v- Hong Kong & Shanghai Banking Corporation (1993) 2 SLR 751, in which the defendant bank rejected documents tendered under a letter of credit which included a quality and weight inspection certificate required to be countersigned by a named individual. The court held that the certificate contained discrepancies which entitled the bank to refuse the documents tendered and went on to find that the inspection certificate was in any event a nullity in that, not only did it fail to state the particulars of the goods and their quality and weight, but that, having been issued by the beneficiary instead of the applicant, it had been countersigned by an impostor. Having considered the observations, and in particular the reservation, of Lord Diplock in the United City Merchants case and the particular facts before the court in relation to the plaintiffs, who had themselves introduced the countersignatory to the bank as the person named, the court observed:
“The law cannot condone actions which, although not amounting to fraud per se, are of such recklessness and haste that the documents produced as a result are clearly not in conformity with the requirements of the credit. The plaintiffs in the present case are not guilty of fraud, but they were unknowingly responsible for having aided in the perpetration of the fraud. In such a case, where the fraud was discovered even before all other documents were tendered, I think it is right and proper that the plaintiffs should not be permitted to claim under the letter of credit.”
While such a finding was not necessary to the outcome of the case, it fell within the reservation of Lord Diplock in the United City Merchants case and has certain attractions. However, it is not necessary for us to decide in this case whether it is correct. This is a case where the judge found neither recklessness, haste, nor blame in the conduct of GK. Furthermore, in the Lambias case the bank rejected the documents as non-compliant, whereas in this case SCB accepted the documents as compliant, having raised Montrod’s observations and reservations with Fibi before it did so. Fibi in turn accepted the documents when sent to them, making clear to Montrod that payment would be made unless a court order to prevent it were obtained.
In those circumstances, I consider that GK were entitled to payment and I would affirm the decision of the judge. Consequently, I would dismiss the appeal of Fibi in respect of the claim of SCB for reimbursement of the sum of US$ 498,311.51 paid to Commerzbank and the appeal of Montrod against the judgment obtained by Fibi for indemnity against the claim of SCB.
MONTROD’S NEW CLAIMS AGAINST GK
By the judge’s decision that Fibi was obliged to reimburse SCB and that Montrod must pay Fibi, the proposed reconstitution of the action with SCB as claimant against Fibi, Fibi claiming in turn against Montrod, was rendered unnecessary. However, that left outstanding Montrod’s application to make new claims against GK to recover what it had paid to Fibi. The judge therefore treated Montrod’s application to file a claim against GK under CPR Part 20 as an application for permission to amend its existing claim for a declaration against GK to include new claims as set out in a draft amended statement of case. Permission was opposed by GK on the grounds that the proposed claims had no real prospect of success.
The claims sought to be made in the draft case were various and some fell by the wayside as a result of the judge’s decision in relation to the nullity exception. However, the pleas relevant to this appeal were the following:
(1) A claim in negligence to the effect that:
“By its agreement to the terms of the letter of credit Grundkotter assumed a duty to Montrod to exercise reasonable skill and care in the presentation to SCB of documents intended to induce a payment thereunder.”
This claim has been referred to as the primary claim in negligence.
(2) A further claim in negligence that:
“16. …. Alternatively, by its assumption of the right and responsibility to issue and sign the certificates of inspection purportedly on behalf of Montrod and thereafter to present the same to SCB without qualification, Grundkotter assumed a duty to take reasonable care to ensure that it had Montrod’s instructions so to do and that the documents so issued, signed and presented were valid.
17. Grundkotter failed to take reasonable or any care to ensure that it had such instructions prior to the issue, signature and presentation of each certificate of inspection to SCB. In the premiss it was in breach of the said duty of care on each such occasion.”
This has been referred to as the narrower negligence claim.
(3) A claim for breach of fiduciary duty pleaded as follows:
“18. Further or in the alternative, by holding itself out to third parties, in particular SCB, as Montrod’s agent for the purposes of issuing and signing the certificates of inspection, Grundkotter assumed a fiduciary duty to Montrod to act only in accordance with Montrod’s instructions to do so, alternatively to take reasonable care to ensure that it was acting only in accordance with such instructions. No such instructions were given by Montrod or by an authorised agent of Montrod. Grundkotter failed to take reasonable care to ensure that relevant instructions had been given to it by Montrod. In the premises, Grundkotter’s issue, signature and presentation to SCB of each certificate of inspection was a breach of the said fiduciary duty”
The primary claim in negligence
The judge rejected the alleged duty of care in the following terms:
“It cannot be argued that the beneficiary to a credit owes a duty to the applicant with regard to the documents which he presents. If the documents accord with the credit, the beneficiary is entitled to be paid. If they do not, they will be rejected unless the applicant agrees to waive the discrepancy. If the documents accord with the credit but there is nonetheless a breach of the underlying contract, which breach arises in connection with the documents, the buyer has a right of action against the seller/beneficiary arising from their contract. If the buyer is not the applicant, when the documents came through he will have had to reimburse the applicant just as he will have had to reimburse the issuing bank if he had been the applicant. The beneficiary does not owe a duty of care to the issuing bank. In the present case Montrod simply stands in the chain as a finance house. Its position is the same as that of Fibi bank save that Fibi Bank is one further up the chain. Grundkotter owed no duty of care to Standard Chartered in the presentation of documents. Nor did it owe such a duty to Fibi Bank or to Montrod.”
Montrod seek permission to appeal against that decision.
In my view the judge was right to refuse Montrod permission to advance the primary claim in negligence. The only fact pleaded in support of the duty of care was GK’s ‘agreement to the terms of a letter of credit’, the duty of care being expressed as a duty relating to all of the documents required to be produced by GK to SCB in order to obtain payment under the letter of credit. Montrod did not plead any express assumption of responsibility or duty, its case was simply based on an implied assumption of responsibility, arising by reason of GK’s agreement to the terms of the credit. So far as GK was concerned, the letter of credit (albeit issued on Montrod’s application) was procured by Ballaris pursuant to its obligation to pay GK under the supply contract by this form of payment. GK agreed to its terms as part of Ballaris’ performance of its payment obligation. GK’s acceptance of that performance did not imply or give rise to any assumption of responsibility by GK vis-à-vis Montrod. In seeking to ensure that documents presented to the issuing bank comply with the terms of the letter of credit, a beneficiary is pursuing his own commercial interests. He seeks to present compliant documents in order himself to be paid in the context of a transaction in which the commercial interests of the issuing bank and other parties involved in connection with the letter of credit are dealt with in the manner provided for under UCP 500, subject to the provisions of which they are aware that the transactions will be conducted and the commercial risk distributed.
Montrod’s arguments before us have not been based upon a Hedley Byrne type assumption of duty or responsibility as pleaded (see Henderson –v- Merrett Syndicates Limited [1995] 2 AC 145 per Lord Goff at 178E-181F) but upon foresight, proximity and the ‘fair, just and reasonable’ test in Caparo Industries PLC –v- Dickman [1990] 2 AC 605. In relation to that test, it has been submitted that it is both proper and appropriate to impose a duty of care on a beneficiary in respect of the presentation of documents intended to induce payment under a letter of credit in circumstances where the credit applicant (not being the buyer) has no alternative contractual relationship with the beneficiary through which any injustice can be addressed. However, that ignores the fact that the applicant for a credit who is not the buyer may normally be expected to have secured his position, and to be reliant upon a remedy against his buyer in respect of any of his liabilities arising from the letter of credit transaction. Further, on the assumption that Montrod did not confer, or authorise those who purported to confer, authority upon GK to sign the inspection certificates, it follows that those individuals were engaged in a conspiracy to defraud in respect of which Montrod could, if it saw fit, pursue legal remedies. The fact that it may not be practicable or financially expedient to pursue those remedies does not point to a lacuna in the law to be filled by implying a duty of care in a situation in which no responsibility was assumed by GK.
The real issue is which of two innocent parties should bear the risk of the fraud of a third party in a case of this kind. It is not the function of the law of negligence to provide a general remedy for the recovery of purely economic losses resulting from such a fraud. In any given situation, the remedy will only exist if the ingredients of a voluntary assumption of responsibility of the relevant type can be established: see Hamble Fisheries Limited –v- L. Gardner and Sons Limited [1999] 2 Lloyd’s Rep 1 at 8 (paras 3 and 4 of the judgment of Mummery LJ). In my view the mere fact that GK agreed to the terms of the letter of credit is insufficient material from which to imply any such assumption of responsibility. I would therefore affirm the judge’s decision in that respect.
The narrower negligence claim
In relation to the narrower negligence claim based on GK’s ‘assumption of the right and responsibility to issue and sign the certificates of inspection’, the judge granted Montrod permission to amend its claim in order to advance that case at trial. He stated his reasons as follows:
“I approach the novel and unusual situation in the present case by considering first the position of a party who is the agent of another in the sense that he regularly receives instructions from him and acts for him. It is not difficult to foresee circumstances in which such an agent should as part of a performance of his duty to his principal check or clarify his instructions. The checking of instructions where the circumstances call for it is one of the ordinary incidents of an agency situation. If the agent failed to do so, then he may be liable in damages if as a result his principal suffers damage. If the party is not an agent in the sense I have mentioned, but believes that he had authority to act for a principal which he does not in fact have, it seems to me arguable with the real chance of success that it would come under a similar duty.
So, on this application, so far as the existence of a duty in this form is concerned, I am in Montrod’s favour.”
GK asserts the judge’s conclusion was wrong for the following reasons.
(1) He was wrong to start with, or treat as analogous, the position of an agent who regularly acts for a particular principal. The duty of such agent to check his instructions arises from a real and pre-existing agency, and then only if the instructions are ambiguous. In the case of clear ‘ad hoc’ and first time instructions as in this case, there was no duty or occasion to check further. From GK’s point of view the instructions were not ambiguous. On GK’s state of knowledge the signature on the certificate was simply a written confirmation and assurance of the quality of the goods, GK having no knowledge of the ‘blocking’ purpose underlying Montrod’s stipulation in respect of such certificates.
(2) Montrod’s claim for negligence must be categorised either as performance of a negligent service by GK or the making of a negligent statement. It is not put on the latter basis and, as to the former, GK were not negligent in that they properly fulfilled the only task of which they were aware, i.e. to certify the quality of the goods, being ignorant of any need to check whether Montrod had been placed in funds.
(3) Causation cannot be established. SCB did not pay because GK had failed to check whether it had Montrod’s authority. The real cause of the loss was that Montrod had failed to obtain cash cover from Ballaris, which contingency was not foreseeable by GK. Thus GK’s failure to check merely provided the occasion for Montrod’s loss but did not cause it.
(4) For the same reasons that it would not be fair, just or reasonable to impose the wider duty of care, it would be wrong to impose the narrower duty, given that GK acted honestly at all times in agreeing to sign for Montrod and in presenting the documents under the letter of credit. It was not party to any information which might lead it to suspect the underlying purpose of Montrod,either from the buyer’s or on the face of the documents. Thus, however it is put, the negligence claim has no prospect of success.
The above submissions have considerable force and may well lead to success at trial. However, they ignore the fact that the only material so far before the court consists of the untested statements of the various witnesses, in particular those for GK, who will plainly be the subject of probing examination as to their experience, competence and state of knowledge as to letter of credit transactions, and what precisely they were told by the buyers or their representatives.
As to GK’s first submission, it is no part of GK’s case that Ballaris had any apparent authority to act or speak for Montrod, let alone to give instructions that GK should check the goods and exercise Montrod’s stated discretion to issue and sign the certificates in respect of which GK assumed authority. Thus, vis-à-vis Montrod, GK acted in the role of self-appointed agents. That being so it is well arguable that, in carrying out the role and exercising the authority they had assumed, they owed Montrod duties analogous to those of an agent. Whether or not it was helpful for the judge to consider the position where there was a pre-existing agency, it does not seem to me possible to say that, in the circumstances of the case as they may emerge at trial, Montrod has no prospect of successfully establishing that, before shipping and/or exercising the role of agent in relation to the certificates of quality, GK should have checked the fact that, and the circumstances in which, they should exercise such authority, in the light of the (somewhat ambiguous) provision that Montrod had a discretion in respect of the issue and signature of the certificates.
As to GK’s second submission, the negligence complained of is GK’s breach of the duty as purported agent to check and clarify its authority and/or the extent of its instructions in the circumstances of doubt and ambiguity which, on Montrod’s case, existed (in respect of which it is noteworthy that GK in part sought advice from Commerzbank); Montrod does not allege negligence in the course of rendering a specific service. Honesty is not relevant to the question of negligence in that respect.
As to GK’s third submission, it seems to me at least arguable that it was foreseeable that Montrod would not exercise its discretion to sign and issue a certificate unless it was in funds, or at least adequately secured, vis-à-vis Ballaris and that the damage was therefore not too remote.
As to GK’s fourth submission, depending upon the position as it emerges at trial, I do not consider that it can at this stage be decided that it would not be fair, just and reasonable to impose liability on GK for breach of duty in a situation in which (ex hypothesi) by its own incompetence it created a document without authority and thereby procured a payment to which it was entitled at the expense of the person in whose name the document was executed. The question in respect of the narrower duty is not whether, simply by agreeing to the letter of credit transaction, GK assumed a duty, but whether, by agreeing to an unusual procedure in respect of certification at the request of the buyer without enquiry as to whether the procedure requested engaged the authority and consent of the applicant for credit, GK both assumed and failed to discharge its responsibility vis-a-vis the applicant. Short of agreement between the parties, it does not seem to me that that issue can or should be disposed of without a trial. I therefore would refuse GK’s application for leave to appeal in this respect.
FIDUCIARY DUTY
The judge rejected Montrod’s pleaded claim for breach of fiduciary duty in the following terms:
“If this claim is intended to give the same remedy as the claim in negligence then it adds nothing. In Bristol & West Building Society –v- Mothew [1998] Ch 1 at 16 Millet LJ stated:
‘The expression ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences different from those consequent upon the breach of other duties.’
In Henderson –v- Merett Syndicates Limited [1995] 2 AC 145 at 205 Lord Browne-Wilkinson stated:
‘The liability of a fiduciary for the negligent transaction of his duty is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others.’
Mr Jones referred to Phipps –v- Boardman [1965] Ch D 992 (Court of Appeal) [1967] AC 46 (House of Lords). But I do not think that the principles considered there have any application to the present circumstances.”
Thus it is apparent that the judge dismissed the claim for breach of fiduciary duty on the basis that it added nothing to the claim in negligence.
Before turning to the question of whether that was an appropriate course, it seems to me clear that where someone puts himself in the position of a self-appointed agent in relation to the affairs and interests of another he is liable to be regarded as a fiduciary in respect of the exercise of his powers in the name of that other. That seems to me inherent in the judgments of the Court of Appeal in Phipps –v- Boardman [1965] 1 Ch 992 at 1017F-1018E per Lord Denning MR and at 1030 DF per Pearson LJ; see also English –v- Dedham Vale Properties Limited [1978] 1 WLR 93. Montrod argues that this is such a case. Reliance is placed on GK’s purported exercise of Montrod’s discretion, its representation to SCB that its signature was that of Montrod in order to demand money from a bank which ultimately Montrod was liable to reimburse, and its continued demand for payment even when it knew and accepted that it had submitted false certificates; all are said to be breaches of duty of a fiduciary nature. While the judge held that GK were not guilty of fraud, it seems to me that those are arguments which are in principle open to Montrod in the circumstances of this case and, since the application was made at an early stage in the proceedings and did not raise matters which would not require to be investigated in any event in relation to the narrower claim in negligence, it is difficult to see why amendment was not permitted. In the event the judge rejected the plea on the basis that it would add nothing to the remedy sought in negligence.
We have received lengthy submissions from Mr Choo-Choy for GK as to why the judge was correct to take that view. He has argued that, since there is no claim for a secret profit (the matter of principle concerned in Phipps –v- Boardman and English –v Dedham Vale) nothing useful can be added to the case via the fiduciary duty route. Nonetheless, Montrod seeks to claim not only damages for common law negligence in the amount of the sum which it is liable to pay Fibi, but also lays claim to the sum paid by, or at the direction of, SCB to GK as a sum held in trust for Montrod for which GK is liable to account. It is at least arguable that recovery on the basis of breach of fiduciary duty will lead to a more beneficial interest rate. In my view, the only vice of this amendment is that if, in truth, it adds nothing to the plea in negligence, argument upon the point of principle will lead to a relatively short increase in court time and (it may be) an increase in costs. I do not think that the former consideration is sufficient to outweigh the opportunity for Montrod to air its case fully and the latter may be compensated for within the order for costs made at trial, should the court think it appropriate to do so.
I would therefore grant Montrod’s application for permission to appeal, allow the appeal and permit the amendment sought to be made together with any appropriate adjustment to the claim for relief.
Sir Martin Nourse:
I agree with the judgment of Lord Justice Potter and with the orders proposed by him.
Lord Justice Thorpe:
I agree.
Order: application allowed.
Banco Santander SA v Bayfern Ltd
[1999] EWHC 284 (Comm)
Langley J
Santander sent to Paribas the documents received from Bayfern under the letter of credit. Santander paid the sum of US$ 19,667,238.84 into Bayfern’s account at the Royal Bank of Scotland on June 17. On June 24 Paribas informed Santander of a message received from Saybolt via Napa Petroleum that the Saybolt certificates of quality and quantity “should be considered to be false”. Santander obtained asset freezing relief against Bayfern that evening with the consequence that approximately US$ 14m is frozen in Bayfern’s account at the Royal Bank of Scotland.
There are several issues in the proceedings (which have been discontinued against Royal Bank of Scotland ) including whether there was any fraud, if so when it was known, and as to other alleged discrepancies in the documents. For the purpose of the issues before me it is to be assumed that Santander was not aware of any fraud when it confirmed the letter of credit or on June 17 when it paid the discounted sum to Royal Bank of Scotland but that there was fraud and it was known to both banks prior to November 27, 1998 the maturity date of the letter of credit.
THE EVIDENCE
The evidence was short. Santander called the head of Structured Trade and Commodity Finance of the bank’s London branch, Mr MacNamara. Each side called an expert banking witness with particular experience in trade finance. Mr Turnbull gave evidence for Santander. Mr Turnbull is currently Managing Director of UBK Trade and Export Finance Ltd a wholly-owned subsidiary of the United Bank of Kuwait. He has widespread experience of trade finance, and is well-known and highly respected in his field. Mr Savage gave evidence for Paribas. I mean no disrespect in saying , as Mr Savage himself readily accepted, that his experience is more limited and substantially confined to his experience with his employers, Credit Agricole Indosuez, where he is now and has been since 1994 the Manager of the Trade Finance Department at the London Branch.
THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (UCP)
The letter of credit was subject to the UCP (1993 Revision). Articles 3 and 4 of the UCP provide for the well known rules that credits are separate transactions from the sales or other contracts on which they are based and that the parties deal with documents and not the performance of those contarcts. Article 3a provides in part that:
Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
Part of the difficulty in construing this Article and all the provisions of the UCP is that, at least in this jurisdiction, they have to be read subject to or qualified by the exception for established fraud to which I shall have to refer further.
Articles 9 and 10 reflect the four types of letter of credit recognised in the UCP.
Article 9 is entitled Liability of Issuing and Confirming Banks and so far as material provides:
a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:
i. If the Credit provides for sight payment – to pay at sight;
ii. If the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the credit;
iii. If the Credit provides for acceptance:
a. By the Issuing Bank – to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,
or
b. ….
iv. If the Credit provides for negotiation – to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit ….
b. A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or reqest of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
i. If the Credit provides for sight payment – to pay at sight;
ii. If the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;
iii. If the Credit provides for acceptance:
a. By the Confirming Bank – to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity,
or
b. ….
iv. If the Credit provides for negotiation – to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit ….
Thus:
(A) The obligations of the Issuing Bank and the Confirming Bank mirror each other and are cumulative (in addition to);
(B) In the case of a deferred payment Credit (as here) the obligation is to pay on the maturity date in contrast to payment at sight;
(C) In the case of acceptance credits or credits available by negotiation the obligation is to accept and pay Drafts or to negotiate documents presented under the credit. Negotiation is defined in Article 10.b.ii.
Article 10 is entitled Types of Credit. It provides:
a All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
b.i. Unless the credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the “Nominated Bank”) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate ….
ii. Negotiation means the giving of value for Draft(s) and/or documents by the Bank authorised to negotiate ….
c. ….
d. By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.
Read in context, the Issuing Bank’s authority to the Confirming Bank to pay must I think be meant to cover both payment at sight and payment under a deferred payment undertaking at maturity. That is the obligation of the Confirming Bank under a deferred payment credit (Article 9.b.ii.) and it is the discharge of that obligation which the Issuing Bank is to “reimburse” in accordance with this Article of the UCP.
Mr Howard submits that it is Article 10d which provides for the payment obligation of the Issuing Bank to the Confirming Bank. Mr Hapgood submits (despite the formulation of paragraph 20A(2) of the Re-Amended Points of Claim ) that obligation is to be found in Article 14. So far as material, Article 14, under the heading “Discrepant Documents and Notice”, provides:
a. When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s) or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. To reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated,
ii. To take up the documents.
The remainder of the Article is concerned with the position where the documents presented are discrepant. In this case Santander had the role of both Confirming Bank and Nominated Bank. It is not an easy reading of this Article that it is intended to provide for the right of reimbursement by a Confirming Bank from an Issuing Bank when it has that dual role. That right is in my judgment expressly addressed in Article 10d. Moreover even if both Articles are addressing the same situation, an obligation to “reimburse” a party which has “incurred a deferred payment obligation” would I think as a matter of normal language fall to be discharged only when that latter obligation had itself been discharged by “payment at maturity”. On that basis, as one would expect, the two Articles say the same thing. The consideration for the Confirming or Nominated Banks’ undertaking to pay at maturity is that if and when it does so the Issuing Bank will reimburse it.
Article 14 is, I think, as Mr Howard submitted, directed at establishing that the Issuing Bank cannot complain about the documents presented under the credit once they have been taken up so as to dispute the Confirming and/or Nominated Bank’s right to incur the deferred payment obligation. But that obligation remains to pay at maturity with the right to be reimbursed if you do so.
ESTABLISHED FRAUD
In United City Merchants v Royal Bank of Canada [1983] AC 168, the House of Lords considered the question of fraud which would entitle a banker to refuse to pay under a letter of credit notwithstanding the rule requiring payment when the documents were in order on their face. In the course of his speech, with which the other members of the House agreed, Lord Diplock, at page 183, said:
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.
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. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or “landmark” case is Sztejn v J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631…. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all”. The courts will not allow their process to be used by a dishonest person to carry out a fraud.
In my judgment it must follow on the assumed facts, that had Bayfern in this case sought to enforce the obligation of Santander to pay the letter of credit at maturity Santander would have been entitled and on the present state of law bound to refuse to make that payment or lose its right to reimbursement. The fact that the documents had been taken up before any fraud was notified would not alter the fact that when it was sought to enforce the consequent payment obligation the claimant would be dishonestly seeking to use the process of the courts to carry out a fraud: see also The Society of Lloyds v CIB [1993] 2 LL Rep 579 per Saville J at page 581.
In European Asian Bank A.G. v Punjab and Sind Bank [1983] 1 LL Rep 611 the Court of Appeal considered a claim by the appellant bank against the issuing bank of a deferred payment letter of credit. The Court decided that on the evidence the issuing bank had unequivocally represented to the appellants that they were entitled to act as negotiating bankers under the credit and that they would be paid as negotiating bankers on the maturity date. The appellants had negotiated the credit by paying its discounted value to the Beneficiary. Between that date and the maturity date fraud, or alleged fraud, on the part of the Beneficiary was discovered and the issuing bank denied liability under the credit. The Court held that there was no arguable defence and entered a summary judgment against the issuing bank: see in particular the judgment of the court delivered by Robert Goff LJ (as he then was) at page 621.
A submission on behalf of the issuing bank that the appellants were merely agents for collection for the beneficiary (and so fixed with its fraud) was rejected, but at page 619, Robert Goff LJ added:
Even if it were a fact that, as at August 13 (when the appellants had forwarded the documents to the issuing bank to enquire whether they would accept them) the appellants had been appointed agents for collection by (the Beneficiary) it is beyond question that by August 20 the appellants had negotiated the letter of credit, and there is no suggestion that they acted otherwise than in good faith in so doing. Thereafter, in February 1980, they claimed payment from the respondents; and this was refused. In our judgment it is not open to the respondents, on these facts, to say against the appellants that they were justified in refusing payment on the ground that the documents were fraudulent or even forged. In our judgment the relevant time for considering this question is the time when payment falls due and is claimed and refused. If, at that time, the party claiming payment had negotiated the relevant documents in good faith, the issuing bank cannot excuse his refusal to pay on the ground that at some earlier time the negotiating bank was a mere agent for collection on behalf of the seller and allege against him fraud or forgery (if that indeed be the case) on the part of the beneficiary of the letter of credit.
The essential distinction between that case and this is that in the European Asian Bank case the appellants were or were to be considered to be negotiating bankers. The credit was type a.iv. under Article 9 of the UCP. In this case the credit is type a.ii.
As Robert Goff LJ said at page 621:
After all it was obvious that the appellants as negotiating bankers, would be discounting the letter of credit and so paying out a very large sum of money on the faith of these messages (that is the messages which constituted the representation that the appellants were entitled to act as negotiating bankers under the letter of credit).
Thus the case was one in which it was in effect held that the discounting of the letter of credit was expressly authorised by the issuing bank on terms that it would be liable at the maturity date for the undiscounted sum of the credit. That reflects the meaning of “negotiation” in Article 10b.ii. of the UCP and the express undertaking of the Issuing Bank to reimburse the negotiating bank for doing just that in Article 10d.
If such authorisation is to be found in the present case it has to be found in Article 14 or some custom or practice or implication as paragraphs 20A, 20B and 20C of the Re-Amended Points of Claim recognise. The difficulty facing Santander is however, that the UCP spells out the extent of express authorisation in a deferred payment credit in terms of payment at maturity: Article 9.b.ii. And, as European Asian Bank illustrates, the UCP expressly permits another type of credit, a credit “for negotiation”, which does authorise discounting and require the issuing bank to reimburse the “discounting” bank when it does so.
In this context I should add a word about acceptance credits as Mr Hapgood’s submission was that there was no good reason why the effect of established fraud should differ in the case of acceptance credits and deferred payment credits. An acceptance credit, however, expressly involves authority from the Issuing Bank to the Confirming Bank to accept drafts and pay them at maturity: Article 9.b.iii. a. The Issuing Bank’s obligation is to reimburse the Confirming Bank for undertaking those obligations. If the Beneficiary discounts the accepted draft to a bona fide third party the third party will be a holder in due course entitled regardless of subsequently discovered fraud to payment on the draft by virtue of the provisions of the Bills of Exchange Act 1882. If the Confirming Bank discounts its own acceptance it will become a holder of the draft and if it holds it at maturity the draft will in law then be discharged: section 61 of the Act. In either case therefore the express obligation of reimbursement of the Issuing Bank is effective. The authorised acceptance of the draft itself carries with it that consequence.
ASSIGNMENT AND PRACTICE
Finally, in the context of fraud by the Beneficiary, it is necessary because of the way the submissions have developed and because of the references to assignment in the documentation to which I have referred, to consider the effects of the assignment from Bayfern to Santander in this case and the evidence relating to the practice of discounting deferred payment credits.
The Beneficiary of a confirmed deferred payment letter of credit has the promise of both the Issuing Bank and the Confirming Bank to pay on the maturity date : UCP Article 9.b.ii.
If the Confirming Bank agrees to discount the proceeds of the letter of credit it is in effect agreeing to “buy” its own future promise to pay at a current price. Whether it does so and if so on what terms is, as all the witnesses agree, entirely a matter for its own decision in agreement with the Beneficiary and will be done (as it was done here) without any reference or notice to the Issuing Bank. For example, it could be done with or without recourse to the Beneficiary (in this case it was with recourse). On the evidence, it could also be done with or without taking an assignment and with or without any attempt to assess the credit or character of the Beneficiary to whom the discounted price was to be paid. Mr Turnbull said it was not his practice to ask for an assignment on discounting “his own” confirmation. But he acknowledged some banks would insist on an assignment, which he said was unnecessary as there was nothing to assign once the discounted payment had been made.
Santander did insist on an assignment as their own Manual required. Mr MacNamara described it as “belt and braces”. Mr Savage said taking an assignment was the normal practice. Although both experts agreed that market practice would not take account of the credit risk of the beneficiary they also agreed that banks would often assess the integrity of the beneficiary. In this case Santander in fact obtained a bank reference on Bayfern from the Royal Bank of Scotland. It is obvious that any bank contemplating discounting is in a position at least to seek to know who it is dealing with.
The experts are also agreed that it is (and was) common market practice in London to discount deferred payment letters of credit where the beneficiary requested it. Whether the beneficiary did request it would of course depend on all sorts of individual factors.
Counsel are not agreed on either the utility or effect of an assignment. Mr Hapgood’s first submission, indeed, is that the assignment was worthless because there was nothing to assign. He submits that the payment made by Santander to Bayfern on June 17 was “plainly intended by both parties to extinguish all Bayfern’s rights under the Credit, both against Santander and against Paribas.” He points to the report of Re Charge Card Services Ltd [1987] Ch 150 at page 175C/D where it is recorded that counsel conceded that a debt cannot be assigned in whole or in part to the debtor since such an assignment operates wholly or partially as a release. That he submits remains unaffected by the decision in Re BCCI SA (No 8) [1997] 4 All ER 568 at pages 575 to 578. Mr Hapgood also submits that in any event an assignee is not affected by the subsequent emergence of fraud on the principle that the claim of an assignee is not defeated by an unknown fraud which induced the debtor to enter into the relevant contract. The authority cited for this principle is the decision of the Court of Appeal in Stoddart v Union Trust Ltd [1912] 1 KB 181.
One context in which this question could arise directly is the forfaiting market. In simple terms a forfaiter may buy, also at a discounted price, the obligations of the issuing bank and confirming bank (if any) under a deferred payment letter of credit. In other words the forfaiter is an independent party to the Credit itself, albeit frequently a bank, and trades in trade paper by the purchase of the obligations it represents. The experts agree that there is a well established forfaiting market which deals in deferred payment undertakings both in London and elsewhere. They also agree that the documentation in such a case provides for the forfaiter to obtain an assignment from the beneficiary of its own rights under the credit and that the forfaiter will give notice that it has done so to the banks whose obligations it has bought. In such a case the basis in law on which the forfaiter is entitled to the proceeds of the credit must be the assignment as it is not a party to the credit.
Mr Howard, on the other hand, submits that an assignment does involve assigning valuable rights, the rights to a future payment from both the Issuing and Confirming Banks. In other words, that even in a case where the Confirming Bank is discounting or buying its own future obligation the position is the same as for a forfaiter. He also submits, on well known principles (see Chitty on Contracts, Vol. 1, paras 19-039 to 042) that an assignee takes subject to equities against the assignor, and thus that in both cases if the assignor had no right to payment, for example because the documents were forged, then the Confirming Bank and forfaiter cannot recover as they are in no better position than the assignor.
These counter submissions became of more importance in the course of the parties’ closing submissions because despite the fact that no claim was pleaded by Santander as assignee and therefore no reference to the effect of the assignment was expressly included in the issues ordered for preliminary trial both counsel agreed that the court should address the issue and, as it had been raised in the course of argument and Mr Hapgood indicated that if Santander was not succesful on any of its claims as formulated, it would pursue a claim as assignee, I agreed to do so.
At this stage I would simply record the following:
(1) It is agreed that the forfaiter’s legal rights are dependant on the efficacy of the assignment to it of the rights of the beneficiary.
(2) Mr Hapgood submits and it is his primary case that the discounting Confirming Bank’s rights are to be found in Article 14a of the UCP and only if he is wrong about that does he now seek to find them in the assignment.
(3) There is therefore in Santander’s own primary case a material difference in the legal basis for a claim by a forfaiter and a claim by a Confirming Bank which has discounted its own obligation.
(4) On any view the rights of a bona fide assignee of an obligation owed to an assignor who has been guilty of fraud in the context of that obligation are as a matter of law of some nicety. Yet, on the evidence of Mr Turnbull, it seems the forfait market has not appreciated this or, if it has, has chosen to run the risk.
(5) It is not easy to see why a Confirming Bank which discounts its own confirmation should be in any better or different position than the forfaiter, especially so where (as here) the discounting agreement with the Beneficiary is in effect on the same basis as a forfaiter would use.
(6) It is a matter of commercial indifference for the issuing bank whether the Beneficiary is able to or chooses to “discount” its rights under a confirmed deferred payment letter of credit with the confirming bank or a forfaiter. It will also be ignorant whether one or the other has in fact occurred. Thus, if the consequences in law are different, that will be so for no apparent commercial reason and without the knowledge of the Issuing Bank.
(7) There can be no doubt that in a case where no fraud is involved both the discounting Confirming Bank and the forfaiter must have an enforceable right to be “reimbursed” by the Issuing Bank.
(8) It was comforting to hear from both experts that the incidence of fraud in these situations is very rare indeed. Thus the extent of the problem, whilst when it arises no doubt capable of involving very large sums, is such that one might expect it to ameliorate Mr Turnbull’s expressed concerns about the effect on the market should Santander not be entitled to recover from Paribas. Moreover, as I have already said, the use of Credits for negotiation is an option and at the least it is agreed that the forfait market has and has always had, a “problem” in such cases but it has continued to grow and develop nonetheless. If as Mr Turnbull’s evidence suggests that was because forfaiters believed they were immune from fraud once they had “bought” the obligations under a deferred payment letter of credit then the belief was wrong.
(9) I accept that it is difficult for a Confirming or any bank to protect itself against fraud and that the UCP looks to the Applicant for the credit to do that. But the law is only that payment is to be refused in cases of established fraud known to the Bank before the due date for payment. That is not harsh. This case concerns the consequences when for its own reasons and without reference to the Issuing Bank or Applicant the Confirming Bank chooses to commit itself to making a payment before it is bound to do so.
THE SUBMISSIONS
Apart from the competing submissions on the Assignment Issue, which I have set out and consider below, the essential submissions on the core questions can I think be fairly summarised as follows.
Mr Hapgood submits that:
(1) Santander is entitled to be reimbursed by Paribas under Article 14a of the UCP regardless of the assumed fact that by November 27, 1998 it knew of established fraud by Bayfern. That is his primary case.
(2) In the alternative it is entitled to be reimbursed as assignee notwithstanding the assumed fraud.
(3) In the further alternative, as set out in paragraphs 20B and 20C of the Re-Amended Points of Claim Santander had “implied, usual or customary” authority to discount and there was an obligation on Paribas to reimburse Santander for having done so as a matter of market practice.
Mr Howard submits that:
(1) the obligation of an Issuing Bank to reimburse a Confirming Bank is to be found in Article 10d of the UCP and not Article 14a and in any event the Articles have the same effect which is that the right to reimbursement arises only at the maturity date.
(2) In the case where a Confirming Bank discounts its obligation and there is no fraud, its right to reimbursement arises at the maturity date as a matter of analysis on the basis that :
(i) its obligation to pay the Beneficiary is deemed in law to be fulfilled or to be discharged at that date as it will then owe the liability to itself; or, as a secondary case,
(ii) as assignee of the obligation of the Issuing Bank to pay the Beneficiary at that date, such an assignment being either express (as in this case) or arising by implication from an agreement to discount. But in either case knowledge of fraud prior to the maturity date entitles the Confirming Bank to refuse payment and disentitles it from reimbursement by the Issuing Bank.
(3) There is no evidence of any relevant market practice to justify Santander’s claims in paragraphs 20B and 20C.
CONCLUSIONS
ARTICLE 14a I have already expressed my view of this Article when considering the provisions of the UCP. In short, in my judgment Mr Howard is right and Mr Hapgood wrong in their submissions about it. The basic authority given by the Issuing Bank to the Confirming Bank in a deferred payment letter of credit is to pay at maturity. The consequent obligation to reimburse is to reimburse on payment being made at maturity. If at that time there is established fraud, there is no obligation on the Confirming Bank to pay nor on the Issuing Bank to reimburse. I cannot construe either Article 10d or 14a as entitling Santander to “reimbursement” for having incurred a deferred payment undertaking as opposed to paying it at maturity, as Mr Hapgood submits I should. That seems to me both to fail to recognise the existence and rationale of the established fraud exception and to be inconsistent with the normal meaning of the word reimbursement. Nor can I accept that the payment of the discounted sum discharged the obligations of Santander and Paribas under the Credit for the reasons stated below. I should make clear that it is no part of Mr Howard’s case or my reasoning that “discounting” of the payment obligation under a deferred payment letter of credit is a “breach of mandate” or that for some other reason (in the absence of established fraud) the Issuing Bank’s reimbursement obligation cannot be invoked. In my judgment Mr Howard is right in his submissions that:
(i) where the Confirming Bank discounts its own obligation, at maturity either it is to be deemed to make payment at that date or it is entitled to claim as assignee of the claims of the Beneficiary.
(ii) where a forfaiter discounts the Credit it is entitled to claim as assignee.
Assignment. (a) Despite the attraction of Mr Hapgood’s submission that an assignment to the debtor of his own obligation to pay extinguishes the debt and discharges it, I am not persuaded. First, the “debt” in question was owed by two parties (Paribas and Santander ) not just Santander and was payable only in the future (unlike the existing debts in the Re Charge Card Services case). Second, the expressed consideration for the payment of the discounted sum was the irrevocable and unconditional assignment to Santander of Bayfern’s rights under the Credit. Third, the agreement to discount and assign cannot be read as Mr Hapgood submits it is to be read as an agreement to discharge or, on payment of the discounted sum, as an actual discharge of the obligations of either Bank under the Credit. Indeed the agreement is inconsistent with such an outcome. The expressed purpose was to keep the Credit intact. Fourth, I do not see anything objectionable in one (Santander) of two parties (Santander and Paribas) liable for a future payment agreeing with the creditor (Bayfern) to acquire the creditor’s rights against the other (Paribas) on terms that his own obligation to make a payment in the future to the creditor is to be preserved so as to be treated as discharged at that future date and thus available then to trigger the obligation on the other debtor to reimburse him. That seems to me to have been the intention of both Santander and Bayfern expressed in the agreement and I do not see why the court should not give effect to it.
(b) The second question in relation to assignment which now arises is whether a claim by Santander as assignee of Bayfern would be sustainable on the assumed facts that Bayfern was guilty of fraud in submitting the documents under the Credit but that fraud was unknown to Santander at the time of assignment but known at the maturity date.
In my judgment the answer to this question is “No”. It is no surprise that Santander have not pleaded a claim on this basis. Stoddart’s case has been the subject of some criticism and can be distinguished : see Chitty para 19-040. On the assumed facts, Bayfern had no rights under the Credit and so nothing to assign to Santander. Unless (which is in reality the first question) Santander has an independent right to recover from Paribas, I do not think qua assignee Santander could obtain more than Bayfern had to give at the time of the assignment.
Custom and Practice. Mr Turnbull’s views are of course entitled to respect and in reaching the conclusions I have I have had them in mind. Essentially, however, I think they come to no more than a reflection of expectations on the part of Banks (or at least discounting banks with London operations) that it is safe to discount Credits and that they are not concerned with the bona fides of the Beneficiary. I cannot spell out from that any relevant custom or practice or the basis for the implication of any relevant contractual term. If I am right in my construction of the UCP it provides for the obligations undertaken in this case and there is nothing in Mr Turnbull’s evidence which can alter that. It also establishes what it was that Santander was authorised to do (“pay at maturity”) and no wider authorisation is justified on the evidence nor any of the ways in which Santander have sought to express the claim in paragraphs 20B or 20C of the Re-Amended Points of Claim. On the evidence there is no common practice even as regards the documentation where a Confirming Bank discounts its own confirmation and the incidence of fraud has been so slight that no practice in that context could exist. Nor, as I have said, in the related case of the forfait market, would it seem that whatever the expectation it reflects the reality.
It follows that on all the issues before the court in my judgment Paribas are right and Santander wrong.
THE ANSWERS TO THE ISSUES
I will hear the parties on the form of Order to be made in the light of this judgment and the fact that both have sought to refine the specific questions which were referred to the court. My essential conclusion is that on the assumption that Bayfern was guilty of fraud in the manner alleged and that was known to Santander before November 27, 1998 the risk of that fraud falls on Santander and not Paribas.
Beam Technology (Mfg) Pte Ltd v Standard Chartered Bank
[2002] SGCA 53
Court : Court of Appeal
Coram : Chao Hick Tin JA, Tan Lee Meng J
Counsel : Kenneth Tan SC, Niko Arthur Isaac and Tito Shane Isaac (Tito Isaac & Co) for the appellants, Toh Kian Sing and Tan Yew Beng David (Rajah & Tann) for the respondents
Relevant provisions
11 Turning now to the substantive issue, it is necessary that we should first set out the relevant provisions of UCP 500 which governed the LC in question:-
Article 3a
Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
Article 4
In credit operations all parties concerned deal with documents, and not with goods, …
Article 9(b)
A confirmation of an irrevocable Credit by another bank (the ‘Confirming Bank’) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank …
Article 13(a) & (b)
a. Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. ….
b. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.
Article 14 (a), (b), (c), (d) and (e)
a. When the Issuing Bank authorises another bank to pay … or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i to reimburse the Nominated Bank which has paid, … or negotiated,
ii to take up the documents.
b. Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, … must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. …
c. If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub-Article 13(b).
d. i. If the Issuing Bank and/or Confirming Bank, … decides to refuse the documents, it must give notice …. without delay but no later than the close of the seventh banking day following the day of receipt of the documents. …
ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.
e. If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article … the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.
Article 15
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; ….” (Emphasis added).
12 It is clear from these provisions of the UCP 500 that the opening of a confirmed LC 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: see also Hamzeh Malass & Sons v British Imex Industries Ltd [1958] 2 QB 127 at 129.
13 The banker is only concerned with documents and what the credit requires them to be, not with goods or the contract which requires them to be paid for. If he does what he is told, he is safe; if he departs from the terms and conditions of the credit, he acts at his own risk. He is not obliged to go behind the documents and to consider whether the terms of the underlying contract conforms to the terms of the LC or whether they have been or will be performed: see Article 3a of UCP 500 and Equitable Trust Co of New York v Dawson & Partners Ltd [1927] 27 Lloyd’s Rep 49.
14 Therefore, visual inspection of the actual documents presented is all that is called for. Of course, the bank must examine them with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of credit. A bank is under no duty to take further steps to investigate the genuineness of a signature which, on the face of it, purports to be the signature of the person named or described in the letter of credit: see Gian Singh & Co Ltd v Banque de l’Indochine [1974] 2 Lloyd’s Rep 1.
15 It is also settled law that where a confirming bank has paid on a credit in the face of prima facie compliant documents, the confirming bank, and in turn the issuing bank, are entitled to claim reimbursement from the applicant. This was unequivocally stated by Lord Diplock, delivering the opinion of the Privy Council in Gian Singh (at 757), in these terms:-
“The fact that a document presented by the beneficiary under a documentary credit, which otherwise conforms to the requirements of the credit, is in fact a forgery does not, of itself, prevent the issuing bank from recovering from its customer moneys paid under the credit. The duty of the issuing bank, which it may perform either by itself, or by its agent, the notifying bank, is to examine documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. The express provision to this effect in article 7 (now art 15 of UCP 500) of the Uniform Customs & Practice for Documentary Credits does no more than re-state the duty of the bank at common law.”
16 However, nowhere in this statement was the Privy Council addressing the situation where the confirming or issuing bank was aware, within the prescribed seven day period and prior to any payment being effected, that a material document tendered was a forgery and nullity. This was not an issue that was before the court in Gian Singh. Therefore, the opinion expressed therein, which on the face is broad, must be considered with care. Reasoning by analogy is not always appropriate. As will be discussed shortly, the House of Lords in a case in 1981 recognised that the issue was still open.
17 There is a dearth of authorities touching on this issue. It appears that there are only two cases which expressly dealt with the point although the facts there were not on all fours with the instant case. The first is United City Merchants (Investments) Ltd & Anor v Royal Bank of Canada & Ors [1981] 1 Lloyd’s Rep 604, where the bills of lading falsely stated that the goods were put on board the vessel on 15 December 1976 at London when in fact it was a day later, on the 16 December, and also not at London but at Felixstowe. The plaintiffs, the beneficiaries, were not aware of the falsehood. The question was whether those bills of lading were a forgery or were they to be treated as valid documents containing inaccuracies. In a sense each of the bills did tell a lie about itself – that it was executed on December 15, when in fact it was executed on December 16. It also contained two lies about its contents – the date of shipment and the place of shipment.
18 At first instance, Mocatta J held that unless there was personal fraud or unscrupulous conduct on the part of the seller plaintiffs, and there was none there, the bank must pay against documents which were prima facie conforming. His decision was reversed on appeal. Stephenson LJ, who delivered the leading judgment, said, after reviewing the authorities, (at p. 623):-
“But whether or not a forged document is a nullity, it is not a genuine or valid document entitling the presenter of it to be paid and if the banker to which it is presented under a letter of credit knows it to be forged he must not pay.”
19 Lord Justice Ackner, the second member of the quorum, put the issues presented in these terms (at p.628):-
If the signature on the bill of lading had been forged, a fact of which the sellers were ex hypothesi ignorant, but of which the bank was aware when the document was presented, I can see no valid basis upon which the bank would be entitled to take up the drafts and debit their customer. Mr Hirst was virtually obliged to accept this. A banker cannot be compelled to honour a credit unless all the conditions precedent have been performed, and he ought not to be under an obligation to accept or pay against documents which he knows to be waste paper. To hold otherwise would be to deprive the banker of that security for the advances, which is a cardinal feature of the process of financing carried out by means of the credit: see Gutteridge and Megrah, The Law of Bankers Commercial Credits, 6th ed., at p. 142.
20 However, on further appeal, the decision of the Court of Appeal, holding that the bank was not obliged to pay on the credit because the bills of lading contained falsehoods, was overturned by the House of Lords. The House restored the decision of Mocatta J. In coming to its decision, the House had regard to the following significant features. The goods sold were ready for shipment in the beginning of December 1976. It was intended that the goods would be shipped on a vessel due to arrive at Felixstowe on 10 December 1976. All parties had acquiesced to changing the loading port to Felixstowe instead of London. However, the arrival of that vessel at Felixstowe was cancelled and the loading brokers substituted it with another vessel scheduled to arrive only on 16 December 1976, one day after the latest date of shipment prescribed under the documentary credit. The goods were loaded on that day itself but the loading brokers, acting as agents for the carrier, put the date 15 December 1976 on the bills of lading as if that day was the day on which the goods were received on board. The brokers handed the bills to the sellers in return for payment of the freight. On 17 December, the documents were presented to the confirming bank for payment. Various points of objection relating to the bills of lading were taken. The upshot of it all was that amended bills, together with other documents, were re-presented to the bank on 22 December. The bank refused to pay because it had obtained information “which suggested that the shipment was not effected as it appeared in the bills of lading”. The trial judge found that an employee of the loading brokers deliberately made a false entry as to the date of shipment.
21 Lord Diplock, having noted that there was no direct authority on point, whether in the United Kingdom or the United States, went on to state that the issue had to be decided on first principles. He said that in such a nature of international trade, there were four separate but yet interconnected transactions: (i) the contract of sale and purchase; (ii) the contract between the buyer and the issuing bank; (iii) the arrangement between the issuing bank and the confirming bank and (iv) the contract between the confirming bank and the seller. The case only concerned the fourth contract.
22 Lord Diplock observed that the object of this system of confirmed irrevocable documentary credit was to give to the seller an assured right to be paid before he parted with control of the goods and that “does not permit of any dispute with the buyer as to the performance of the contract of sale being used on a ground for non-payment or reduction or deferment of payment.” However, he also said that the one established exception to the general statement of principle as to the contractual obligations of the confirming bank to the seller was where the seller “fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue …” The rationale for the exception was the principle “fraud unravels all”.
23 Lord Diplock further amplified that the contractual duty between the confirming bank and the issuing bank, and as between the issuing bank and the buyer under the credit, was “to examine with reasonable care all documents presented in order to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit” and if they so appeared, to pay on it. He referred to Article 7 of the then UCP (now Article 15 of UCP 500) which provided that neither the confirming bank nor the issuing bank assumed any liability or responsibility to one another or to the buyer “for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents.”
24 His Lordship also noted that there was a distinction between a document which was a nullity and that which only contained some inaccuracies. In respect of the former situation, his Lordship left the question open:-
“I would prefer to leave open the question of the rights of an innocent seller/beneficiary against the confirming bank when a document presented by him is a nullity because unknown to him it was forged by some third party.”
25 But in so far as the inaccuracy as to the date of shipment on the bills of lading was concerned, Lord Diplock was of the view that the bills were far from being a nullity. He said:-
“It was a valid transferable receipt for the goods giving the holder a right to claim them at their destination, Callao, and was evidence of the terms of the contract under which they were being carried.”
Thus the House allowed the appeal on the ground that the bills of lading were not null and void but only that they contained inaccuracies.
26 The question left open in United City Merchants came up for consideration in Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] 1 All ER (Comm) 368. There, the credit required the presentation of inspection certificates signed by the applicant for the credit, who had provided finance to the buyer of the goods. The buyer informed the seller, the beneficiary under the credit, that one of its employees should sign the inspection certificates on behalf of the applicant. The seller, honestly thinking that it had the applicant’s authority, signed the certificates on behalf of the applicant, and presented them for payment. In accordance with the terms of the credit, payment was to be effected 45 days after presentation of the documents. Before the expiry of the 45 day period, it became apparent that the applicant had not given any authority to the seller to sign the certificates. The bank nevertheless paid on it.
27 It was argued that the certificates were a nullity and as the bank knew of it before payment, the bank should not have paid the seller. At first instance, the Deputy High Court Judge (Deputy Judge) held that the seller did not act fraudulently when its representative signed the certificates and that the seller was entitled to payment. The issuing bank was, in turn, entitled to reimbursement from the applicant. The Deputy Judge was of the view that the banks need only consider the documents alone and should not take into account other matters. He felt that the fraud exception should be restricted to a case where there was fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment. He concluded by stating that –
“the nullity exception should and does form no part of English law. It is unsupported by authority. It provides a further complication where simplicity and clarity are needed. There are problems in defining when a document is a nullity.”
28 On appeal, Montrod argued that besides fraud on the part of the beneficiary, there should still, in law, be room for a nullity exception where a document tendered was worthless, which was really a natural extension of the fraud exception. The fraud exception allowed the court to intervene to prevent the perpetration of fraud on the part of the beneficiary or other presenting party. It was contended that surely the court should also intervene where the document presented was a nullity even though the beneficiary did not know it. However, Potter LJ, who delivered the sole judgment of the court, rejected the suggestion of a nullity exception. He said (at p. 273):-
“The fraud exception to the autonomy principle recognised in English law has hitherto been restricted to, and it is in my view desirable that it should remain based upon, the fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment under and in accordance with the terms of the letter of credit. It should not be avoided or extended by the argument that a document presented, which conforms on its face with the terms of the letter of the credit, is none the less of a character which disentitles the person making the demand to payment because it is fraudulent in itself, independently of the knowledge and bona fides of the demanding party. In my view, that is the clear import of Lord Diplock’s observations in Gian Singh and in the United City Merchants case, in which all their Lordships concurred. As I understand it, Lord Diplock was of the view that a seller/beneficiary who was ignorant of forgery by a third party of one of the documents presented, or of the fact that the document contained a representation false to the knowledge of the person who created it, should not be in a worse position than someone who has taken a draft drawn under a letter of credit in circumstances which rendered him a holder in due course. While he left open the position in relation to a forged document where the effect of the forgery was to render the document a ‘nullity’, there is nothing to suggest that he would have recognised any nullity exception as extending to a document which was not forged (i.e., fraudulently produced) but was signed by the creator in honest error as to his authority, nor do I consider that such an exception should be recognised.
That being so, I do not consider that the fact that in this case it was the seller/beneficiary himself who created the document said to be a nullity should of itself disentitle him to payment, assuming (as the judge found) that such creation was devoid of any fraudulent intent and was effected in the belief that GK enjoyed the authority of Montrod, as applicant for the credit, to sign and issue the certificate. Although the circumstances were highly unusual, they may none the less be regarded as no more than an illustration of the wide variety of circumstances in which documents come into existence in a commercial context which do not necessarily reflect the factual situation but which parties may none the less employ as a convenient means of progressing a particular transaction. If, in the circumstances of a multipartite transaction, a seller/beneficiary is indeed led to believe that he has authority to create and present a certificate of inspection for the purpose of triggering payment by letter of credit, I do not see why he should be regarded as any less entitled to payment in accordance with UCP 500 than in a case where he receives from a third party a document regular on its face which has, unknown to him, been created without authority.” (Emphasis added).
29 Potter LJ also thought that as a matter of policy, the UCP 500, which embodied the international banking practice, should be interpreted and applied to ensure certainty and precision. He felt that if the court were to create a general nullity exception, the formulation of which was insusceptible of precision, that would involve making undesirable inroads into the principles of autonomy and negotiability universally recognised in relation to letters of credit transactions.
30 At this juncture we should refer to a local first instance case, Mees Pierson N Bay Pacific (S) Pte Ltd & Ors [2000] 4 SLR 393, where one of the documents required for presentation to the confirming bank, a health certificate, was a forgery. At the time of presentation, neither the seller nor the confirming bank had knowledge of the forgery. The confirming bank accepted the documents and paid the sums under the credit. When it subsequently discovered the forgery, it sought to recover the sum from the seller. Rajendran J dismissed the bank’s claim on the basis that the bank had already accepted the documents and made payment under the credit. Further, it had also failed to give the necessary notice of rejection within the period stipulated under article 14(d) of the UCP 500. Rajendran J, however, expressed, obiter, the following opinion at 40 of the judgment:-
When a confirming bank makes a payment out under a commercial credit, the bank holds the documents as security for the payment. However, if the bills of lading are forged and therefore a nullity, the bank would not have any security. To require the bank to make payment when the bank knows that the bills of lading are a nullity is to require the bank to knowingly forgo its security. That would be tantamount to requiring the bank to honour the credit on terms less favourable to the bank than that envisaged under the credit arrangement. (Emphasis added).
Rajendran J would appear to have accepted the reasoning expounded by Ackner LJ in United City Merchants.
Our views
31 In summary, the current position of the law would appear to be this. The House of Lords in United City Merchants had left open the question whether there is a nullity exception although at the Court of Appeal all the three members of the quorum thought there was. In Montrod the Court of Appeal (of a different quorum) was inclined to the view that, apart from the traditional fraud exception (i.e., fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment), there was no separate nullity exception. In any case, even if there was such a nullity exception, it held that the certificate issued by the seller in Montrod in honest belief that he had the authority of the applicant of the LC could not be a nullity. Perhaps another way of differentiating Montrod from the present case is that there the certificate required was not an essential document but one touching on the question as to the quality of the goods sold. In short, there is no definite authority on point, although the views of the Court of Appeal in United City Merchants are no doubt highly persuasive.
32 It seems to us that the issue must be approached on first principles. It is clear that the obligation of the issuing/confirming bank towards the beneficiary is independent and separate from the contractual obligations between the seller and the buyer, and the obligation to pay is absolute irrespective of any dispute that may arise between the seller and the buyer. As far as the confirming or negotiating bank is concerned, their duty is only to verify whether what appears on the documents conforms with what is required by the credit. If there is prima facie compliance, the bank is authorised to pay and may claim reimbursement from the issuing bank notwithstanding that a document tendered may subsequently turn out to be a forgery: Gian Singh. This is to protect the bank and to ensure the smooth flow of international trade and the avoidance of delay. But we are unable to see why such a rule should also lead to the result that if the confirming or negotiating bank, from whatever source, is able to establish within the prescribed seven day limit that a material document tendered is a forgery, being null and void, the bank is nevertheless obliged to pay.
33 While the underlying principle is that the negotiating/confirming bank need not investigate the documents tendered, it is altogether a different proposition to say that the bank should ignore what is clearly a null and void document and proceed nevertheless to pay. Implicit in the requirement of a conforming document is the assumption that the document is true and genuine although under the UCP 500 and common law, and in the interest of international trade, the bank is not required to look beyond what appears on the surface of the documents. But to say that a bank, in the face of a forged null and void document (even though the beneficiary is not privy to that forgery), must still pay on the credit, defies reason and good sense. It amounts to saying that the scheme of things under the UCP 500 is only concerned with commas and full stops or some misdescriptions, and that the question as to the genuineness or otherwise of a material document, which was the cause for the issue of the LC, is of no consequence.
34 As the judge below observed, UCP 500 does not provide that a bank is obliged to accept a document which is a nullity notwithstanding that the time prescribed under Article 14 for the bank to reject the document has not expired. Thus the nullity exception which we postulate is a limited one and would not have given rise to the sort of problems which Potter LJ had expressed concern:-
“If a general nullity exception were to be introduced as part of English law it would place banks in a further dilemma as to the necessity to investigate facts which they are not competent to do and from which UCP 500 is plainly concerned to exempt them.”
We are not in any way suggesting that the bank is obliged to investigate into any document tendered. The nullity exception would only permit a bank to refuse payment if it is satisfied that a material document is a nullity.
35 Here, we would like to refer to the following comments of Professor R M Goode in an article in Centre Point entitled “Reflections on Letters of Credit –1”, where he, in discussing the position of the bona fide plaintiff, said:-
“Is a plaintiff who seeks to enforce a letter of credit affected by forgery of the documents or other fraud in the transaction if he himself acted in good faith? There is a remarkable dearth of authority on this question. Let us start with the beneficiary. He himself has a duty to tender documents which are in order, and the fact that he acted in good faith in tendering forged documents is thus irrelevant. This fundamental point appears to have been overlooked by Mr Justice Mocatta in The American Accord when he held that the beneficiary was entitled to collect payment despite the insertion of a fraudulent shipping date on the bill of lading, since the fraud had been committed by the loading broker who was the agent of the carrier, not of the seller/beneficiary. But this, with respect, is not to the point. The beneficiary under a credit is not like a holder in due course of a bill of exchange; he is only entitled to be paid if the documents are in order. A fraudulently completed bill of lading does not become a conforming document merely because the fraud is that of a third party.”
36 It is our opinion that the negotiating/confirming bank is not obliged to pay if it has established within the seven day period that a material document required under the credit is forged and null and void and notice of it is given within that period. While we recognise that there could be difficulties in determining under what circumstances a document would be considered material or a nullity, such a question can only be answered on the facts of each case. One cannot generalise. It is not possible to define when is a document a nullity. But it is really not that much more difficult to answer such questions than to determine what is reasonable, an exercise which the courts are all too familiar with.
Judgment
37 However there is one fact in this case which troubles us and which, in our view, merits further consideration and it is this. The buyers nominated “Link Express (S) Pte Ltd” as the freight forwarder to whom the sellers should consign the goods. Presumably the buyers would have given the sellers the name of the contact person at “Link Express” as well as the latter’s telephone number. The sellers would have contacted the person at “Link Express” to air-freight the goods to the buyers. An air waybill was accordingly issued by “Link Express” for the consignment. Could the air waybill so issued by “Link Express” be considered to be a forgery, as being issued by a non-existent entity, when it was the very entity which the buyer had nominated the seller to deal with? Indeed, one could say that the very document asked for by the buyers was tendered. Could it, therefore, still be considered to be non-compliant or a forgery? These are serious issues which must be answered because they could be determinative of the action. The question posed to the court, pursuant to O 14 r 12 (as set out in 5 above), simply assumed that the document was a forgery and nullity.
38 Accordingly, in our judgment, the questions whether the air waybill constituted forgery and is null and void and whether it amounted to non-compliance with the credit terms, warrant, in the circumstances of the present case, further exploration.
39 In the result, we would allow the appeal and set aside the judgment in favour of the respondents, the confirming bank. The appellants (the sellers) shall have the costs of this appeal, and the security deposit, together with any accrued interest, shall be refunded to the appellants’ solicitors. The costs of the hearing below shall be in the cause.
Mahonia Ltd. v JP Morgan Chase Bank
[2003] EWHC 1927 (Comm) [2003] 2 LLR 911, [2003] EWHC 1927 (Comm), [2003] 2 Lloyd’s Rep 911
Colman J
In this connection it is necessary to refer to Tinsley v. Milligan [1994] 1 AC 340. There the issue was whether the defendant was entitled to enforce a resulting trust over a house which had been purchased in the name of the plaintiff alone as part of an unlawful scheme to defraud the Department of Social Security. The House of Lords held by a 3-2 majority that once the beneficial interest had been created when legal title to the house passed to the plaintiff, the defendant did not need to rely on the unlawful underlying agreement in order to prove the beneficial interest upon which he relied. On the authority of Bowmakers Ltd v. Barnet Instruments Ltd [1945] KB 65 the defendant could therefore make good her beneficial interest by circumventing the illegal purpose. As Lord Browne-Wilkinson concluded at page 326:
“In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.”
At the conclusion of his judgment Lord Browne-Wilkinson considered an argument that if the underlying transaction were illegal collateral rights acquired under it could not be enforced even if the underlying legal transaction did not have to be pleaded: as in Scott v. Brown, Doering, McNab & Co supra, He put the position thus:
“It is said that once the illegality of the transaction emerges, the court must refuse to enforce the transaction and all claims under it whether pleaded or not: see Scott v. Brown, Doering, McNab & Co [1892] 2 QB 724. Therefore, it is said, it does not matter whether a plaintiff relies on or gives evidence of the illegality: the court will not enforce the plaintiff’s rights. In my judgment, this submission is plainly ill founded. There are many cases where a plaintiff has succeeded, notwithstanding that the illegality of the transaction under which she acquired the property has emerged: see, for example, Bowmakers Ltd v. Barnet Instruments Ltd [1945] KB 65 and Singh v. Ali [1960] AC 167. In my judgment the court is only entitled and bound to dismiss a claim on the basis that it is founded on an illegality in those cases where the illegality is of a kind which would have provided a good defence if raised by the defendant. In a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property) the court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the plaintiff’s case.”
Although the Bowmakers v. Barnet Instruments approach may sometimes be relevant in cases not involving claims of title to goods or real property: see Pye Ltd v. BG Transport Services Ltd [1966] 2 Lloyd’s Rep 3000, I do not consider that Tinsley v. Milligan has abolished illegality or unenforceability due to considerations of public policy as a defence in all cases except those where the claimant can only recover if he pleads and proves a transaction which is on its face intrinsically unlawful or unenforceable as a matter of public policy. In my judgment, that case is concerned with enforcement of collateral rights, legal or equitable, acquired under an illegal contract or one having an illegal purpose but leaves untouched the principle that the English courts will not enforce a contract lawful on its face which is entered into for an unlawful purpose. A collateral right in this context normally refers to a proprietary right and does not include a right of action on a contract itself. Cases such as Fisher v. Bridges (1854) 3 E&B 642, Alexander v. Rayson, supra, Regazzoni v. Sethia, supra, and Spector v. Ageda [1973] Ch 30 remain good law.
Does it make any difference that the purpose was unlawful, not under English law, but under the law of a foreign friendly state?
In my judgment, it does not. It must logically be just as contrary to public policy to enable the claimant to enforce a contract which has been entered into for a foreign illegal purpose known only to himself as to enable him to enforce such a contract the purpose of which is known to both parties to it.
It follows inexorably that if Enron had sought in the English courts to enforce the letter of credit contract against the Bank, for example because the Bank had omitted to give effect to a properly formulated request from Enron to open the letter of credit, the claim would have failed on the assumed facts. Enron’s purpose in procuring the opening of the letter of credit, being to enable it to provide to Chase the security necessary to create by means of the three swaps a device for deceiving the SEC and the public, the court would have held that to enforce the contract would be contrary to public policy.
Consequently, the position at which one arrives on this application on the assumed facts is that the claimant seeks the court’s assistance in enforcing the letter of credit which has been opened pursuant to a contract which would be unenforceable on the grounds of public policy due to its unlawful purpose, that purpose being known to the claimant, but not to the Bank until long after the demand for payment had been presented to the Bank.
On the face of it, the enforcement of the letter of credit would appear to conflict with the public policy principle of ex turpi causa, in as much as the court is being invited to enforce a contract validon its face which was with the claimant’s knowledge created to support the unlawful purpose of the wider three swaps transaction.
It is therefore necessary to investigate whether, as Mr Rabinowitz, on behalf of the claimant, contends the principle of autonomy of letters of credit makes all the difference.
The Nature of the Autonomy Principle and the Fraud Exception
There can be no doubt that the concept of the separation of letters of credit from the contracts in respect of the performance of which they provide security is a principle well-established in English law. Article 3a of the Uniform Customs and Practice for Documentary Credits (1993 Revision) which was expressly incorporated in this case states:
“Credits, by their nature, are separate transactions from the sales or other contract(s) on which they are based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit.”
The starting point for analysis of the autonomy principle is the decision of the House of Lords in United City Merchants (Investments) Ltd v. Royal Bank of Canada [1983] 1 AC 168. The letter of credit there was opened to effect payment of monies due under a contract for the sale of manufacturing equipment. The sellers and the buyers agreed that the amount payable and covered by the letter of credit should be double the true price. This was for the purpose of enabling the Peruvian Buyers to exchange Peruvian currency into hard currency under the cloak of a sale contract. Further, the goods were shipped one day later than the shipment period and the loading brokers, without the knowledge of the claimants or the defendant bank, fraudulently entered on the bills of lading the last day in the shipment period. The defendant bank refused to pay under the letter of credit on two distinct grounds:
(i) the forged bills of lading;
(ii) the letter of credit was unenforceable under the Order in Council giving effect in England to the Bretton Woods Agreements because the sale contract was an exchange contract and both it and the letter of credit were therefore within Article VIII section 2(b) of the Order in Council.
As to the first defence Lord Diplock, with whose speech all four other members agreed in rejecting the submission that, even without the knowledge of the beneficiary or the bank at the time of presentation, the fact that the bills of lading were forged, entitled the bank to refuse payment, stated the relevant principles relating to the contract in the letter of credit between the beneficiary and the bank thus (at pages 183 to 184).
“the parties to it, the seller and the confirming bank, ‘deal in documents and not in goods,’ as article 8 of the Uniform Customs puts it. 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.
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, expressly or by implication, (makes) material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or ‘landmark’ case is Sztejn v. J Henry Schroder Banking Corporation (1941) 31 NYS 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur action or, if plain English is to be preferred, ‘fraud unravels all’. The courts will not allow their process to be used by a dishonest person to carry out a fraud.”
It is to be observed that Lord Diplock was in that passage at pains to emphasise that there was only one “established exception” (emphasis added) to the principle set out in that passage that the confirming bank’s duty was to pay against documents which on their face conformed with the requirements of the letter of credit and without reference to any challenge to those documents arising from disputes between buyer and seller, that exception being where the beneficiary attempted to procure payment by presenting documents which he knew to contain material misrepresentations pertinent to the terms of the credit. Lord Diplock’s reference to the decision in the New York Supreme Court in Sztejn v. J Henry Schroder Banking Corporation (1941) 31 NYS 2d 631 shows that at this stage of his speech he is dealing with the circumstances in which on the information before the issuing bank at the time of presentation of documents it is then entitled to reject the documents. In Sztejn the plaintiff seller sought to restrain the payment or presentment for payment of drafts under the letter of credit for the reason that the documents were fraudulent in that the boxes shipped by the seller were not packed with the goods but with rubbish. Having observed that the application of the doctrine of autonomy presupposed that the documents were genuine and conforming, Shientag J. continued at page 634:
“However, I believe that a different situation is presented in the instant action. This is not a controversy between the buyer and seller concerning a mere breach of warranty regarding the quality of the merchandise; on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller’s fraud has been called to the bank’s attention before the drafts and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller. It is true that even though the documents are forged or fraudulent, if the issuing bank has already paid the draft before receiving notice of the seller’s fraud, it will be protected if it exercised reasonable diligence before making such payment:
Bank of New York & Trust Co v. Atterbury Bros, Inc 226 App Div 117, 234 NYS 442, affirmed 253 NY 569, 171 NE 786; Brown v. C Rosenstein Co 120 Misc, 787, 200 NYS 491, affirmed 208 App Div 799, 203 NYS 922. However, in the instant action Schroder has received notice of Transea’s active fraud before it accepted or paid the draft.”
For these reasons it was held that the seller was entitled to restrain presentation of the documents and payment by the bank.
Lord Diplock’s explanation for the fraud exception, by reference to his citation with obvious approval of Sztejn, that it was “a clear application” of ex turpi causa and his further reference to the English courts not permitting the use of their process by a dishonest person to carry out a fraud strongly indicates that he had in mind that as a matter of public policy a claimant would not be entitled to use the autonomy doctrine to derive a benefit from his own fraud. What he is saying is that the fraudulent claimant will not be entitled to a remedy if the Bank, having clear evidence of fraud, declines to pay at the time when the documents are presented. What he is not saying is that the claimant who, at trial, is proved to be fraudulent will nevertheless be entitled to recover from the bank if it did not have clear proof of fraud at the time of the presentation of documents. Not only does Lord Diplock not support this latter proposition, but his speech is completely inconsistent with it. If the bank is protected by the doctrine of ex turpi causa when it has clear evidence of fraud at the time of presentation it must, inescapably, also be protected if, at trial, it is demonstrated that the beneficiary is attempting to use the court’s process to benefit from his own fraud. It is true that later in his judgment (page 185 B-C) Lord Diplock refers to the bank’s “contractual right to refuse to honour the documentary credit” which at first sight suggests an analysis which involves the qualification of the absolute nature of the bank’s obligation. However, his judgment should be read as a whole and with regard to his veryexplicit reference to the ex turpi causa principle as the true foundation for the bank’s not being liable for a refusal to pay in the face of clear evidence of fraud. That explanation accords more comfortably with principle and is therefore to be preferred to Lord Diplock’s subsequent apparently inconsistent reference to a “contractual right” to refuse to pay.
In this connection, it is important to distinguish between the contractual duty assumed by the bank under the letter of credit and the availability to a beneficiary of a remedy for breach of that duty. As to the bank’s contractual duty, there is very clear authority that, upon presentation of conforming documents, the bank must pay unless it can at the time of presentation or when it ought to pay establish on the evidence in its possession that the beneficiary is perpetrating a fraud in presenting the documents and demanding payment: see Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159, per Lord Denning MR at 171, Browne LJ. at 172-173 and Geoffrey Lane LJ. at 175, and United Trading Corporation SA v. Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 544, per Ackner LJ. at 560-561. Both these cases relate to performance bonds, but it is well established that the same principles apply as to letters of credit. By setting at a high level the evidential threshold of fraud on the information available to the bank at the time of presentation of the documents – “on the material before it the only realistic inference to draw is that of fraud”, per Ackner LJ in the United Trading Corporation Case, supra – there is preserved the almost impregnable financial integrity of a letter of credit or performance bond as “the life-blood of international commerce” as per Kerr J. in R D Harbottle v. National Westminster Bank Ltd [1978] QB 146 at 155. Thus, neither the bank nor the party on behalf of whom the letter of credit or bond has been opened can obtain from the court any order interfering with payment against conforming documents unless they can satisfy this very high evidential threshold.
It is however to be observed that in the United City Merchants case, supra, at page 184 in the passage cited above Lord Diplock did not define the contractual obligation of the bank to pay upon presentation of conforming documents as limited to cases where it did not have clear evidence of fraud. He explained the fraud exception as to recovery bar based on the ex turpi causa principle prohibiting the beneficiary from enforcing its rights against the bank by relying on the bank’s failure to pay as a breach of contract. The bank’s “entitlement” to decline to pay in those circumstances is thus that it has instantly available to it, on the evidence in its possession at the relevant time, a good defence to a claim for breach of contract, that of ex turpi causa.
It then becomes necessary to explore the position that arises when a bank fails to pay against presentation of conforming documents yet does not have sufficiently compelling evidence of fraud at that time. It has no more than a suspicion. On the face of it, the beneficiary is at once entitled to summary judgment on the basis of a breach of contract by the bank and the bank can obtain no order from the court. But what happens if, in the meantime and, before the application for summary judgment is heard, the bank acquires clear evidence of fraud? Is the beneficiary still entitled to judgment? Has the bank lost the ex turpi causa defence which would have been available to it if it had acquired that clear evidence at the time when it was called upon to pay?
This problem was discussed by the Court of Appeal in Balfour Beatty Civil Engineering v. Technical & General Guarantee Co Ltd (1999) 68 Con LR 180. That was an appeal from a summary judgment on a performance bond, the defence being that the beneficiary had no honest belief that there had been a default under the underlying agreement, when demand for payment was made. Waller LJ, with whom Swinton Thomas LJ and Jonathan Parker J. agreed, said this:
“Mr Bartlett submits that where the bank or surety is itself refusing to pay and the question is whether judgment should be given under Order 14 the position is different. In that context it would, he submits, be very odd if the court had concluded on the evidence available at the Order 14 hearing that the demand was fraudulent, but then proceeded to give judgment in favour of the fraudster because the evidence of the fraud was not available to the bank when the demand was made. He submits there simply is no authority that compels the court to reach such a conclusion. He thus submits at the very least the question must be tested at the time of the Order 14 summons. He further submits that if at that stage the bank puts up simply an arguable case there is no reason why the bank should not have leave to defend.
There is obviously force in at least part of Mr Bartlett’s submission. If at the Order 14 stage the bank can show that the only proper inference is fraud it would be absurd to think that the bank would have judgment entered against it. It would not seem right to hold that since the bank can recover from its customer, it is legitimate to give judgment in favour of the fraudster allowing recovery from the fraudster only at the suit of the customer.
However, as it seems to me, whatever the context in which the Edward Owen case was decided, it is authority for the proposition that the bank or surety is only entitled to refuse to pay on a bond where it has clear evidence of fraud. The liability of the surety or bank cannot, as it seems to me, alter depending on the context. How then can the absurdity be avoided?
The answer, as it seems to me, is that on analysis if a bank or surety has a clear case at the Order 14 stage which it did not have at the demand stage, that the demand was fraudulent, the bank has a counterclaim against the fraudster which it is capable of establishing for the return of the money. Just to expand on that theme a little. It is clear that simply because after demand on a bond it turns out that no sum was due from the customer to his contractor, that does not lead to the bank or surety having any remedy against the beneficiary of the bond. The customer who of course must indemnify the bank or surety may have a right as against the beneficiary under their contract but that is all. If, however, the beneficiary has made a fraudulent representation to the bank in order to obtain money under the bond, I cannot see why in addition to any remedy that the bank’s customer may have (if the customer has been forced to indemnify the bank), the bank does not have its own remedy directly against the beneficiary. That may be very important in the context of a case such as the present in which the customer of the surety or the bank has gone into liquidation.
Now, coming back to the order 14 application, and seeing where the above analysis would lead. A bond is treated as the equivalent of a bill of exchange or a letter of credit, so that it follows that normally a set-off or counterclaim will not be enough to prevent judgment being given. That does not prevent the defendant continuing to pursue the counterclaim, and may in some rare cases lead to a stay of execution while that counterclaim is being fought out. Of course if a defendant is in a position to bring its own Order 14 on a counterclaim, then if judgment were obtained one would simply cancel out the other.
If the above is a correct analysis, it seems to me to lead to a sensible solution which fits with the Edward Owen case but also produces a just result. The questions to be asked are:
1. When the demand was made did the surety or the bank have clear evidence from which the only inference to be drawn is fraud? If the answer is ‘No’ then prima facie the beneficiary is entitled to judgment.
2. What, on the information now available, is the strength of the surety’s case that the demand was fraudulent?
(a) If the evidence is now clear, then no judgment will be given in favour of the beneficiary because of the fact that the surety would be entitled to a judgment for the equivalent sum.
(b) If the evidence is powerful but not quite sufficient to enable Order 14 judgment to be entered in favour of the surety on the basis that the demand was fraudulent, then either judgment would be entered with a stay of execution or probably no judgment would be entered at all until what is in effect the counterclaim had been fought out.
(c) If the evidence is less than powerful, judgment will be entered in favour of the beneficiary, and the surety will be left either to pursue his remedy against the customer or pursue a claim or counterclaim for reimbursement if so advised.
The above analysis produces solutions which fit with the philosophy of performance bonds as exemplified by Edward Owen. It places on the surety or the bank who refuses to meet a demand the onus of showing that it had clear evidence of fraud at the date of the demand so as to allow it not to pay if the beneficiary is not prima facie to be entitled to judgment. If it fails in that task, it still has the opportunity where again the onus is on it, to establish that it now has clear evidence of the fraud which will again lead to the beneficiary being refused judgment. If it fails in that task, it still has an opportunity where again the onus is on it, to establish that the case of fraud is a powerful one which should allow the counterclaim to be fought out before any judgment in favour of the beneficiary is enforced. If it fails to show even a powerful case judgment will be entered but that does not preclude the surety continuing with a claim to return of the money based on an allegation of fraud if it can persuade counsel that the evidence is such that it is proper to plead it.”
The Court of Appeal decided that the surety’s evidence did not amount to an arguable case that the beneficiary had been fraudulent and the summary judgment was therefore upheld.
The nature of the fraud considered in that case was such as to amount to a fraudulent misrepresentation made to the surety, which could form the basis of an action for damages for deceit by way of counterclaim. The discussion, in the passage which I have cited, as to the remedies available to the surety at the summary judgment stage based on evidence of fraud has to be read against that background. However, although the point was never taken or considered in that case, it is, in my view, unnecessary to confine the surety’s position to one founded on a counterclaim for damages or circuity or potential circuity of action. As long as there is before the court evidence which establishes fraud by the beneficiary there is evidence sufficient to establish a straight defence based on ex turpi causa. For this purpose, I agree with Waller LJ. that the strength of the fraud case has to be tested on the evidence available at the hearing of the summary judgment application, as distinct from the time of demand.
Just as the surety’s entitlement to withhold payment is based, according to United City Merchants, supra, on clear evidence of fraud and therefore of an ex turpi causa defence at the time when demand is made and payment would otherwise become due, so also the surety should have a direct defence on the basis of ex turpi causa at whatever stage in the proceedings prior to the hearing of the summary judgment application he can adduce the evidence necessary to establish fraud. The availability of that defence cannot, in my judgment, depend on whether evidence of fraud becomes available before or after demand is made and payment would otherwise become due.
This analysis of the remedies available to the beneficiary cannot be said to damage the integrity of the letter of credit as a virtually impregnable security any more than the analysis of Waller LJ. in the Balfour Beatty Case. Nor does it affect the circumstances in which the court will restrain a beneficiary from making demand under a letter of credit or a bank from paying against such demand which are helpfully and comprehensively considered by Rix J. in Czarnikov-Rionda Sugar Trading v. Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187, particularly at 202-203.
Illegality and Letters of Credit
The only English case in which illegality has been considered as affecting payment under a letter of credit is Group Josi Re v. Walbrook Insurance Co Ltd and Others [1996] 1 Lloyd’s Rep 345. In that case an underwriting agency, Weavers, wrote primary risks on the London market for a pool of overseas insurers. Weavers also arranged and managed reinsurance of its pool members by outside reinsurers. The plaintiffs, Group Josi, one of the reinsurers, agreed with Weavers that the latter would pay over to them loss reserves held in respect of the reinsurers in exchange for a letter of credit under which Weavers would be entitled to draw down against debit notes stating that Group Josi were liable for the amounts claimed under the reinsurances. Group Josi brought proceedings against Weavers and the reassured companies to restrain them from drawing down under the letters of credit. Amongst the grounds for this claim were:
(i) Group Josi was not authorised to carry on insurance business in Great Britain under the Insurance Companies Acts 1974-82 and as the contracts of reinsurance were made in London, they and the letter of credit were illegal and unenforceable;
(ii) the chairman, deputy chairman and managing director of Weavers were party to a fraud to divert from Weavers and the reassured pool members commissions which should have been credited to them and Group Josi were induced to enter into the contracts of reinsurance by false and fraudulent representations that the commissions would be duly paid or credited to those to whom they were due and that there was a failure to disclose the fraudulent purpose when the reinsurances were placed, that Group Josi had to Weaver’s knowledge validly avoided the reinsurances for that reason and that there would therefore be a fraud if Weavers presented the debit notes against the letter of credit.
I had granted an interlocutory injunction restraining the reinsured and Weavers from presenting a claim for payment under the letters of credit. Clarke J held that the reinsurance contracts were illegal but that the letters of credit were not thereby rendered illegal or tainted with illegality and Phillips J. held that the reinsurance contracts had not been avoided for non-disclosure. On appeal it was held that there was no evidence that either Weavers or the reassured companies knew of the alleged representation or relied on them and that there was therefore no basis for the argument that it would be dishonest for Weavers to present debit notes to obtain payment under the letters of credit. It was also held that the effect of section 132(6) of the Financial Services Act 1986 on Section 2 of the Insurance Companies Act 1982 was retrospectively to render contracts of reinsurance illegally entered into on the grounds of lack of authorisation unenforceable only at the suit of the reinsurers and not by the reassured. Accordingly, operation of the letter of credit by or on behalf of the reassured would involve no illegality.
The question of the effect of any illegality under the Insurance Companies Acts on the letters of credit was considered by Clarke J. at first instance and in the Court of Appeal by Staughton LJ. Before Clark J. exactly the same issue was raised in relation to another reinsurer, Deutsche Ruck. He held that the authorities going back to Hamzeh Malas & Sons v. British Imex Industries Ltd [1958] 2 AB 127 supported the proposition that the contract between the reassureds and the bank was quite separate from that between the reassureds and the reinsurers. He observed at page 351:
“It is the separate or independent nature of the relationships between the parties to the commercial contract on the one hand and the beneficiary and the issuing or confirming bank on the other which is one of the underlying bases for the decisions to which I have referred.”
Further, basing his reasoning on the principle that the provision of a confirmed letter of credit was conditional payment of the amount due under the reinsurance contracts as identified by the Court of Appeal in W J Alan & Co v. El Nasr Export & Import Co [1972] 2 QB 189 per Lord Denning MR at 210-211, Clarke J. continued at page 352:
“Thus when the letters of credit were issued in 1983 they amounted to payment under them by the reinsurers unless Citibank failed to pay when conforming documents were presented, in which case the reinsurers’ obligations would revive. But until then the reinsurers had done everything which was required of them under the relevant contracts of reinsurance. They were under no obligation to do any more. When the letters of credit were issued and confirmed by Citibank new rights and obligations came into existence as between the defendants as beneficiaries and Citibank as confirming bank.
In these circumstances the letters of credit are not in my judgment void because the contracts of reinsurance are void. Mr Bartlett correctly accepts that the plaintiffs would not be entitled to recover cash paid in settlement of claims. Equally, in my opinion, they are not entitled to the delivery up of the letters of credit on the ground that they are void. Subject to the possibility of revival referred to above, in the inconceivable event that Citibank did not pay, the provision of the letters of credit amounted to payment under the contracts of reinsurance just as payment of cash would have done.
It follows from the above analysis, in my judgment, that the letters of credit are not void and that the defendants are entitled to present documents under the letters of credit and to be paid in cash in accordance with their terms. Moreover neither the defendants in presenting the documents nor the bank in paying against them would be carrying on of the business of insurance by the plaintiffs.”
It will be noted that the route by which Clarke J. arrived at his conclusion that the letters of credit were not void and unenforceable was:
(i) the letter of credit represented a contract separate from the underlying reinsurance contract;
(ii) the opening of the letter of credit was conditional payment under the reinsurance contract;
(iii) in presenting the documents to the bank the reassured would not be carrying on the business of insurance prohibited by the Insurance Companies Acts and nor would the bank in paying under the letters of credit.
(iv) nor would either of the reassured and the bank be aiding and abetting the carrying on by the insurers of unauthorised insurance business.
He then went on to consider the alternative argument, based on United City Merchants, that the letters of credit were rendered illegal by the illegality of the underlying transactions, that is the reinsurance contract. Having referred to Lord Diplock’s speech in that case, he continued:
“Thus it can be seen that one of the purposes of the whole transaction including the letter of credit was to convert Peruvian currency into United States dollars in breach of the exchange control regulations. The House of Lords held that the task of the court in deciding whether the contract was unenforceable under the Order in Council was to consider the substance of the transaction and to penetrate any disguise presented by the actual words the parties used, to identify any monetary transaction which the words were intended to conceal and to refuse to enforce the contract to the extent that to do so would give effect to the monetary transaction. The House held that there was no difficulty in identifying that part of the transaction which fell foul of the exchange control regulations, namely the sum of US $331,043 which was half the price shown in the contract and provided for in the letter of credit.
The contract including the letter of credit was held to be unenforceable to that extent. In my judgment however that decision does not assist the plaintiffs in the present case. There the House of Lords held that the role of the court was to examine the substance of the whole transaction in order to see to what extent it fell foul of the regulations. That included an examination of the letter of credit which was part of the whole transaction so that the prohibition directly attacked the enforceability of the letter of credit. See also Mansouri v. Singh 1 WLR 1393, especially per Lord Justice Neill at p1403.
The prohibition in the Insurance Companies Acts does not seem to me to attack the enforceability of the letters of credit. The question here is whether the letters of credit given in payment under the reinsurance contracts are void and unenforceable in circumstances where it is accepted that cash payments made under the contracts would not be. In my judgment they are not void or unenforceable.”
Clark J. then considered whether, if the collateral contract between the reinsurers and the bank for the opening of letters of credit was void because tainted by illegality or as amounting to the carrying out by the reinsurers of unauthorised insurance business, the letters of credit themselves were also illegal. He concluded that they were not. He observed at page 354.
“As soon as the letters of credit were opened and confirmed they had an independent existence. There is no suggestion that Citibank (or indeed Chase Manhattan) knew the relevant facts. Thus I see no reason why the defendants should not present the documents to the bank. For all the reasons which I have already discussed, the relationship created by the letters of credit is separate from and independent of the underlying contracts, including the collateral contract pursuant to which they were opened. Thus, in my judgment, whether or not the collateral contract was void because it was tainted with the illegality of the reinsurance contracts or because it amounted to the carrying on of unauthorised insurance business, the letters of credit themselves are not void.”
Accordingly, the reinsurers were not entitled to the declarations claimed that the letters of credit were illegal, void and unenforceable.
In the Court of Appeal Staughton LJ. considered the position under the letters of credit on the assumption, which he held to be wrong, that the contracts of reinsurance were illegal. He held that, although Lord Diplock had referred in the United City Merchants Case to fraud as the one established exception to the bank’s duty to pay against conforming documents under a letter of credit, illegality was “a separate ground of defence under a letter of credit” (page 362). He relied for this proposition on the analogous position in United City Merchants where the Bretton Woods Agreement Order in council had rendered unenforceable in the English courts exchange contracts which were in breach of the exchange control regulations of states parties to the Agreement. I interpose that Lord Diplock clearly stated at page 189 of his judgment that an exchange contract contrary to the exchange control regulations of a party to the Agreement other than the UK would not be illegal under English law and acts in this country in performance of such an exchange contract would not be illegal. It was merely unenforceable. However, although as a matter of construction the contract constituted by the letter of credit in that case was not an exchange contract, not being a contract to exchange one currency for another currency but a contract to pay currency in exchange for documents, nonetheless the court could “penetrate any disguise presented by the actual words the parties have used to identify any monetary transaction ……. which those words were intended to conceal and to refuse to enforce the contract ….” (page 190).
Staughton LJ. then considered the following example:
“It seems to me that there must be cases when illegality can affect a letter of credit. Take for example a contract for the sale of arms to Iraq, at a time when such a sale is illegal. The contract provides for the opening of a letter of credit, to operate on presentation of a bill of lading for 1000 kalashnikov rifles to be carried to the port of Basra. I do not suppose that a court would give judgment for the beneficiary against the bank in such a case.”
His conclusion may have been influenced by the approach to unenforceability in United City Merchants.
Having tentatively expressed the view that, before the bank could rely on the illegality of the underlying transaction as a defence to a claim for non-payment, the illegality would have to be clearly established and known to the bank and having expressly left open the question whether the bank would have a defence if illegality were clearly proved at trial but in doubt when the documents were presented for payment (page 362) Staughton LJ. continued:
“Turning to the present case, if the reinsurance contracts are illegal, and if the letters of credit are being used as a means of paying sums due under those contracts, and if all that is clearly established, would the Court restrain the bank from making payment or the beneficiary from demanding it? In my judgment the Court would do so. That would not be because the letter of credit contracts were themselves illegal, but because they were being used to carry out an illegal transaction.”
He then went on the justify that conclusion by holding that because the required debit notes to be presented to the bank had to assert that outstanding losses were due to the reassureds under the reinsurance contracts, the reassureds and Weavers would, when inviting the court to enforce the letters of credit, be founding their claim on the underlying illegal contracts of reinsurance and would thus be within the principle in Bowmakers Ltd v. Barnet Instruments Ltd [1945] KB 65. This reasoning clearly assumes that the reassureds and Weavers were knowing participants in the assumed illegality of the reinsurance contracts. Staughton LJ. expressly rejected the argument, upon which Clark J. had relied, that the fact that opening a letter of credit amounted to effecting conditional payment under the reinsurances by means of a separate contractual engagement between the bank and the reassureds and that such conditional payment was not rendered illegal by the Insurance Companies Acts (page 363). He concluded that part of his judgment with this passage:
“But that does nothing whatever to convince me that the obligation of the bank to pay under the letters of credit is altogether free from taint from any obligation of the reinsurers which it superseded.”
Of the other two members of the court Rose LJ. confined his short judgment to holding that the subsequent legislation had retrospectively removed the illegality from performance of the reinsurance contracts and Saville LJ. having reached the same conclusion, observed, without reasons, that he did not accept the argument that the postulated illegality applied to or tainted the letters of credit (page 368).
Finally, it is necessary to refer to the decision of Power J. in the Queen’s Bench Court of Alberta in Morguard Bank of Canada v. Reigate Resources (Canada) Ltd and Canada Trust Company (1985) 40 Alta LR (2d) 77 in which there is a clear indication that if a letter of credit were set up to give effect to an underlying contract which was illegal, the letter of credit would, in principle, remain enforceable as a separate and distinct contract from the contract under which it was procured to be opened. Since illegality was not established, the decision is obiter.
Discussion
In order to investigate the enforceability of the letter of credit it is first necessary to identify what function it had in relation to the assumed illegal purpose of the three swaps. That function was to provide security to Chase in case the planned circulation of funds was interrupted by the failure of ENAC to pay Mahonia, the beneficiary under the letter of credit. If ENAC failed to pay Mahonia, then the money would not get back to Chase and the circularity which was an essential feature of the structure of the overall transaction would be broken, with the source of the funding (Chase) remaining out of its money.
The transaction is therefore similar in many ways to one in which the underlying contract is illegal to the knowledge of both parties and therefore unenforceable by either and where one of the parties to it procures an innocent third party to provide to the other a bond which pays against a certificate that the underlying contract has not been performed. Leaving aside the additional feature of a letter of credit, the authorities discussed in paragraphs (21 to 27) above support the proposition that the innocent third party could rely by way of defence on the underlying illegality. The position would be no different if the underlying contract were legal on its face but entered into for an illegal purpose or if the underlying contract were illegal because it required the carrying out of an act in the United States which was unlawful there or was for the purpose of the carrying out of such an act. Does it make any difference that the security was provided by means of a documentary letter of credit confirmed by a bank innocent of the illegality of the underlying transaction, but which has clear evidence of that illegality at the time when it ought otherwise to pay?
As appears from the authorities discussed earlier in this judgment, the impregnability of letters of credit is a consequence of the need to insulate them from the transaction in relation to which they have been utilised as security. That is because they have a special function in international trade which requires that their integrity and irrevocability should not be interfered with unless an ex turpi causa defence can be clearly proved by the bank, as for example in a case of fraud such as to be found in Sztejn v. J Henry Schroder Banking Corporation, supra. As a matter of public policy the courts will not permit their process to be used to obtain the benefit of an unlawful act. In such a case the policy of the law in withholding its process from the enforcement of benefits derived from an unlawful act displaces the otherwise impregnable nature of the letter of credit. Does that policy extend to a case like the present where the unlawfulness consists not in a fraud on the bank but in the purpose for which the letter of credit has been procured?
I am bound to say that I have found the reasoning of Clark J. in the Group Josi case discussed at paragraph (52) above, strongly persuasive resting, as it does, on the insulation of the opening and negotiation of the letter of credit from the unlawful carrying on of insurance business. He was able to distinguish between conduct prohibited by the legislation and conduct collateral to that unlawful conduct. Only the latter would have to be relied upon in order to enforce the letters of credit. In that case however the letters of credit were not an integral part of the unlawful conduct. They were simply a facility provided subsequently to the entering into of the illegal contracts which assisted performance in a manner not specifically rendered illegal. Where, however, the letter of credit plays from the outset an integral part in the illegal transaction, there is, as I see it, a very different situation, when its comes to enforcement for the court’s process is then deployed for the purpose of giving effect to an essential part of the illegal scheme.
Although in United City Merchants, supra, Lord Diplock expressly stated that the underlying sale contract and letters of credit were not rendered illegal by the Bretton Woods Order in Council, the underlying sale contract was certainly prohibited and thereby rendered unenforceable. However, the conclusion that the letter of credit was also rendered unenforceable was derived from the proper construction of the Order in Council which required the court to go behind contracts which on their proper construction, when taken in isolation, were not exchange contracts but which were a disguise for a prohibited monetary transaction. Accordingly, that case is an example of a letter of credit which because of its cosmetic purpose was directly rendered unenforceable by legislation. Unlike Straughton LJ. I therefore am unable to derive from that case any very significant assistance on this point.
However, there is a real conflict between on the one hand the well-established principle that contracts lawful on their face which are entered into in furtherance of an illegal purpose will be unenforceable at the suit of the party having knowledge of that purpose at the time of contracting and on the other hand the policy of the law reflected in all the letter of credit cases of preserving the impregnability of the letter of credit save where the bank has clear evidence of an ex turpi causa defence such as fraud. This conflict is not, in my judgment, a matter which can be resolved simply by postulating the separate nature of the letter of credit and applying reasoning similar to that in the Bowmakers case. Thus, like Staughton LJ. in Group Josi, supra, at page 362 I find it almost incredible that a party to an unlawful arms transaction would be permitted to enforce a letter of credit which was an integral part of that transaction even if the relevant legislation did not on its proper construction render ancillary contracts illegal. To take an even more extreme example, I cannot believe that any court would enforce a letter of credit to secure payment for the sale and purchase of heroin between foreign locations in which such underlying contracts were illegal. On the other hand, there is much to be said for the view that the public policy in superseding the impregnability of letters of credit where there is an unlawful underlying transaction defence may not be engaged where the nature of the underlying illegal purpose is relatively trivial, at least where the purpose is to be accomplished in a foreign jurisdiction. The problems which arise from attempting to reconcile conflicting considerations of public policy may well give rise to uncertain consequences, as illustrated in relation to the finality of New York Convention arbitration awards in Westacre Investments Inc v. Jugoimport – SDPR Holding Co [1999] QB 740. It would, however, be wrong in principle to invest letters of credit with a rigid inflexibility in the face of strong countervailing public policy considerations. If a beneficiary should as a matter of public policy (ex turpi causa) be precluded from utilising a letter of credit to benefit from his own fraud, it is hard to see why he should be permitted to use the courts to enforce part of an underlying transaction which would have been unenforceable on grounds of its illegality if no letter of credit had been involved, however serious the material illegality involved. To prevent him doing so in an appropriately serious case such as one involving international crime could hardly be seen as a threat to the lifeblood of international commerce.
In the present case, I have therefore come to the conclusion that on the assumed facts there is at least a strongly arguable case that the letter of credit cannot be permitted to be enforced against the defendant bank. That represents at the very least a realistic prospect of success for the Bank’s defence based on this point. Furthermore, the conclusion as to whether enforcement is permissible at least arguably depends on the gravity of the illegality alleged. Although on the pleaded case that appears to be considerable, the uncertainty of this area of law is such that this is an issue which ought to be determined by reference to the evidence before the court at trial and not merely on assumptions derived from the pleaded defence. Moreover, I have also concluded, as I have sought to explain, that the fact that the Bank did not have clear evidence of such illegality at the date when payment had to be made would not prevent it having a good defence on that basis if such clear evidence were to hand when the court was called upon to decide the issue. For this purpose I proceed on the basis that it now has sufficiently clear evidence as expressed in the pleading.
Accordingly, the claimant’s application to strike out the illegality defence and for summary judgment in respect of that defence will be dismissed.
Unusually, I have not set out in this judgment in extenso the respective arguments of counsel. It is a consequence of the need to keep this judgment to manageable proportions in the time available. This is in no way an indication that those submissions were unhelpful. On the contrary, they could not have been more comprehensive or of greater assistance. Should this matter go further those arguments will appear with admirable clarity in their respective outline submissions before me.
Safa Ltd v Banque Du Caire
[2000] EWCA Civ 221
The basic rule, so far as letters of credits were concerned, was that they too must be treated like a bill of exchange. Thus if the documents conformed and were in order, and the terms of the credit satisfied, the letter of credit was like a bill of exchange and ranked as cash. Therefore, the English court did not, for example, impose a stay of execution because foreign buyers had obtained a foreign attachment order in relation to the underlying contract. [see Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233].
The above principles applied so that summary judgment should be available to those claiming by virtue of bills of exchange and letters of credit because otherwise the principles are not effective. The court, save in exceptional circumstances, gave judgment and left the counterclaim to be pursued, and did not stay execution in the meanwhile. [see Lord Denning MR in Brown Shipley & Co Ltd v Alicia Hosiery [1966] 1 LLR 668 at 669].
In the instant case the judge has held, and there is no appeal from his finding, that a conforming document was presented under these letters of credit, and that the Bank had no right to reject the document as such. Furthermore, the Bank did not, at the time of presentation of the document, raise any other defence to payment which could justify non-payment.
By the time of the summary judgment application however the Bank were raising various defences. First, they sought to establish an arguable case that the demand made by PGI had in fact been fraudulent. Second, they sought to allege that arguably PGI were in breach of duty in advising on the credit-worthiness of Merrion. Third, they alleged that there was an arguable case that PGI had made representations as to the creditworthiness of Merrion to AFE knowing the representations would be passed on to the Bank, and that the Bank had relied on them in entering into the letter of credit transactions. Fourth, they alleged that they had a strongly arguable case that the Bank had an entitlement to be repaid by PGI the liquidated sum represented by the sums payable under the letters of credit because Merrion never came on risk.
The judge ruled that no summary judgment should be entered, and Safa’s attack on that judgment is that the judge has failed to apply the long standing principles relating to letters of credit being treated as cash.
The above principles do have to be adapted to the new language of the CPR. As indicated already the word is “may” give summary judgment where the defendant has no real prospect, and there is no other compelling reason. It seems to me that so far as bills of exchange and letters of credit were concerned the authorities held that normally a defence of set-off was not available; it was only available between immediate parties in relation to liquidated sums. Under the CPR that principle will continue to apply, in considering whether the defendant has any real prospect of defending the claim at trial. Furthermore, in most circumstances that will leave the defendant making a counterclaim which will be disposed of at a trial, and the fact that a defendant may have that counterclaim will not normally produce a compelling reason for the issue that arises on the letter of credit or bill of exchange not to be resolved on the summary application. It is only if the Bank can raise an actual defence with a real prospect of success as opposed to a counterclaim, and/or if it appears as it might in exceptional circumstances that there is a compelling reason why there should be a trial of the issue of liability on the letter of credit or bill of exchange that summary judgment should be refused.
As regards a fraud defence when it is raised by the paying Bank, and where the Bank had no clear evidence of fraud as at the date of presentation of the documents, but wished to raise the same on an application for summary judgment, the matter was dealt with, so far as Order 14 under the previous rules was concerned, in Balfour Beatty Civil Engineering v Technical & General Guarantee, (Court of Appeal Transcript 14th October 1999). That case was concerned with a performance bond and an allegation that the beneficiary had made a fraudulent demand, albeit it was common ground that on any view the surety had no evidence of the same as at the date of the demand. What was said on that occasion was as follows:
“If at the Order 14 stage the Bank can show that the only proper inference is fraud it would be absurd to think that the Bank would have judgment entered against it. It would not seem right to hold that since the Bank can recover from its customer, it is legitimate to give judgment in favour of the fraudster allowing recovery from the fraudster only at the suit of the customer.
However, as it seems to me, whatever the context in which Edward Owen was decided, [Owen (Edward) Engineering Ltd v Barclays Bank International Ltd (C.A.) [1978] QB 159 was concerned with an application by the customer for an injunction to restrain the Bank from paying] it is authority for the proposition that the Bank or surety is only entitled to refuse to pay on a bond where it has clear evidence of fraud. The liability of the surety or Bank cannot, as it seems to me, alter depending on the context. How then can the absurdity be avoided?
The answer, as it seems to me, is that on analysis if a Bank or surety has a clear case at the Order 14 stage which it did not have at the demand stage, that the demand was fraudulent, the Bank has a counterclaim against the fraudster which it is capable of establishing for the return of the money. Just to expand on that theme a little. It is clear that simply because after demand on a bond it turns out that no sum was due from the customer to his contractor, that does not lead to the Bank or surety having any remedy against the beneficiary of the bond. The customer who of course must indemnify the Bank or surety may have a right as against the beneficiary under their contract but that is all. If however the beneficiary has made a fraudulent representation to the Bank in order to obtain money under the bond, I cannot see why in addition to any remedy that the Bank’s customer may have (if the customer has been forced to indemnify the Bank), the Bank does not have its own remedy directly against the beneficiary. That may be very important in the context of a case such as the present in which the customer of the surety or the Bank has gone into liquidation.
Now, coming back to the Order 14 application, and seeing where the above analysis would lead. A bond is treated as the equivalent of a bill of exchange or a letter of credit, so that it follows that normally a set-off or counterclaim will not be enough to prevent judgment being given. That does not prevent the defendant continuing to pursue the counterclaim, and may in some rare cases lead to a stay of execution while that counterclaim is being fought out. Of course if a defendant is in a position to bring its own Order 14 on a counterclaim, then if judgment were obtained one would simply cancel out the other.
If the above is the correct analysis, it seems to me to lead to a sensible solution which fits with Edward Owen but also produces a just result. The questions to be asked are:-
1. When the demand was made did the surety or the Bank have clear evidence from which the only inference to be drawn is fraud? If the answer is no then prima facie the beneficiary is entitled to judgment.
2. What, on the information now available, is the strength of the surety’s case that the demand was fraudulent?
(a) If the evidence is now clear, then no judgment will be given in favour of the beneficiary because of the fact that the surety would be entitled to a judgment for the equivalent sum.
(b) If the evidence is powerful but not quite sufficient to enable Order 14 judgment to be entered in favour of the surety on the basis that the demand was fraudulent, then either judgment would be entered with a stay of execution or probably no judgment would be entered at all until what is in effect the counterclaim had been fought out.
(c) If the evidence is less powerful, judgment will be entered in favour of the beneficiary, and the surety will be left either to pursue his remedy against the customer or pursue a claim or counterclaim for reimbursement if so advised.”
Mr Slade was anxious about the use of the words “set-off and counterclaim” in the fourth paragraph of the passage quoted above. He would I think suggest that a claim by a Bank that it is being sued on what it alleges is a fraudulent demand is something that the Bank can raise by way of defence or set-off and not simply by counterclaim. He would thus submit that an arguable case that a fraudulent demand has been made with a real prospect of success would entitle the Bank to resist an application for summary judgment. I accept that. I also think that the difference between “the powerful evidence” that the court had in mind when considering the Order 14 position and the “real prospect of success”, the language of the new rules, is not very different, and I would accept that where the Bank can raise a set-off as a defence the question whether it has a “real prospect of success” is the appropriate test.
HSBC v Kloeckner [1989] 2 LLR 323 is also of relevance in the context of this case..
In HSBC the position was that the Bank had issued a letter of credit in relation to transactions in which the Bank was also involved. The Bank was making a claim for $8m in relation to those transactions against the beneficiary. Part of the argument before Hirst J by the beneficiary was that the letter of credit was as good as cash and thus the Bank had no right to set-off its claims under the related transactions. Hirst J said this at 330:-
“The present situation is quite different; it is only on the rarest occasions, as Mr Havelock-Allan recognised, that a separate dispute will arise between the bank and the beneficiary, since from the beneficiary’s point of view the choice of paying bank is fortuitous, and it is only in the rarest cases that there will be any antecedent banking connection between them that could give rise to such a dispute. Moreover, if a beneficiary wished to avoid the nomination of a particular bank as paying bank he would, as Mr Havelock-Allan recognised, be in a position to do so before completion of the underlying contract, though I accept that it is unlikely that he would always be alert to the risk. Consequently the same policy reasons do not apply to the present problem and give no justification for a similar restriction.
There is thus nothing in the Edward Owen line of authorities which compels me to adopt the conclusion sought by Mr Havelock-Allan. I should add that the statement in Lord Denning’s judgment in the Power Curber case that “no set-off or counterclaim is allowed to detract from (the letter of credit)”, must be interpreted as meaning a set-off or counterclaim by the buyer against the seller and not one by the bank against the seller, the latter situation not being under consideration in that case.
There are two striking features of the present case. First, the standby letter of credit was opened for the specific purpose of financing the liabilities on the dry cargo transactions, so that it would seem veryunjust if the bank were precluded from enforcing a set-off in relation to the present claims which arise directly out of selfsame transactions. Secondly, this is a liquidated set-off, and it would seem to me anomalous that such a set-off should be unavailable in letters of credit cases, but available against bills of exchange which, as the judgments quoted above show, are closely analogous in that a bill of exchange is also virtually equivalent to cash.
Had it been necessary to decide the point I should have been prepared to hold that there is no principle equivalent to that laid down in the Edward Owen line of cases that debars a bank setting off against a beneficiary under a bill of exchange a claim by the bank themselves against that beneficiary. Given the additional circumstances present here, namely, that the bank’s claim is liquidated and relates to the very banking transactions which gave rise to the letter of credit itself, the case in favour of a right of set-off seems to me overwhelming.”
Mr Slade also referred us to Clovertogs Ltd v Jean Scenes Ltd [Court of Appeal Transcript 5 March 1982]. The claim was on a cheque. The Court of Appeal gave conditional leave to defend on the basis that there was a triable issue as to whether the cheques had been delivered on the basis of a misrepresentation. In the notes in the 1999 Annual Practice to which Mr Slade very properly drew our attention, it is said that the case is of dubious authority being out of line with other cases on bills of exchange. Since the misrepresentation seemed to relate as much to the underlying transaction as to the issuing of the bill, it seems to me the note is right. However, if there was a misrepresentation by a beneficiary made directly to induce the opening of a letter of credit in that beneficiary’s favour, and there was a real prospect of such being established at the trial, it would seem to me that a court would be entitled not to give summary judgment.
Gathering the threads from the above authorities and adapting them to the circumstances of this case, my view is as follows:
1. The principle that letters of credit must be treated as cash is an important one, and must be maintained.
2. It is however unusual for a Bank which has opened a letter of credit to be involved in the related transaction to the extent this bank was.
3. When a Bank is involved in the related transaction it may be unjust for that Bank to be forced to pay on a summary judgment where it has a real prospect of succeeding by reference to a claim on the underlying transaction, and particularly if that claim is a liquidated claim, the court should not give summary judgment either because a set-off has a reasonable prospect of success or because there is a compelling reason to have a trial of the letter of credit issue.
4. If a Bank can establish a claim with a real prospect of success, either that the demand was fraudulent even if it had no clear evidence of fraud at the time of demand, or that there was a misrepresentation by the beneficiary directed at persuading the bank to enter into the letter of credit, it may also be unjust to enter summary judgment against the Bank either because the Bank has a reasonable prospect of succeeding in a defence of set-off or because there is a compelling reason for a trial of the letter of credit issue.
The evidence
We had before us a great deal of material that was not before the judge. Safa sought to put in two statements from Mr Towey dated 9th December 1999 and 1st February 2000, one from Mr Sterry dated 1st January 2000 (both of PGI), and a statement from Mr Naser Taher dated 4th February 2000. The Bank objected to the new material but was content that we should read it and put in eight witness statements of their own in response. They desired to put in a ninth statement but there was objection on the ground of privilege, and thus the full statement was not put before us but Mr Slade told us that what he wanted to establish from it was that Mr Towey had said that his statements had been drafted for him by lawyers for Safa.
Safa wanted to put in some further four witness statements including a further statement from Mr Towey, all dated very shortly before the date that this appeal came on for hearing. At the hearing Mr Bogle did not persist with his application to put in this last group of statements albeit in some parts of his submissions he referred to one or two matters that he said were covered by them. If those statements had been allowed in the Bank was itself going to seek to put in further evidence including a handwriting expert to challenge the authenticity of the signature of Mr Towey. Mr Slade accepted that if the application to put in those last statements was not pursued he would not be pursuing his application to put in the evidence of the handwriting expert.
Even at the last minute of the hearing before the Court of Appeal an attempt was made by Safa to put in a further statement referring to newspaper reports and conversations which attempted to impugn certain of the Bank’s employees, Mrs Sapur and Mr Abdel Salam, and suggested that Mr Fotouh had been accused of corruption.
This is a very unusual case. In former days if a defendant had summary judgment entered against it, it was not uncommon for the Court of Appeal to allow fresh evidence to be produced, in case that should demonstrate that an arguable defence was available. It was always unusual to allow a plaintiff to put in evidence to attempt to reverse a decision granting leave to defend. But Safa are clearly concerned that if this matter goes to trial it may be beyond them to put up security for costs ordered by the Commercial Court. Their case is that in the letter of credit context, they were entitled to summary judgment and that justice may be denied if they cannot establish that the judge was faced with an inaccurate picture in the court below.
The difficulty for them is first, that a decision would seem to have been taken to proceed with the summary judgment application and not request an adjournment, and prima facie having chosen that course the Court of Appeal will be reluctant to allow a party to go back on that choice; see Krakauer v Kratz [1954] 1 WLR 278. Second, and this may have had something to do with the decision taken at that time, the more material which is put in on a summary application and the more areas of dispute that arise the more likely it is that the court will find that a trial is the appropriate place to resolve matters.
In this instance some pragmatism, as it seems to me, is called for. The application to put in the evidence dated shortly before the hearing is not pursued, and it should not therefore be admitted. If it had been pursued its very lateness would have been a good ground for rejecting it, particularly as some dispute would have then emerged as to authenticity of the signature of Mr Towey which this court could not conceivably have resolved. The evidence sought to be put in right at the conclusion of the hearing should also not be admitted. Apart from the fact it was hearsay upon hearsay and the Bank had no opportunity to deal with the same, it did not go to the critical issues on this appeal.
As regards the other material, there might have been strong grounds for rejecting it in the light of the stance taken by Safa in the court below, but it was read, as was the Bank’s material in response, and both counsel in their addresses found considerable difficulty in making submissions without reference to it, Mr Bogle sometimes referring to what Mr Slade’s clients had put in in response and Mr Slade sometimes wishing to refer to the material put in by Safa. It would not make practical sense to refuse to admit that evidence now.
Assignee point
One of Mr Bogle’s points was that Safa were an assignee without notice of the defences which might be raised as against PGI. He was referred to Banco Santander S.A. v Banque Paribas [Court of Appeal Transcript dated 25th February 2000] He rightly did not pursue the point thereafter. The position is as recorded as common ground before the judge that Safa can be in no better position than PGI the assignor.
Defences
I have formed the conclusion, even taking account of the material that was not before the judge, and taking account of the important principles that apply in the context of claims under letters of credit, that the Bank has established that this is not a case where Safa should have summary judgment. My starting point for so thinking is already foreshadowed in what I have said above. The history seems to me to demonstrate first that no loans have ever been entered into, and that very arguably Merrion never came on risk, that PGI were not entitled to any brokerage, and that whoever Mr Ahmed was he was not entitled to any payment and thus that even if payment was due under the letters of credit, the Bank were entitled to immediate reimbursement by PGI. That claim would be for a liquidated sum, and the connection between the Bank obliged to pay under the letter of credit and its relationship with PGI its broker for the purpose of placing the financial insurance was such, that a set-off would be allowed if the claim were established.
As to the other defences it seems to me that I should say a little because if they were unarguable they should be disposed of at the summary stage. I should not however say too much if there is to be a trial.
So far as the fraud defence is concerned, if the Bank’s allegations are right, the complaint is not simply that an improper demand is being made on a Bank under a letter of credit but that the Bank in this case was being deceived into believing that what it was agreeing to pay under the letter of credit was premium to Merrion (from which it is now accepted by the Bank brokerage would be deducted), whereas in fact it was agreeing to pay that premium plus a payment to Mr Ahmed.
On the material before the court it seems to me that there is a real prospect of the Bank establishing that PGI was leading the Bank to think that the letters of credit were to pay the premium (less brokerage). The role of Mr Ahmed is unexplained at present but there is also material before the court which indicates that Mr Ahmed may well be connected to PGI and thus the recipient of a payment on their behalf to which they were not entitled. The inter-connection of the letter of credit with the Bank’s role as lender and beneficiary of such policy as PGI were meant to be negotiating on its behalf would make it unjust if the Bank were not entitled to set up their claim for fraud against PGI which again would be for the liquidated sum otherwise due under the letters of credit as a set-off.
The claim for breach of duty, and the claim for misrepresentation are also arguable. PGI, through Mr Sterry, assert that they were brokers for their client AFE, but this overlooks the fact that the beneficiary under the policy was the Bank. It seems to me arguable that PGI had a duty not to place the insurance with an Insurer that they themselves would not recommend, without the fully informed consent of the insured. The consent of AFE would arguably not be enough. It is not suggested that PGI obtained the consent of the Bank.
As regards misrepresentation there is material on which a court could find that PGI represented to AFE that they had excellent reports on Merrion and that it was intended that those representations were to be passed on to the Bank for the beneficiaries under the insurance proposed. Again, in the context of the inter-relationship between the Bank and PGI, it would be unjust for the Bank not to be able to raise its claim by way of set-off. Its claim would include a claim to the return of the premium.
Conclusion
I would dismiss Safa’s appeal.
Lady Justice Hale: I agree
Lord Justice Schiemann: I agree that the general principles established in relation to bills of exchange and letters of credit should continue to guide the practice of the courts in relation to applications for summary judgment. The purpose of those principles is to facilitate normal trade and commerce.
However, as appears from my Lord’s judgment, the facts of the present case are most unusual and it is clear that we are not here dealing with a normal commercial transaction. I am not persuaded that refusing summary judgment in the present case runs the risk of creating some adverse effect on normal commercial transactions. The facts cry out for further investigation and it would not be just to give summary judgment against the Bank.
For the reasons given by my Lord, I also would dismiss this appeal.
Order: Appellant to pay £30,000 on account to respondents; detailed assessment; leave to appeal refused.
Glencore Grain Rotterdam BV v Lebanese Organisation For International Commerce
[1997] EWCA Civ 1958 [1997] CLC 1274, [1997] 2 Lloyd’s Rep 386, [1997] 4 All ER 514, [1997] EWCA Civ 1958
Evans LJ
Issues
It is convenient to begin with a summary of the essential facts. The sale contract, as amended, called for shipment during April. The buyers were obliged to open a letter of credit in accordance with the contract requirements before the shipment period began, that is, by 1 April at the latest. The terms of the letter of credit which were notified on 24 March were not as required by the contract, and the sellers proposed different terms on 25 March. On 29 March the buyers said that they had instructed their bank to make certain amendments “in a way to comply the maximum we can with sellers’ requirement” without affecting their own position vis-a-vis their own buyers. The amended terms were such that the sellers could not obtain payment under the letter of credit unless they presented bills of lading endorsed “freight prepaid”. The vessel named in the sale contract failed to arrive at the loading port until 2315 on 31 March which was after business hours. It gave notice of readiness on 1 April but was not ready to load in fact until the following day, a Friday, and the notice was not accepted until Monday 5 April. Meanwhile, on 1 April the sellers under pressure from their own suppliers TMO made extra-contractual demands for pre-payment of the price and for an additional payment of $7 per ton. They gave as their reason the late arrival of the ship, which was rendered invalid as an excuse for their refusal and failure to ship the goods on and after 1 April by the Board’s other findings. They relied in the alternative on the fact that the letter of credit opened by the buyers called for “freight pre-paid” bills of lading. That was not a reason which they gave at the time nor was raised until, at the earliest, during the appeal hearing before the Board.
The contractual analysis in my judgment is clear. The buyers claim damages for the sellers’ refusal and failure to ship the contract goods, which under the contract as amended they were required to do in April. They refused to do so on 1 April, when they demanded payment on extra-contractual terms, and if their refusal was not justified then the buyers were entitled to accept it as an unlawful repudiation – strictly, an anticipatory breach – of the contract on 6 April, as they purported to do. But if the buyers were already themselves in repudiatory breach on 1 April, by reason of their failure to open a letter of credit which guaranteed payment in accordance with the agreed payment terms, then (subject to waiver) the sellers were entitled to refuse to perform the contract, as they did by refusing and failing to ship the goods (except at a later date and upon other terms, with which this dispute is not concerned).
The first issue, therefore, is whether the buyers under a sale contract on what are described as normal f.o.b. terms are entitled to open a letter of credit which requires the sellers to present “freight pre-paid” bills of lading if they are to receive payment from the buyers’ bank. Absent any special agreement, the sellers are entitled to see a conforming letter of credit in place before they begin shipment of the goods, and then their obligation is to ship the contract goods on board the vessel provided by the buyers, for carriage on whatever terms as to freight and otherwise the buyers have agreed with the shipowner. The sellers are expressly free of any obligation to pay freight (special terms apart, f.o.b. is the antithesis of c and f – cost and freight) and in the normal course they cannot be sure before shipment that the shipowner will issue freight pre-paid bills of lading, unless they are prepared if necessary to pay the amount of freight themselves, or unless some other guaranteed payment mechanism is already in place. I would put the matter broadly in that way, because it may be that an undertaking from the shipowner himself, or a third party guarantee of the payment of freight following due shipment of the goods, would suffice. It is unnecessary to consider that aspect further in the present case, because all that was offered by the buyers was their own assurance that the freight would be paid, by them or on their behalf. It is abundantly clear, in my judgment, that the buyers’ own assurance cannot be enough to serve as a guarantee to the sellers that “freight pre-paid” bills of lading will be issued when shipment is complete. That would mean, as the judge pointed out, that the security of a bank guarantee for the payment of the price, which is what the letter of credit mechanism provides, would be destroyed. I therefore agree with the judge’s observations that the buyers’ contention, that the letter of credit terms were in conformity with the contract, is contrary both to the underlying concept of the f.o.b. contract (subject always to what special terms may be agreed in a particular case) and to the essential commercial purpose of the letter of credit machinery.
The buyers’ submission is that there were special features which entitled the Board to reach the conclusion that the buyers were entitled to require freight pre-paid bills in this case. In my judgment, the Board’s conclusion that the buyers were so entitled “provided that they did indeed ensure that such freight was paid by the completion of loading” is open to the objections set out by the judge. More generally, Mr Havelock-Allan refers to certain specific facts. The sellers knew that Hoboob, the receivers and sub-buyers, had bought on c and f terms and themselves required freight pre-paid bills. The named vessel was time-chartered to the buyers, and so they were entitled to instruct the master to issue “freight pre-paid” bills ( The Nanfri [1979] 1 Lloyd’s Rep. 201). The buyers gave their assurance (though not until 29 March, after the dispute had arisen) that the freight would be paid before the bills were issued “without any problem”. But none of this, in my judgment, justifies the implication of a term which, for the reasons stated above, would be wholly at variance with the express terms of the f.o.b. sale in fact agreed.
In this context, the buyers referred to the judgment of Robert Goff J. in Ficom v. Sociedad Cadex Ltda . [1980] 2 Lloyd’s Rep. 118 at 131, which was quoted by the judge. This judgment distinguishes between implying a term in the sale contract and, on the other hand, establishing what the parties agreed should be the terms of the letter of credit issued or to be issued under that contract. The latter process may result in a letter of credit agreement which supplements or even varies the terms originally agreed. This is demonstrated in the present case by the agreement to vary the shipment date to include the month of April. But I do not consider that it is relevant to the question in issue. The freight pre-paid requirement, unless it was a term of the sale contract itself, was introduced by the buyers and immediately rejected by the sellers. The buyers maintained their requirement on 29 March and it is of the essence of their case that the sellers made no further reference to it before the contract came to an end. The sellers thereafter did not act inconsistently with their previous refusal, and their silence on this matter cannot be regarded as an acceptance of the buyer’s demand : The Leonidas D [1985] 1 W.L.R. 925 per Robert Goff L.J. at 936-7. In short, the buyers cannot allege that there was a fresh agreement as regards this term of the letter of credit which had the effect either of supplementing or varying the requirements of the sale contract.
For these reasons, as well as those given more succinctly by Longmore J., in my judgment the buyers were not entitled to require the sellers to procure and produce freight pre-paid bills of lading in order to receive payment under the letter of credit opened by them. It follows that the buyers failed to open a letter of credit conforming with the sale contract and, subject to the question of waiver considered below, they were thereby in breach of contract. The second issue is whether the sellers can rely on that breach to justify their own refusal and failure to ship on the contract terms. They did not assert that they were relying on it at the time.
Basic rule
“It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not”. (per Greer J. in Taylor v. Oakes,Roncoroni & Co. (1922) 127 LT 267 at 269.
First qualification – Heisler v. Anglo-Dal Ltd.
“The rule is, however, subject to a proviso. If the point not taken is one which if taken could have been put right, the principle will not apply”. (per Somervell L.J. in Heisler v. Anglo-Dal Ltd . [1954] 1 W.L.R. 1273 at 1278).
The buyers’ duty was to open a conforming letter of credit by the beginning of the shipment period (this is the prima facie rule : Ian Stach Ltd. v. Baker Bosley Ltd. [1958] 2 Q.B. 130). Under the sale contract as varied, therefore, they were required to do this by 1 April. The sellers demanded a price increase and insisted on more onerous payment terms on that day. Undoubtedly, the buyers were entitled to regard this demand as a refusal by the sellers to ship goods on the contract terms. They contend, however, that the sellers “did not convey any acceptance of a termination. It made an extra contractual demand based on a false premise (that the vessel was late)” (Skeleton argument para. 4.2), and that if the sellers had specified the letter of credit defect as a reason for their attitude, then they would or might have been able to dispense with the freight pre-paid requirement, after making some further arrangements with the receivers. The correct legal analysis, Mr Havelock-Allan submits, is that the contract remained in existence after 1 April, because it was not terminated; the sellers waived the buyers’ breach, or alternatively they extended the time within which the buyers might open a conforming letter of credit ; therefore, they could or might still have remedied the defect, if it had been relied upon by the sellers in their message of 1 April.
Longmore J. rejected this submission, on the ground that a contractual letter of credit had to be in place “strictly before the first day for shipment …. In fact, therefore, the buyers could not have put the position right at the time when the point could have been but was not taken”. He also said, however, that “the refusal to perform was as early as 1st. April, or (perhaps more likely) when the sellers took no steps to conform to the requirement of the buyers’ solicitors letter on or about 6th. April”. Mr Havelock-Allan submits that the later date, 6 April, should be preferred, and that the judge’s conclusion therefore is not inconsistent with his waiver submission, as set out above.
In my judgment, however, the submission falls at the first hurdle. The sellers’ demand for an increased price etc. on 1 April was undoubtedly a refusal to perform the contract, even though if viewed in isolation from the buyers’ previous failure to open a conforming letter of credit it was an anticipatory rather than a actual breach . If the buyers’ breach is included in the perspective, the refusal was justified by it and the sellers’ failure to refer to it then does not necessarily preclude them from relying on it now (the basic rule). The Heisler v. Anglo-Dal qualification in my judgment does not apply, because by 1 April the time for contractual performance of the buyers’ letter of credit obligation had passed. I do not see how the sellers’ refusal to perform the contract could either extend the time for performance by the buyers or amount to a waiver of their right to refuse performance, if such a right existed.
I would add that in any event the buyers’ language in their response on 29 March was peremptory (“the maximum we can”) and there was no further indication from them, either before or after 1 April, that the freight pre-paid terms of the letter of credit could or might be deleted. On the Board’s findings, therefore, the possibility of such a change was entirely speculative, and both Longmore J., and Colman J., when giving leave to appeal, decided against remitting the Award for further reasons (judgment p.15F).
Second qualification – waiver and estoppel
There has been much debate as to the basis of the Panchaud Freres judgment, which may represent a species of estoppel, perhaps embracing the broad “requirement of fair conduct” referred to by Winn L.J., or the application of the common law rule regarding the acceptance of non-contractual goods delivered under a sale contract which is now embodied in section 35 of the Sale of Goods Act. No one doubts, however, that what may be called the classic rules of estoppel and waiver can apply in circumstances such as these, so as to prevent a party who fails or refuses to perform the contract from relying upon conduct by the other party which would otherwise justify his doing so. The occasions when these rules may be invoked in these circumstances are limited, for example, by the fact that it is rarely if ever possible to imply an unequivocal representation of fact from a party’s silence on the relevant issue. The buyers do not suggest that these rules apply in the present case, and therefore I need say no more about them.
Third qualification – acceptance of goods (s.35 S.G. Act)
This explanation of Panchaud Freres was adopted by Robert Goff J. in B.P. Exploration v. Hunt (No.2) [1997] 1 W.L.R. 783 and it is preferred also by the editors of Benjamin’s Sale of Goods (4th ed.) para. 19-139. Section 35 reads as follows :-
“35(1) The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or …. when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.”
The authorities cited in Chalmers Sale of Goods (18th. ed. p.195) for the last proposition include Fisher Reeves & Co. v. Armour & Co. [1920] 3 K.B. 614 where Scrutton L.J. said this :-
“When one party to a contract becomes aware of a breach of a condition precedent by the other he is entitled to a reasonable time to consider what he will do, and failure to reject at once does not prejudice his right to reject if he exercises it within a reasonable time” (p. 624).
(This was an obiter dictum but nevertheless it is of undoubted authority, more particularly because it is the rule enacted in section s.35.)
It should be noted that the deemed acceptance under section 35 is based simply on the buyer’s retention of the goods which have been delivered to him and his failure to intimate to the seller that he has rejected them. If these facts are established, then the buyer cannot thereafter raise a ground for rejection, however valid it may be, and the “basic rule” in Taylor v. Oakes Roncoroni does not save him. He is precluded from raising even a valid ground, not because he failed to raise it at the time but because he retained the goods and did not reject them on any ground. (The basic rule could apply, of course, if he did reject the goods, though giving an invalid reason for doing so.)
The facts in Panchaud Freres were that c.i.f. buyers accepted the documents of title to goods, by retaining them without claiming to reject them on the grounds of late shipment which appeared sufficiently from the documents themselves, and subsequently they claimed to reject the goods on that same ground. The c.i.f. buyer has a separate right to reject the goods when they are physically delivered to him (Kwei Tek Chao v. British Trades and Shippers Ltd. [1954] 2 Q.B. 459 at 480-1). The decision of the Court of Appeal was that the buyers could not reject the goods for a reason which had been available to them when they accepted documents which disclosed a non-contractual shipment.
I would hold that “acceptance” of goods in the circumstances specified in section 35 may bring about a further (third) qualification to the basic rule that a party can rely upon a matter which he did not raise at the time. I would also hold that this provides an acceptable basis for the decision in Panchaud Freres . The effect of the decision is that the c.i.f. buyer’s right to reject non-contractual goods is not entirely separate from his right to reject the documents, if they are non-contractual also.
A further qualification – “unfair and unjust”?
Giving the leading judgment in Panchaud Freres , Lord Denning M.R. based the decision squarely on the principle of estoppel by conduct, which he stated as follows :-
“The basis of it is that a man has so conducted himself that it would be unfair or unjust to allow him to depart from a particular state of affairs which another has taken to be settled or correct” (p.57).
He applied the principle to the particular facts of that case by reference to the c.i.f. buyer’s acceptance of documents which gave him “the full opportunity of finding out … what the real date of shipment was”. He could not thereafter reject the goods by reason of their late shipment. Cross L.J. saw it as a question of fact and degree, and pre-eminently one for the Board of Appeal to decide (p.61). Winn L.J. expressed his entire agreement with Lord Denning, adding :-
“In my own judgment it does not seem possible in this case to say affirmatively that there was here … anything which, within the scope of the doctrine as hitherto enunciated, could be described as an estoppel … what one has here is something perhaps in our law not yet wholly developed as a separate doctrine – which is more in the nature of a requirement of fair conduct – a criteria of what is fair conduct between the parties. There may be an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs, negativing any liberty to blow hot and cold in commercial conduct” (p.59).
What Winn L.J. saw as an emerging “separate doctrine” has received no support, in my judgment, from any of the later authorities. Counsel have tended to invoke this passage from his judgment, as Robert Goff J. noted in B.P. Exploration v. Hunt , “as an argument of last resort when they find it difficult to bring their case within the established principles of estoppel, waiver or election” : [1979] 1 W.L.R. at 811F.
Lord Denning referred to it subsequently as “a kind of estoppel. He cannot blow hot and cold according as it suits his book” ( Toepfer v. Cremer [1975] 2 Lloyd’s Rep. 118 at 123), where Orr and Scarman L.JJ. agreed with him. (126,128). Lord Denning held that a similar estoppel by conduct arose in different circumstances in Ismail v. Polish Ocean Lines [1976] 1 Q.B. 893 at 903C. In Berg v. Vanden [1977] 1 Lloyd’s Rep. 499 he referred to Panchaud Freres as “a case where there was a waiver by one person of his strict right – or an estoppel – whatever you like to call it – whereby a person cannot go back on something he has done” (pp. 502-3). The same case gave Roskill L.J. an opportunity to comment on what he called “the so-called principles laid down by this Court in the Panchaud …. . this Court then laid down no new principles of law. It merely applied well-established principles of law to the particular facts of that case, and those principles …. are no more than if in the course of the working out of a contract one party by his conduct leads the other party to think that he will not insist on the strict performance of a particular term in the contract so that the other party alters his position, the former party will not be permitted to resile and to seek to insist upon strict performance – at least without notice” (p.504). Lawton L.J. supported these remarks, adding trenchantly that merchants and brokers in the international grain trade should not be regarded as “fragile characters”, and “There must be more robustness in the application of the Panchaud principle” (p.505).
In the leading case of Bremen v. Vanden [1982] 2 Lloyd’s Rep. 109 the House of Lords upheld Mocatta, J.’s judgment, including his finding that a plea of waiver was established. There is no express reference to Panchaud Freres in the judgment or in any of the speeches, and the decision turned on the questions whether an unequivocal representation could be spelled out a series of “no less than 10 communications” between the parties and whether the other party had acted upon it (per Lord Salmon at 126-7). This is the conventional analysis of estoppel and waiver, and soon afterwards it was hailed by Lord Denning as “a most important decision on waiver. As Mr Davenport said, it is the final step in the series”, citing High Trees House [1948] KB 130 and Panchaud Freres . He stated the principle as applied to GAFTA cases thus :-
“If a buyer, who is entitled to reject goods or documents on the ground of a defect in the notices or the timing of them, so conducts himself as to lead the seller reasonably to believe that he is not going to rely on any such defect – whether he knows of it or not – then he cannot afterwards set up the defect on a ground for rejecting the goods or documents when it would be unfair or unjust to allow him to do so”
(Bremer v. Mackprang [1979] 1 Lloyd’s Rep. 221 at 226).
In that case, Stephenson L.J. dissented on the question whether an unequivocal representation had been made (p.229), but Shaw L.J. agreeing with Lord Denning saw no difficulty “in distilling from the stream of telexes sent by the buyers in the circumstances which then obtained coupled …. with their delay in rejecting the documents a strong indication that they waived their right to treat the sellers as being in default” (p.230).
These authorities were reviewed and extensively quoted by Hirst J. in The Manila (Proctor & Gamble v. Peter Cremer) [1988] 3 All E.R. 843. He concluded :-
“Perhaps the best lesson to be drawn from all this subsequent commentary is that no distinctive principle of law can be distilled from the Panchaud case …. Counsel for the sellers invited me to accept the interpretation in BP exploration Co. (Libya) Ltd. v. Hunt , but if I have to choose, I should feel bound to prefer the estoppel explanation, since it has the greater weight of authority behind it.” (p.852g).
In my judgment, the following conclusions can now be drawn :-
(1) Panchaud Freres is authority for the application of the common law rule of acceptance, now established in section 35 of the Sale of Goods Act, in the comparatively limited circumstances of a case where a c.i.f. buyer accepts documents but rejects or purports to reject the goods.
(2) The decision can equally be said to represent a form of “estoppel by conduct”, but there is no “separate doctrine” derived from Panchaud Freres alone.
(3) Like all other forms of estoppel or waiver, the facts must justify a finding that there was an unequivocal representation made by one party, by conduct or otherwise, which was acted upon by the other.
(4) When the facts do justify that finding, it is likely to be regarded as “unfair and unjust” for the party which made the representation to a contrary effect, to rely upon its contractual rights.
(5) Without such a representation, no estoppel or waiver can arise, and there is no general rule that what the Court or Tribunal may perceive as “unfairness or injustice” has the same effect.
(6) Panchaud Freres and subsequent cases illustrate the possible scope of an estoppel or waiver in circumstances such as these, but they do not reveal a further exception to the basic rule, that a party is entitled to rely upon his contractual rights.
(7) Unfairness and injustice, however, will always be relevant where the Court is required to exercise a discretionary power e.g. where a party seeks leave to raise a fresh matter by way of amendment or at a late stage of the proceedings before it (see the example given by Lord Denning M.R. in Panchaud Freres at p.57).
Conclusion
The judge held that it would be unjust to allow the sellers (appellants)” to go back to an old ground which was not pursued at the time when it might have been possible for the buyers to do something about it” (page 19B). This conclusion might be criticised on the narrow semantic ground that it does not sit easily alongside the judge’s earlier finding that the Heisler v. Anglo-Dal qualification did not apply because “the buyers could not have put the position right at the time when the point could have been but was not taken” (page 17B). I would however put the matter more broadly. There was no finding by the Board or by the judge of any unequivocal representation by the sellers that they relinquished or would relinquish their rights arising out of the buyers’ failure to open a letter of credit in the form required by the sale contract. Nor in my judgment could any such finding be justified by the facts found by the Board. The buyers made their position clear on 29 March, saying that no further changes were possible. This was immediately over-shadowed by the ship’s failure to meet the contractual e.t.a. on 29 March and, in the event, to arrive and give valid notice of readiness before the amended loading period began on 1 April. The fact that the sellers made no further reference to the letter of credit issue after 29 March cannot be said to have misled the buyers into believing that the “freight pre-paid” requirement was no longer important to them, nor so far as we know is there any evidence to that effect.
In my judgment, the judge was wrong to hold that the sellers were unable to rely upon the buyers’ breach as a defence to the claim for damages for refusal and/or failure to load. I would answer the certified questions of law accordingly, and as stated in this judgment, and I would allow the sellers’ appeal, and dismiss the cross-appeal.
SIR RALPH GIBSON:
I agree that the appeal of the sellers should be allowed, and that the cross-appeal should be dismissed, for the reasons given by Lord Justice Evans.
LORD JUSTICE NOURSE:
I also agree.
Order: appeal allowed and cross-appeal dismissed with costs; counsel to lodge an agreed minute of order; leave to appeal to the House of Lords refused.
Fortis Bank S.A /N.V & Anor v Indian Overseas Bank
[2009] EWHC 2303 (Comm) [2009] 2 CLC 550, [2010] 1 Lloyd’s Rep 227, [2009] EWHC 2303 (Comm)
Mr Justice Hamblen :
Introduction
The first Claimant (“Fortis”) is a Belgian bank. The second Claimant (“Stemcor”) is an English company carrying on business in the international distribution of steel and raw materials in London. The Defendant (“IOB”) is a bank carrying on business in India, with an International Business Branch in Kolkata, India.
The Claimants’ apply for summary judgment on all of their pleaded claims (save for Stemcor’s claims for container demurrage and port costs).
The claims arise under five letters of credit (“L/Cs”) issued by IOB in August 2008:
(a) Fortis claims, as confirming bank (alternatively nominated bank), US$5,024,041.80 under three of these IOB L/Cs;
(b) Stemcor claims, as beneficiary, US$3,033,037.20 under two of these IOB L/Cs (which were not confirmed).
IOB refused to make any payment under any of these L/Cs on the basis of alleged documentary discrepancies. However, it is now accepted that certain of the drawings were non-discrepant. In particular IOB accepts that payment should have been made on the Stemcor drawings of US$161,316.00, US$32,496.00, US$335,990.40 and US$909,130.80.
In relation to the remaining drawings IOB disputes the Claimants’ entitlement to summary judgment. In particular it contends:
(a) In relation to the majority of drawings and the bulk of the quantum IOB raised one or more valid objections to each such drawing, and was therefore entitled to refuse payment. Alternatively, IOB’s case on such drawings has a reasonable prospect of success and should be permitted to advance to trial, the more so given IOB’s evidence that expert evidence may be of assistance to the court on a number of the issues which arise.
(b) In relation to all of Fortis’ claim IOB has a further arguable defence, in that Fortis’ claim is not, as a matter of law, as a confirming bank, and any alternative claim (as nominated bank) is highly arguable on the facts. It is not therefore the case that Fortis are entitled to judgment on those three drawings where no discrepancy is now maintained, and in relation to the remainder of Fortis’ claims IOB have at least two arguable defences.
The Contractual Background
Stemcor had five sale contracts, under which they sold various quantities of containerised scrap to SESA International Limited (“SESA”) CFR CY Haldia (or Haldia/Kolkata in sellers’ option).
The sale contracts all provided for the incorporation of Incoterms 2000 and that
the law of England was to govern, with arbitration of disputes in London;
payment was 100% by sight L/C by a first class bank acceptable to Stemcor, opened in workable form and received in London with the advising bank nominated as Fortis’ Aldermanbury Square branch.
These contracts were made through MSTC Limited (“MSTC”), an Indian government owned company, under the Ministry of Steel, who were described in the L/Cs as “FACILITATOR”.
IOB issued the L/Cs now in dispute upon the application of MSTC who were described in the L/Cs as “APPLICANT”.
The Letters of Credit
Upon MSTC’s application, IOB issued five L/Cs in favour of Stemcor in respect of the purchases by SESA. The L/Cs were duly made available by negotiation with Fortis’s London branch each naming Stemcor as named beneficiary:
L/C ref: L/C date: L/C value (US$):
L/C1 585/LC/166/08* 14 August 2008 1,160,000.00
L/C2 585/LC/170/08* 18 August 2008 1,440,000.00
L/C3 585/LC/184/08* 29 August 2008 2,625,000.00
L/C4 585/LC/171/08 13 August 2008 1,800,000.00
L/C5 585/LC/164/08 18 August 2008 1,240,000.00
(The L/Cs will be referred to below by the number in the first column in the above table. The asterisks indicate confirmation by Fortis)
Each L/C was expressly subject to the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (“UCP 600”)..
Field 72 of each L/C contained a request by IOB to Fortis to advise each credit to Stemcor, which Fortis duly did, as agent for IOB, under cover of letters from Fortis to Stemcor dated, respectively, 15 August, 19 August, 1 September, 19 August and 14 August 2008.
In the field for “CONFIRMATION INSTRUCTIONS” (Field 49), each L/C stated that Fortis “MAY ADD” its confirmation. It was also an “ADDITIONAL CONDITION” of each L/C (Field 47) that “THE LC MAY BE CONFIRMED AT THE REQUEST AND COST OF BENEFICIARY”.
Pursuant to requests by Stemcor, Fortis added its confirmation to L/C numbers 1, 2 and 3 above on 20th October 2008, 13th October 2008 and 13th October 2008 respectively.
Stemcor made a number of drawings under each of the letters of credit:
(a) The documents Stemcor presented in respect of each drawing under L/C numbers 1, 2 and 3 were negotiated and honoured by Fortis and forwarded by Fortis to IOB; and
(b) The documents presented in respect of each drawing under L/C numbers 4 and 5 were forwarded by Fortis to IOB.
In most cases IOB purported to reject the documents and in all cases refused to authorise the reimbursement of Fortis (in respect of each of the drawings under L/C numbers 1, 2 and 3) and payment to Stemcor (in respect of the each of the drawings under L/C numbers 4 and 5).
The Issues
The issues arise under four principal headings:
(1) The alleged discrepancies
(2) The confirming bank point
(3) The preclusion point
(4) The bill of lading date point.
(1) The alleged discrepancies
The law
IOB relies on the rigour of the doctrine of strict compliance. In this regard it refers to a number of authorities. In particular:
(1) the dictum of Viscount Sumner in Equitable Trust Co of New York v Dawson Partners (1926) 27 Ll L Rep 49 @ 52:
“It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. The bank’s branch abroad, which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk.”
(2) Banque de l’Indochine et de Suez v J H Rayner (Mincing Lane) Ltd [1983] 1 QB 711 @ 729H/730B per Sir John Donaldson MR):
“I approach this aspect of the appeal on the same basis as did the judge, namely, that the banker is not concerned with why the buyer has called for particular documents (Commercial Banking Co. of Sydney Ltd. -v- Jalsard Pty. Ltd. [1973] AC 279), that there is no room for documents which are almost the same, or which will do just as well, as those specified (Equitable Trust Co. of New York -v- Dawson Partners Ltd. (1926) 27 Ll.L.Rep. 49), that whilst the bank is entitled to put a reasonable construction upon any ambiguity in its mandate (Jalsard’s case [1973] AC 279), the documents have to be taken up or rejected promptly and without opportunity for prolonged inquiry (Hansson -v- Hamel and Horley Ltd. [1922] 2 A.C. 336) and that a tender of documents which properly read and understood calls for further inquiry or are such as to invite litigation are a bad tender (M. Golodetz & Co. Inc. v. Czarnikow-Rionda Co. Inc. [1980] 1 W.L.R. 495).”
The Claimants do not dispute the nature of the doctrine of strict compliance, but they stress the following qualifications:
(1) As is reflected in clause 2 of the International Standard Banking Practice for the Examination of Documents (the ISBP; ICC publication No. 681):
“The Applicant bears the risk of any ambiguity in its instructions to issue or amend a credit.”
Where instructions are ambiguous a confirming bank which acts upon a reasonable construction of those instructions is still entitled in law to reimbursement, even if the court were ultimately to conclude that that was a wrong construction: Crédit Agricole Indosuez v. Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep. 275 at 280 (per Sir Christopher Staughton) and 281 (per Peter Gibson LJ).
(2) The doctrine does not extend to trivial discrepancies.
(3) The question of compliance should be considered intelligently rather than mechanically and may involve the exercise of judgment:
“… the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents. To some extent, therefore, the banker must exercise his own judgement whether the requirement is satisfied by the documents presented to him” – per Evans LJ in Krediet Bank Antwerp v Midland Bank [1999] CLC 1108 at para. 12.
As to the scope for trivial discrepancies, it would appear that this is limited. As stated in Jack, Documentary Credits (4th ed. 2009 paragraph 8.38):
“a document containing an error in a name or similar should be rejected unless the nature of the error is such that it is unmistakably typographical and that the document could not reasonably be referring to a person or organisation different from the one in the credit. In assessing this the bank should look only at the context in which the name appears in the document and not judge it against the underlying facts of the transaction.”
Against the background of the legal principles summarised above I will consider each of the alleged discrepancies.
(i) Documents not in the name of SESA International
In relation to three drawings under L/C1 IOB purported to reject the documents presented citing the following discrepancy:
“INVOICE AND OTHER RELATED DOCUMENTS EXCEPT BILL OF LADING ARE NOT PREPARED IN THE NAME OF BUYER. ROLE OF MSTC LTD, IS LIMITED TO THAT OF FACILITATOR. PLEASE REFER TO FIELD 47A, CLAUSE 7”
IOB points out the L/Cs were raised to cover a contract in which SESA International is the purchaser and stress that the actual contract details are referred to at field 46A and that Field 47A states as an additional condition “MTSC WILL ACT AS FACILITATOR”.
IOB objects that all the documents other than the Bill of Lading appear to reference a sale between Stemcor and MTSC, with MTSC appearing as the party to whom the invoice is addressed, as the consignee, as the applicant for the certificate of quality, and as the addressee of the beneficiary’s certificate. IOB contends that this is inconsistent with the true commercial facts, which were that the L/Cs were issued in relation to a Stemcor/SESA transaction and with MTSC’s defined role (as facilitator) within the L/C.
I agree with the Claimants that what matters is not the “true commercial facts” but the documentary requirements of the L/Cs. The L/C does not stipulate the name of the person to whom the documents are to be addressed and does not identify the name of any “buyer”. The only parties identified in the letters of credit are the “APPLICANT” (MSTC) and the “BENEFICIARY” (Stemcor). Although clause 7 of field 47A of L/C1 stated, as an “ADDITIONAL CONDITION”, that “MSTC WILL ACT AS FACILITATOR”, it does not follow that documents issued in the name of MSTC rather than an unnamed “buyer”, do not comply with the documentary requirements in the L/C.
Further, UCP 600 Article 18 ii states that a commercial invoice must be made out in the name of the “applicant”. In this case the “applicant” was stated to be MSTC. As such, it was appropriate to make out the invoice in MSTC’s name and, if so, there can be nothing wrong (in the absence of clear instructions to the contrary) in preparing “other related documents” in MSTC’s name.
Alternatively, if on their true construction the instructions given did require “other related documents” to be made out in SESA’s name, such instructions were ambiguous and Fortis acted on a reasonable construction thereof.
I am accordingly satisfied in relation to this alleged discrepancy that the documents were compliant. Nor do I consider that there is any real prospect of factual matrix or other evidence affecting this conclusion.
(ii) Bill of Lading not in the name of SESA International
In relation to drawings under L/C2 IOB purported to reject the documents presented under L/C2 citing the following discrepancy:
“ALL DOCUMENTS EXCEPT THE CERTIFICATE OF ORIGIN WERE REQUIRED TO BE PREPARED IN THE NAME OF THE BUYER VIZ. SESA INTERNATIONAL LTD, 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA-700017, WHICH HAS NOT BEEN DONE, THUS NON COMPLIANCE OF CLAUSE 7 OF FIELD 47A. B/L IS NOT IN CONFIRMITY WITH CLAUSE 7 OF FIELD 47A”.
Clause 7 of Field 47A of L/C2 set out the following “ADDITIONAL CONDITION” for L/C2:
“ALL DOCUMENTS EXCEPT FOR CERTIFICATE OF ORIGIN TO BE PREPARED IN THE NAME OF THE BUYER VIZ. SESA INTERNATIONAL LTD, 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA 700017”.
IOB alleges that the Bills of Lading presented were not prepared ‘in the name of SESA’.
However, the Bills of Lading were made out in the terms required by clause 2 of field 46A, namely:
“2. FULL SET OF 3/3 ORIGINAL SHIPPED ON BOARD BILLS OF LADING STAMPED, SIGNED MARKET FREIGHT PREPAID CONSIGNED TO ORDER OF INDIAN OVERSEAS BANK, INTERNATIONAL BUSINESS BRANCH, 2, WOOD STREET, KOLKATA-700016, INDIA AND NOTIFY THE APPLICANT BANK AND SESA INTERNATIONAL LTD., 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA 700017, INDIA. …”
IOB disputes this on the basis that SESA was only named as second notify party under the “Description of Packages and Goods” section. Nevertheless SESA is expressly identified as the second notify party on the face of the Bills of Lading and I am satisfied that this constitutes compliance with the L/C requirements. SESA is clearly not a “package”. It is, as expressly stated on the Bills of Lading, a “notify party”. Considering the matter intelligently rather than mechanically, that plain statement is not undermined or made unclear by its position within the Bills of Lading.
In relation to drawings under L/C4, IOB purported to reject the documents presented citing the following discrepancy:
“AS PER FIELD 47A, CLAUSE 7 BILL OF LADING IS NOT ISSUED IN THE NAME FO BUYER, VIZ, SESA INTERNATIONAL LTD, THE CONTRACTING PARTY. IT IS ISSUED IN THE NAME OF MSTC LTD, WHOSE ROLE IS LIMITED TO THAT OF FACILITATOR AS STATED IN CLAUSE 6 OF FIELD 47A.”.
Clause 7 of field 47A was in the same terms as in L/C2 as set out above. Clause 6 of field 47A set out the following “ADDITIONAL CONDITION” for L/C4:
“MSTC WILL ACT AS FACILITATOR”.
IOB’s allegation that the Bills of Lading presented were discrepant because they were prepared in the name of MSTC rather than SESA has already been dealt with above, but in addition, L/C4 required the Bills of Lading to name the notify party as “THE APPLICANT BANK” (i.e. IOB) and the “APPLICANT” (i.e. MSTC) under clause 2 of field 46A of L/C4. The Bills of Lading were thus made out in the terms called for by clause 2 of Field 46A, naming, in each case, both IOB and MSTC as the notify party. I am satisfied that this constituted compliance with the L/C requirements.
IOB contends that despite the express terms of clause 2 the Bill of Lading should still have been “prepared in the name of the buyer”. However, it is unclear precisely what this means or how it could be done consistently with the requirements of the specific L/C clause dealing with Bills of Lading.
Alternatively, if on their true construction the instructions given did require SESA’s name to be on the Bills of Lading, such instructions were ambiguous and Fortis/Stemcor acted on a reasonable construction thereof.
I am accordingly satisfied in relation to this alleged discrepancy that the documents were compliant. Again, I do not consider that this is an issue in relation to which evidence of banking practice is likely to be of assistance, still less that there is a real prospect that it would lead to a different conclusion on construction.
(iii) Haldia or Haldia/Kolkata
In relation to drawings under L/C4 IOB purported to reject the documents presented citing the following discrepancy:
“COMMODITY AND SPECIFICATION: THE COMMERCIAL INVOICES DO NOT COMPLY THE PRICE TERM OF THE LC: THE PRICE TERM, IE, ‘USD 600.00 NET PMT CFR CY HALDIA, INDIA’ DOES NOT CORRESPOND WITH THAT APPEARING IN THE CREDIT AS PER FIELD 45A”.
Field 45A of L/C4 (which relates to “DESCRIPTION OF GOODS AND/OR SERVICES”) describes the price as:
“USD 600.00 NET PMT, CFR CY, HALDIA/KOLKATA, INDIA”
whereas the price set out on the commercial invoices presented is:
“USD 600.00 NET PMT, CFR CY, HALDIA, INDIA”.
IOB contends that because the commercial invoice does not mention Kolkata as well as Haldia it is discrepant. I agree with IOB that the Claimants’ assertion that as a matter of fact Haldia is a port in Kolkata (which is disputed) is no answer. However, I accept the Claimants’ case that Haldia and Kolkata were being referred to in the price term as alternatives and that a reference to Haldia alone is appropriate or at least suffices in circumstances where the goods were shipped under the Haldia Bills of Lading.
Further or alternatively, the price term in Field 45A of L/C4 was not a documentary requirement so that the documents would be compliant provided that there was no inconsistency with it. There is no inconsistency in circumstances where Haldia is one of the named ports and in the event is the relevant Bill of Lading port.
Alternatively, if on their true construction the instructions given did require the invoice to state Haldia/Kolkata, such instructions were ambiguous and Stemcor acted on a reasonable construction thereof.
I am accordingly satisfied in relation to this alleged discrepancy that the documents were compliant. Nor do I consider that there is any real prospect of evidence affecting this conclusion.
(iv) Beneficiary’s consolidated certificate
In relation to a number of drawings IOB purported to reject the documents presented citing the following discrepancy:
“BENEFICIARY’S CONSOLIDATED CERTIFICATE IS CONTRARY TO THE LC TERMS. REFER FIELD 46A CLAUSE 7D”
Field 46A clause 7D sets out the following documentary requirement:
“7. BENEFICIARY’S CONSOLIDATED CERTIFICATE CERTIFYING AS FOLLOWS:
WE HEREBY CERTIFY THE FOLLOWING
….
…D) THAT THE NEGOTIATING BANK HAS BEEN ADVISED TO DESPATCH ORIGINAL SHIPPING DOCUMENTS ONLY BY AIR COURIER SERVICE TO THE LC OPENING BANK AT OUR COST….”
The consolidated certificate that Stemcor presented, and which Fortis presented to IOB, stated:
“WE HEREBY CERTIFY THE FOLLOWING:
… D) THAT THE NEGOTIATING BANK HAS BEEN ADVISED TO DESPATCH ORIGINAL SHIPPING DOCUMENTS ONLY BY AIR COURIER SERVICE TO THE LC OPENING BANK AT ISSUING BANK’S COST.”
The consolidated certificate did not therefore follow the exact terms of L/C by referring to “OUR” cost and instead replaced it with a reference to the “ISSUING BANK’S” cost.
IOB contends that that consolidated certificate was discrepant because it certified that the negotiating bank had been advised to despatch the documents by courier at “ISSUING BANK’S” cost, rather than at Stemcor’s cost.
The Claimants contend that the documentary requirement at Clause 7D) is materially ambiguous because the reference to “OUR” cost can reasonably be interpreted as a reference either to (a) Stemcor’s cost (as issuer of the certificate) or (b) the issuing bank’s cost (as the issuer of the L/C). Given that ambiguity, and the fact that Fortis therefore acted on a reasonable interpretation of the word “OUR” when it accepted the certificate as complying, Fortis is still entitled in law to reimbursement, even if the court were to now disagree with that interpretation.
I agree, however, with IOB that there is no ambiguity. The words in clause 7D “WE HEREBY CERTIFY THE FOLLOWING …” make it plain that (i) the wording of the L/C sets out a pro forma certificate which is to be issued by Stemcor and (ii) “OUR” is to be identified with “WE” – i.e. the person giving the certificate – namely Stemcor.
The Claimants’ alternative argument is that any discrepancy was legally trivial and therefore of no consequence. They contend that by the time IOB received the documents it would have known not only that it had not been charged for the despatch of the documents but that it would not be charged. However, this involves the documentary checker having to investigate the facts rather than merely examine the documents. In this connection I do not accept that a distinction is to be drawn between facts which may be within the knowledge of the bank and other facts, or facts relating to the transaction and other facts. It is the documents alone that fall to be considered and no factual inquiry or investigation should be required. In any event, I do not accept that IOB would have known that it was not going to be charged for the despatch of the documents. On the face of the documents it was going to be so charged regardless of whether or not it had yet been charged.
I therefore accept IOB’s case that this was a documentary discrepancy. The Claimants agreed that this was a point which should be determined one way or the other and did not depend on further evidence.
(2) The Confirming Bank Point
In the alternative, and in relation to the Fortis’s claims only, it is argued that IOB has a real prospect of defending Fortis’s claims on the basis that Fortis was not a confirming bank.
The definition of “Confirming Bank” is in Article 2 of UCP 600 which provides that a confirming bank means “the bank that adds its confirmation to a credit upon the issuing bank’s authorisation or request”.
IOB argues that Fortis added their confirmations in this case without IOB’s “authorisation”. It is contended that the confirmations were what is known as “silent confirmations” – which is not in law confirmation at all. In this connection IOB rely on:
(1) Goode, Commercial Law (3rd ed.) p 959:
“It is not uncommon for an advising bank to add its confirmation without authority from IB in return for a commission from S himself. This so called ‘silent confirmation’ is outside the UCP, and the ‘confirming’ bank, though committed to S by virtue of its confirmation, is no more than an advising bank vis a vis IB.”
(2) Jack, Documentary Credits (4th ed.) paragraph 6.25:
“exporters … themselves requesting confirmation of a credit by the advising bank without the authorisation of the issuing bank .. is referred to as a ‘silent’ confirmation. Such a confirmation will fall outside the ambit of the Uniform Customs.”
In the field for “CONFIRMATION INSTRUCTIONS” (Field 49), each L/C stated that Fortis “MAY ADD” its confirmation; it was also an “additional condition” of each L/C (Field 47) that “THE LC MAY BE CONFIRMED AT THE REQUEST AND COST OF BENEFICIARY”. Fortis contends that thereby IOB did authorise Fortis to add its confirmation to the credits at Stemcor’s request.
This is supported by Jack, Documentary Credits, which expresses the view that an issuing bank that permits the advising bank to confirm a credit at the beneficiary’s request and expense, amounts to relevant authorisation for the purposes of UCP 600. The matter is put as follows at paragraph 6.26:
” (b) Permission to confirm on request
In contrast, sometimes the instruction to the advising bank will expressly permit it to confirm a credit at the beneficiary’s request and expense. Such a situation is encompassed by the definition of a confirming bank in Article 2 – namely, ‘the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request’ (emphasis added). It is suggested that such an instruction will bring a confirmation at the beneficiary’s request within the express terms of Article 8 as a confirmation by a ‘confirming bank’ (because it is a confirmation which has been authorised (though not requested) by the issuing bank). In a credit transmitted by SWIFT, the instruction would be given by including ‘MAY ADD’ in the confirmation field.”
Whilst there is no authority on the point, I agree with this approach. The issuing bank has expressly stated to the nominated bank that it “MAY ADD” add its confirmation. By agreeing that it “MAY” do so it is authorising that to be done.
IOB suggested that the additional words “THE LC MAY BE CONFIRMED AT THE REQUEST AND COST OF BENEFICIARY” qualify any such authorisation and mean that any confirmation would be a silent confirmation. I do not agree. If anything these words provide further evidence of authorisation in that IOB have expressly agreed that the L/C may be confirmed in this manner.
Fortis as Nominated Bank
Even if Fortis was not an authorised confirming bank, Fortis contends that it would still have an indisputable claim against IOB as the ‘nominated bank’ under the Letters of Credit. This is disputed by IOB which contends:
(1) Under UCP IOB are only liable to Fortis for failing to reimburse Fortis if Fortis honoured or negotiated a complying presentation as nominated bank: see Article 7(c) of UCP 600 which states: “An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing banks. Reimbursement for the amount of a complying presentation… is due at maturity..”
(2) If Fortis were to pay or at least to negotiate as nominated bank their obligation to do so arose on sight of the documents at their counter and in any event within five working days of the presentation of the documents, without waiting for reimbursement from IOB as issuing bank.
(3) For the reasons set out in Mr Hardaker’s evidence there are serious doubts whether Fortis did negotiate the documents so as to come within UCP 7(c). In particular:
(i) In no case does it appear that Fortis (as they were obliged to do under the terms of the LC) paid or negotiated on sight;
(ii) In a number of cases no negotiation was made until more than five days after presentation of the documents, and negotiation was thus outside the terms of UCP Article 14(b); and
(iii) In a number of other cases payment was not made until after IOB had rejected the documents and therefore after the date for reimbursement under the LC. Such a payment would be contrary to the requirements for a negotiation in UCP Article 2.
In all the circumstances IOB contends that any claim by Fortis as nominated bank will require to be investigated further at trial in order that it can be established whether on the facts as to presentation, negotiation and payment of each drawing Fortis did act as a nominated or negotiating bank within the provisions of the UCP so as to give rise to a right of reimbursement by IOB.
I reject these arguments. Under the UCP the obligation to reimburse the nominated bank arises if it honours or negotiates a complying presentation and forwards the documents to the issuing bank. In the present case Fortis did negotiate what on their case was a complying presentation and did forward the documents to IOB. What matters is the fact of honouring or negotiating a complying presentation.
(3) The Preclusion point
The Claimants contend that IOB is in any event precluded from relying on the alleged discrepancies. The preclusion is said to arise as follows:
(a) Article 16(c) of UCP 600 provides that when an issuing bank decides to refuse to honour it must give a notice to that effect to the presenter. Article 16(c) prescribes that that notice must state that the issuing bank will do one of four things with the rejected documents, namely:
(i) that it is holding the documents pending further instructions from the presenter; or
(ii) that it is holding the documents until it receives a waiver from the applicant or receives further instructions from the presenter prior to agreeing to accept a waiver; or
(iii) that it is returning the documents; or
(iv) that it is acting in accordance with instructions previously received from the presenter.
(b) Article 16(f) then provides that if an issuing bank fails to act in accordance with the provisions of Article 16, the issuing bank “…shall be precluded from claiming that the documents do not constitute a complying presentation”.
The Claimants contend that, in most cases, IOB’s Article 16(c) notice stated that it would “RETURN” the documents. In the one instance where IOB stated that it would “HOLD” the documents, Fortis subsequently instructed IOB to “return” them, in instructions given on 13 and 19 January 2009, so that IOB became obliged to return the documents under Article 16(c)(iii)(b) in accordance with Fortis’s instructions. IOB failed to return the documents which it said it would “return” and failed to return them when instructed by Fortis to do so, despite chasers from Fortis. In the event, IOB finally returned the documents only after Fortis had declared that, by reason of IOB’s failure to act in accordance with their obligations, Fortis had no further interest in the documents and was treating IOB’s failure to return them as a waiver of the alleged discrepancies.
In all the circumstances, the Claimants contend that by reason of IOB’s failure to act in accordance with its obligations under Article 16 either at all, or within a reasonable time, IOB is now precluded by Article 16(f) from claiming that the documents presented were not complying presentations.
As IOB points out, there is no express requirement in Article 16 that documents be returned, or that instructions from an advising or confirming bank be complied with. It is accordingly contended that no waiver could arise based on failure to return documents, because there is no obligation in the rule to do so.
The Claimants’ response is that it must be implied that when the issuing bank states by notice that it is returning the documents (or is requested to return documents which it is holding) it must actually do so within a reasonable time. An implication that this be done within some time limit is necessary as a matter of business efficacy and/or is so obvious that it goes without saying, and that the obvious time limit to be implied is the common one of a reasonable time.
This is not, however, the Claimants’ pleaded case and IOB objected to it being raised for the first time in argument. It was contended that the issue of implication, the terms of any such implication and the question of compliance with any term as might be implied are all issues fit for trial and could not be dealt with summarily. I have carefully considered whether I should dismiss the Claimants’ application on these grounds, particularly given the late stage at which the implied term argument was articulated and advanced. On balance, however, I have concluded that the preferable course of action would be to grant IOB the opportunity to put forward such further evidence or other material as it wishes in relation to: (1) whether any term is to be implied; (2) if so, the nature of such term; and (3) compliance with such term. I therefore propose to give IOB that opportunity and will hear counsel as to when and how that is to be done. In the meanwhile I shall defer any ruling on the preclusion point.
I should add for completeness that the Claimants say that they wish to raise an as yet unpleaded claim that IOB was precluded from claiming that the documents were discrepant by reason of its delay in giving its notices of discrepancies, but acknowledged that this issue could not be determined on a summary basis. They also argued that the notices were bad notices if IOB was not in fact returning the documents or holding them to the instructions of the presenter. The latter point will be dealt with at the same time as the preclusion point as they are inter-related.
(4) The Bill of Lading point
IOB raised a new point at the hearing in relation to the drawing of US$365,000 under L/C 3. It was contended that the presentation was non compliant because the re-presentation of the documents occurred more than 21 days after the bill of lading date. Although this was not a point taken at the time it was said that it could found a counterclaim (as yet unpleaded).
The short answer to the point is that the presentation was within 21 days of the date of issue of the bill of lading and it is that date rather than the date of shipment which is relevant.
Conclusion
I accordingly conclude that all IOB’s defences fail save for the consolidated certificate discrepancy defence, which defence succeeds subject to preclusion issues. In relation to the preclusion point I will allow further evidence/argument to be advanced and will hear counsel as to the appropriate order to be made in such circumstances.
Governor & Company of the Bank of Ireland v State Bank of India
[2011] NIQB 22 [2011] NI 169
WEATHERUP J
[1] This is the defendant’s application to stay proceedings on the basis that the appropriate forum for the determination of the issues between the parties is India, where proceedings are already underway between the parties in respect of the same subject matter. Mr Good appeared for the plaintiff and Mr Horner QC for the defendant.
[2] The Writ of Summons was issued on 30 November 2009 and claims damages for loss and damage alleged to have been sustained by the plaintiff by reason of the breach of contract of the defendant in the refusal to reimburse the plaintiff pursuant to a letter of credit issued by the defendant. The Statement of Claim pleads that on 5 September 2008 the defendant issued an irrevocable letter of credit for a sum up to $625,000 on behalf of the applicant, Sony Ispat Limited (“Sony”) based in India, in favour of the beneficiary European Metal Recycling Limited (“EMR”) based in Warrington, England. The purpose of the letter of credit was to facilitate payment for goods shipped and sold by EMR as seller to Sony as buyer where EMR requested the plaintiff to agree to act as confirming bank.
[3] It was a pre-condition to payment for the goods and the letter of credit that the seller presented specific documentation to the plaintiff as the confirming bank. The requisite documents relating to three shipments of goods by the buyer to the seller were presented to the plaintiff by the seller in October 2008. The plaintiff determined that the three sets of documents conformed with the requirements of the letter of credit and made payment to the seller in respect of the three shipments in a total sum of $460,000. In October 2008 the plaintiff forwarded the documents to the defendant requesting reimbursement of the amounts paid at maturity and stating that the plaintiff had paid the seller in accordance with the terms of the letter of credit. In November 2008 the defendant, allegedly in breach of the letter of credit, rejected the documents, claiming discrepancies, and refused to reimburse the plaintiff for the sums that had been paid to the seller. Thus the plaintiff’s claim against the defendant is for the loss of the reimbursement of the sum of $460,000.
[4] The defendant entered a conditional appearance on 18 February 2010. The defendant has identified 13 discrepancies in the documentation and this, the defendant claims, justifies the refusal to pay. The plaintiff on the other hand rejects the alleged discrepancies and contends that there is no justification for non-payment on foot of the irrevocable letter of credit.
[5] The grounding affidavit on this application outlines the progress of proceedings in India. The Indian proceedings were initiated by the present defendant on 31 December 2008 in the District Court at Indore against the present plaintiff as first named defendant and against Sony, as buyer of the goods, as second named defendant and against EMR, as seller of the goods, as the third named defendant. In the Indian proceedings the Bank of India sought an injunction to restrain the Bank of Ireland from issuing any other proceedings in relation to the dispute, known as an anti-suit injunction, and also sought declaratory relief that the documents negotiated under the letter of credit contained discrepancies and did not satisfy the test for presentation of compliant documents.
[6] In the Indian proceedings the Bank of Ireland filed a written statement that specifically addressed the substantive issue between the parties concerning the discrepancies. The Bank of India contends that the Bank of Ireland did not seek to challenge the jurisdiction of the Indian court in the Indian proceedings.
[7] The District Judge at Indore declined to grant the Bank of India the anti-suit injunction and that decision was appealed by the Bank of India to the High Court and judgment was delivered on 27 November 2009. The High Court upheld the decision at first instance and held that the Bank of Ireland was amenable to the jurisdiction of the Indian courts and directed that the trial court should hear and determine the substantive merits of the case and should expedite the suit and decide as expeditiously as possible, preferably within a period of nine months.
[8] In the present proceedings the grounding affidavit states that the defendant has obtained an expert opinion from an Indian lawyer which states that the plaintiff has failed to raise the issue of the lack of jurisdiction of the Court in the Indian proceedings and therefore has submitted to the jurisdiction of the Indian Court. Further the defendant contends that, unlike the plaintiff in connection with the Indian proceedings, it has not to date submitted to the jurisdiction of the Court in Northern Ireland. As indicated above the defendant entered a conditional appearance on 18 February 2010.
[9] The defendant contends that in the circumstances the appropriate forum for determination of the issues between the parties is India. It will be noted that the Northern Ireland proceedings were commenced immediately after the disposal of the appeal in the Indian proceedings. The substantive issue in both jurisdictions concerns the discrepancies in the documents supporting the irrevocable letter of credit and whether there are any discrepancies that warrant the refusal of payment.
[10] There is also an issue as to whether the Bank of Ireland has submitted to the jurisdiction of the Indian court. Mr Forrester, solicitor for the plaintiff, has indicated in his replying affidavit, in response to the debate on the jurisdiction issue, that the plaintiff has now lodged in the Indian proceedings a specific challenge to the jurisdiction of the Indian Court.
[11] In Spiliada Maritime v Cansulex Limited (1987) AC 460 Lord Goff set out the approach to considering forum conveniens and I summarise as follows.
First of all the basic principle is that a stay will only be granted on the ground of forum conveniens where the Court is satisfied that there is some other available forum having competent jurisdiction which is the appropriate forum for the trial of the action, that is where the case may be tried more suitably in the interests of the parties and in the ends of justice.
Secondly, in general the burden of proof rests on the defendant to persuade the Court to exercise its discretion to grant a stay.
Thirdly, the question being whether there is some other forum which is the appropriate forum for the trial of action, it is pertinent to ask whether, if the plaintiff has founded jurisdiction as of right in accordance with the law of this country, that of itself gives the plaintiff an advantage.
Fourthly, since the question is whether there exists some other forum which is clearly more appropriate for the trial of the action, the Court will look first to see what factors there are which point in the direction of another forum. These will include not only factors affecting convenience or expense such as the availability of witnesses but also factors such as the law governing the relevant transaction and the places where the parties respectively reside or carry on business.
Fifthly, if the Court concludes at that stage that there is no other available forum which is clearly more appropriate for the trial of the action, it will ordinarily refuse the stay.
Sixthly, if however the Court concludes at that stage that there is some other available forum which prima facie is more appropriate for the trial of the action, it will ordinarily grant a stay, unless there are circumstances by reason of which justice requires that a stay should nevertheless not be granted. In this inquiry the Court will consider all the circumstances of the case including circumstances which go beyond those taken into account when considering connecting factors with other jurisdictions.
[12] The prior proceedings in the Indian Court commenced between the same parties and additional parties and are concerned with the same issues and additional issues. The issue in relation to the discrepancies, which is the substantive issue between the parties in the present proceedings, is a matter which is before the Indian Court. The ruling on an anti-suit injunction was appealed and the substantive case is back before the Judge at first instance, with a direction that the matter proceeds with expedition.
[13] The plaintiff contends that there is likely to be inordinate delay if the dispute is dealt with by the proceedings in India. It is said that civil proceedings in India can take 20 years. There is also affidavit evidence which places the matter in more modest terms but nevertheless involving considerable delay in that at first instance the decision may take 5-7 years and if there is an appeal the whole process may take 10-12 years. The Indian High Court, on disposing of the appeal, directed that the matter should proceed with expedition and preferably within nine months. Recent correspondence in relation to the present state of the Indian proceedings suggests on the one side that the matter has been stayed pending the outcome of these proceedings, while on the other side it has been suggested that the proceedings have not been stayed but that they have been adjourned from time to time by the Bank of Ireland pending the outcome of these proceedings.
[14] The Indian proceedings have progressed and the first instance Court has been directed to proceed with expedition. I conclude that any failure of the first instance Court to proceed as directed by the High Court in India has been occasioned by the commencement of these proceedings in Northern Ireland. I am not satisfied that there is evidence of delay or the prospect of delay in the Indian proceedings such as would warrant excluding the Indian Court as a suitable alternative for the resolution of this dispute.
[15] There are issues about the convenience of witnesses who may be called on the hearing of the substantive proceedings. Inevitably, where there is consideration of proceedings in Northern Ireland or proceedings in India, with witnesses being required to travel to the other jurisdiction. there will be inconvenience to those who have to travel. The defendant draws attention to its domicile in India and having no place of business in Northern Ireland, to the seller being an English company, the buyer being based in India, the plaintiff, while carrying on business in Northern Ireland, being an international company and the identity of witnesses based in India, including the defendant’s expert witness. On the other hand some of the plaintiff’s witnesses are based in Northern Ireland, some are based in England and the plaintiff’s expert is not based in Northern Ireland. On balance the greater inconvenience probably rests with proceedings in Northern Ireland.
[16] A further consideration is the place of performance of the contract. The Contracts (Applicable Law) Act 1990 applies the Rome Convention on the Law Applicable to Contractual Obligations.
Article 4 of the Convention provides that, to the extent that the law applicable to the contract has not been chosen in accordance with Article 3, a contract is to be governed by the law of the country with which it is ‘most closely connected’.
By Article 4(2) it shall be presumed that the contract is most closely connected with the country where the party who is ‘to effect the performance which is characteristic of the contract’ has, at the time of the conclusion of the contract, its base. If the contract is entered into in the course of the parties trade or profession, as in this case, that country shall be the country in which the principal place of business is situate or where under the terms of the contract the performance is to be effected.
[17] The Uniform Customs and Practice for Documentary Credits is a set of rules on the issue and use of letters of credit and they were incorporated into this contract between the plaintiff and the defendant.
[18] The defendant contends that the characteristic performance of the contract is the reimbursement by the defendant and that the reimbursing bank has its place of business in India. The plaintiff contends that the contract is most closely connected with Northern Ireland where the plaintiff has its place of business, where the plaintiff accepted the documents as confirming bank and made payment to the seller, where all documents were submitted by the seller from England, where all the documents were reviewed by the plaintiff, where the payment to the seller was arranged and where the documents submitted by the seller were forwarded to the defendant in India.
[19] The defendant relied on Royal Bank of Scotland v Cassa di Risparmio (Transcript 21 January 1992), decided in the Court of Appeal of England and Wales. The UCP was not incorporated into the contract and the terms of the contract provided for reimbursement in New York of the amount due on the letter of credit. The application was to set aside proceedings in England and it was considered under the Civil Jurisdiction and Judgments Acts 1982 applying the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. The Convention concerns jurisdiction being conferred on the place of performance of the obligation in question. The Bank of Scotland sued the Italian bank because of a cancellation of reimbursement by the Italian bank. Phillips J at first instance was upheld by the Court of Appeal, having stated that the agreed mode of performing the reimbursement obligation was through an American reimbursing bank in New York or in one case in Philadelphia. In consequence the agreed place of performance of the reimbursement obligation was New York or in one case Philadelphia. The substantive issue was whether the defendant could justify the failure to effect payment. England was not the place of performance of the obligation in question. The terms of the contract provided that the place of reimbursement was American.
[20] The plaintiff relied on Bank of Baroda v Vysya Bank (1994) 4 CLC 41 where the confirming bank claimed against the issuing bank for withdrawing authority to claim the reimbursement from the reimbursing bank, Citibank in London. The plaintiff had been granted leave to issue proceedings out of the jurisdiction because the law of the contract was considered to be English law and the contract was to be performed in England. The letter of credit was governed by English law and the contract was to be operated in London because the plaintiff’s London branch was effecting payment in London.
[21] It is necessary to determine what is the relevant contract and what is the characteristic performance of that contract. There are a number of contracts that arise in relation to the sale of the goods and I summarise the contracts as follows.
The first contract is between the buyer and the seller of the goods, that is, between Sony in India and EMR in England.
The second contract is between the buyer and the issuing bank whereby the issuing bank issues a letter of credit for the seller, either by itself or through a confirming bank, and the buyer agrees to repay the bank. The issuing bank is the defendant and the confirming bank is the plaintiff.
The third contract, being that with which we are particularly concerned, is between the issuing bank and the confirming bank, which provides for repayment of the amount paid upon provision of the appropriate confirming documents.
Fourthly, there is a contract between the confirming bank and the seller, in that the confirming bank will pay on foot of the documents.
Fifthly there is a contract between the issuing bank and the beneficiary, that is the seller.
[22] Within the above complex of contractual arrangements the dispute arises in relation to the third mentioned contract between the issuing bank and the confirming bank because of the dispute over compliance of the documents that has resulted in the defendant’s refusal to make the payment.
[23] What are the performance obligations that arise in the contract between the issuing bank and the confirming bank? On one side the obligation is to furnish the appropriate documents. On the other side the obligation is to make the payment on foot of the documents.
[24] What is the performance that is characteristic of the contract? Essentially the characteristic performance is reimbursement on receipt of the appropriate documents. Which party is to effect that characteristic performance? The defendant as the reimbursing bank is the party making the payment that is the characteristic performance of the contract between the plaintiff and the defendant. The defendant’s principal place of business is India.
[25] Accordingly, I do not accept the plaintiff’s approach to the place of performance. The contract in question, being the contract between the plaintiff and the defendant for reimbursement, will involve payment made by the defendant in India. It is India that is the place of the characteristic performance of the particular contract and the country with which the contract is most closely connected.
[26] Ultimately the burden is on the defendant to persuade the Court to exercise its discretion to grant a stay. The question is whether there is a more appropriate forum than Northern Ireland. I am satisfied that there is a more appropriate forum and that is India as the place of performance of the contract, the country with which the contract is most closely associated, the venue of the Indian proceedings already dealing with the same issues and involving the same parties and where the matter is advancing, where the proceedings can be completed without undue delay and which on balance is more convenient for all those involved.
[27] There being a more appropriate forum the question is whether there is any reason in justice and for the appropriate disposal of the proceedings that the matter should not be stayed in this jurisdiction so that it may proceed in India. In all the circumstances I am satisfied that there is not any such ground for refusing a stay.
[28] The defendant has discharged the burden of establishing that there is a more appropriate forum for the trial of the action. There will be an Order to stay the Northern Ireland proceedings while the proceedings continue in India.
National Infrastructure Development Company Ltd v Banco Santander S.A.
[2017] EWCA Civ 27
Lord Justice Longmore :
Introduction
This is an appeal from Knowles J who, sitting in the Commercial Court, gave judgment against the appellant bank (“the bank”) and in favour of the beneficiary of four letters of credit, National Infrastructure Development Company Limited (“NIDCO”). NIDCO is a corporate vehicle used by the government of Trinidad and Tobago to effect public infrastructure works.
On 4th July 2011 NIDCO entered into a contract with Constructora OAS Ltda (“OAS”), a Brazilian contractor, to construct an important public highway in the south of Trinidad. The construction contract was governed by the law of Trinidad and Tobago and disputes were to be resolved by arbitration with a seat in Port of Spain under the auspices of the London Court of International Arbitration (“LCIA”).
OAS wrote to the main engineer on the project on 19th October 2015 stating that NIDCO had defaulted on payment and that it was giving notice under clause 16.1 of the construction contract. Construction work subsequently ceased (the reasons for which are disputed between NIDCO and OAS). On 21st June 2016 NIDCO issued a termination notice on the basis that OAS had abandoned the project. OAS’s case was (and is) that they had stopped working because of non-payment by NIDCO.
OAS filed an arbitration request with LCIA on 1st August 2016 and the dispute between NIDCO and OAS is currently subject to ongoing arbitration.
The dispute between NIDCO and the bank has arisen because OAS, pursuant to the construction contract, procured standby letters of credit in NIDCO’s favour. On 15th September 2016 NIDCO issued proceedings to enforce these letters of credit after the bank had refused on four separate occasions to honour them. The letters of credit are governed by International Standby Practices 98 (ISP 98). Any matter not governed by ISP 98 is governed by English law and the parties conferred jurisdiction on the English Courts in respect of any dispute arising under the letters of credit.
The Letters of Credit
On the 28th day of each month OAS would submit to the engineer a statement about work done. NIDCO would then pay for the value of the work if certified by the engineer, subtracting amounts previously paid. The contract entitled NIDCO to withhold an amount of “retention money” in accordance with clause 14.3(c) of the contract. OAS could, however, instead provide “retention security” in lieu of retention money. OAS provided such retention security by procuring standby letters of credit in NIDCO’s favour. As the total retention money increased, OAS would procure from time to time new letters of credit to increase the retention security.
OAS also procured letters of credit in favour of NIDCO by way of “performance security” in accordance with clause 4.2 of the contract. The level of security represented a percentage value of each phase of work.
Clause 4 of the letters of credit required demands made under them to be in accordance with an annex. The required form was to contain the following statement:-
“We hereby notify you that the amount of USD XXXXXXX is due and owing to us by the contractor and demand immediate payment under the letter of credit of that amount.”
Further relevant clauses of the letters of credit provided:-
“7. The presentation of a demand shall be conclusive evidence that the amount claimed is due and owing to you by the contractor.
8. Demands made hereunder may be made during the period from the date of issue of this letter of credit until close of business on [August 30th 2016] (the “expiry date”).
…
11. We will pay amounts due to you under this letter of credit in full without set-off or counterclaim.
…”
Relevant provisions of ISP 98 include:-
“1.06(d) Because a standby is documentary, an issuer’s obligations depends on the presentation of documents and an examination of required documents on their face.”
There is no dispute that the written demands in the present case were made in the form set out at annex 1 to the standby letters of credit. In them NIDCO stated:-
“We hereby notify you that the amount of [the relevant USD sum is given] is due and owing to us by the Contractor [i.e. OAS].”
On 6th July 2016, a fortnight after NIDCO issued their termination notice, OAS, on appeal, persuaded a Brazilian court to issue a temporary injunction preventing the bank from paying out on any demand under these letters of credit, pending the determination of that court as to its jurisdiction. No determination has yet been made.
The decision of Knowles J
The issue for the judge was whether summary judgment ought to be granted in NIDCO’s favour against the bank in respect of the sums stated to be due and owing. The bank resisted summary judgment on the following basis:-
i) That the sums claimed were not “due and owing” from OAS as stated in the drawing notice and NIDCO had no honest belief in the truth of its statement that they were “due and owing”. NIDCO had therefore acted fraudulently in seeking to operate the letters of credit;
ii) NIDCO was claiming around US$35m retention scrutiny when in fact it was only entitled to US$31m in retention money and NIDCO was fully aware of this;
iii) There was potentially an equitable jurisdiction to prevent unconscionable demands under letters of credit, in addition to the fraud exception. This was said to be a developing area of law not suitable for summary judgment; and
iv) There ought to be a stay of execution pending further order because the bank was prohibited by Brazilian court order from paying the money, even though that order may soon fall away.
The judge rejected these arguments, granted summary judgment and ordered the bank to pay US$38,020,306.79 by 4pm on 23rd November 2016. He refused permission to appeal and refused to grant a stay of execution. There is now an appeal for which, as it happens, I gave permission.
In support of the bank’s case of fraud, three pieces of evidence were put forward:-
i) A statement by the president of the claimant made to the Public Accounts (Enterprises) Committee on 1st June 2016 that OAS did not owe money to NIDCO;
ii) The lack of any mention of sums due in a letter from the claimant signed by its president in the letter terminating the contract on 21st June 2016; and
iii) A letter dated 6th July 2016 from the claimant, signed by its president, which divided sums up into debts described as due and debts which required quantification in due course.
The judge dismissed the first piece of evidence because the president’s evidence predated termination and dealt only with “very large overall sums indeed”. He did not regard the second piece of evidence as persuasive and said that the third matter “shows the way in which the claimant viewed their entitlement as a current entitlment in respect of all sums”. He said that even if what was demanded was based on an estimate of future sums that did not mean that the claimant did not hold an honest belief that those sums were due and owing now.
The substantive law
The principles are well settled. In RD Harbottle v National Westminster Bank [1978] QB 146, 155 Kerr J said:-
“It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the lifeblood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in contracts.”
That decision was approved in the Court of Appeal case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 where it was emphasised that the bank must honour a performance bond unless it has notice of clear fraud.
Edward Owen was itself approved by the House of Lords in United City Merchants v Royal Bank of Canada [1983] 1 A.C. 168 which concerned a letter of credit issued to a seller of goods who presented apparently conforming documents including falsely dated bills of lading which it (the seller) did not know were false. Having set out the obligations of the confirming bank to pay the seller Lord Diplock continued (page 183):-
“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. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or “landmark” case is Sztejn v J.Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all”. The courts will not allow their process to be used by a dishonest person to carry out a fraud.”
The position on a summary judgment application
This was a matter of some debate because commercial judges have been somewhat troubled by the supposedly low burden assumed by a defendant successfully resisting summary judgment namely “a real prospect of establishing a defence” according to CPR Part 24. Even before the advent of CPR Part 24 Rix J had said in Czarnikow-Rionda v Standard Bank [1999] 2 Lloyd’s Rep. 187, 202:-
“… the fact that the [relevant party] gets the benefit of a lower standard of proof for the purposes of a pre-trial hearing, places on the court, as I believe the cases demonstrate, an additional requirement to be careful… not to upset what is in effect a strong presumption in favour of the fulfilment of the independent banking commitments.”
After the CPR came into force, Mance LJ in an obiter passage in Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 (para 31) said that the words “real prospect” provided a comparatively low hurdle and (para 32) that Harbottle and Edward Owen had required fraud to be “established” and that such defence if good at all must be capable of being established with clarity at the interlocutory stage. These paragraphs were expressly approved by the Privy Council in Alternative Power Solution Ltd v Central Electricity Board [2015] 1 WLR 697 at paragraph 59 which, however, was a case in which the bank’s customer had sought to restrain the bank from paying sums required to be paid under a letter of credit on the ground that it was “seriously arguable” that the beneficiary could not honestly have believed in the validity of its demands. Speaking for the judicial committee, Lord Clarke of Stone-cum-Ebony said:-
“In summary the Board concludes that it must be clearly established at the interlocutory stage that the only realistic inference is (a) that the beneficiary could not honestly have believed in the validity of its demands under the letter of credit and (b) that the bank was aware of the fraud.”
The position with regard to cases of interlocutory injunctions sought against the bank by the bank’s own customer is, however, not the same as the position in cases in which the beneficiary of the letter of credit seeks summary judgment against the bank. This was recognised and accepted by Teare J in Enka Insaat Ve Sanayi A.S. v Banca Popolare Dell’Alto Adige SpA [2009] EWHC 2410 (Comm) [paras 24-25]:-
“In my judgment the test to be applied must be that of a “real prospect” because that is the test set out in CPR Part 24. I do not consider that this court is bound to apply a “heightened test” because the courts in Solo and Banque Saudi Fransi were not considering a claim against a bank under a guarantee where the defence was that the demand was said to be fraudulent. I therefore consider that the test in the present context is whether there is a real prospect that the Banks will establish at trial that the only realistic inference is that the fraud exception applies, that is, that ENKA could not honestly have believed in the validity of its demands.
However, there is considerable support for the view, which I accept, that in applying that test the Court must be mindful of the principle that banks, when sued on a letter of credit or performance bond or guarantee, need particularly cogent evidence to establish the fraud exception.”
This seems to me to be the correct approach despite the fact that decision of Teare J was given before the Privy Council in Alternative Power had approved the obiter passage of Mance LJ in Solo.
The matter is of some importance in this case because the judge in his unreserved judgment said twice (paras 15 and 24 that he did not regard it as seriously arguable that NIDCO did not honestly believe in the validity of its demands. He seems to have derived that phrase from its use in the Alternative Power case where it was used appropriately to describe the burden on a claimant seeking to establish a claim for interim relief in the form of an interlocutory injunction; but the phrase is, with respect to the judge, not appropriate to describe the burden on a defendant seeking to resist summary judgment who only has to establish a “real prospect” of establishing his defence. With these prefatory remarks I can turn to the permitted grounds of appeal.
Grounds of Appeal
There are now six grounds of appeal:-
i) The judge applied an incorrect test of serious arguability when he should have asked himself whether the bank had a real prospect of establishing its defence.
ii) The bank did have a real prospect of establishing that NIDCO did not believe in the validity of its claim because a claim for unliquidated damage for premature abandonment of the construction contract was not in law a claim that money was “due and owing”.
iii) The factual evidence relied on by the bank demonstrated that NIDCO had no genuine belief that money was due and owing from OAS.
iv) On any view the claim under the retention letters of credit could only be in respect of the certified retention; at the time of the demand the certified retention was only US$31m and it was therefore wrong to claim an amount of US$34m in respect of the retention security.
v) It was wrong to give summary judgment without offering the bank an opportunity to cross-examine NIDCO’s witnesses.
vi) The judge’s refusal to order a stay in the light of the Brazilian Injunction was wrong in principle.
(1) The “incorrect test”?
It will be apparent from what I have already said that I think that the judge did apply the wrong test. The use of the phrase “seriously arguable” may have been an inadvertent infelicity in the course of an unreserved judgment. But the judge appears to have set the bar too high and this ground of appeal, so far as it goes, must succeed.
I say “so far as it goes” because one must bear in mind exactly what it is that the bank must have a “real prospect” of establishing. It is in the words of Teare J that “the only realistic inference is that [the claimant] could not honestly have believed in the validity of its demands” (the emphasis is mine but none the less crucial for that).
(2) No sum “due and owing” in law?
It follows from (1) above that this ground of appeal is misconceived. The position in law is irrelevant because it is the beneficiary’s belief in the validity of its demands which is relevant, not whether the demands are correct as a matter of law.
That said the words “due and owing” in a contractual context must inevitably be construed against their contractual background. In the present case the construction contract required the performance security to be provided to cover a number of events set out in clause 4.2(d) of the contract, including not merely failure to pay amounts due but:-
“(d) circumstances which entitle the Employer to termination…. irrespective of whether notice of termination has been given”.
In the light of this provision it must be arguable (and, if necessary, I would hold) (1) that the letters of credit constituting performance security covered the sums for which clause 4.2 (d) of the construction contract contemplated the letters of credit would be given and (2) that the requirement that any demand should state that a sum was “due and owing” enabled the beneficiary to include sums to which it was entitled on any allegedly contractual termination, following OAS’s repudiation by abandoning the work. Mr Russen QC for the bank submitted that no claim in respect of damages for wrongful termination could be made under the letter of credit unless and until such sum has been determined by agreement or award. But that cannot be right in the light of the context in which the letters of credit were issued.
Since, moreover, there is a set date on which the letter of credit expires (albeit one which OAS may have been contractually required to extend), the bank (if the letter of credit was not in fact extended) could escape any liability if an arbitration award could not be made before the date of expiry. That is also something which the parties could not have intended when the letters of credit were provided.
This conclusion is also consistent with Balfour Beatty v Technical & General [2000] CLC 252 in which the beneficiary had to state that the sum demanded was “due and payable” and the claim made was a claim for repudiation of the contact.
Genuine belief that money was “due and owing”?
In these circumstances the bank’s assertion that NIDCO were fraudulent in asserting that money was due and owing to them as a result of OAS’s wrongful repudiation of the construction contract would be extremely difficult to establish. It cannot be fraudulent to make a demand one is entitled to make. Even if there was (as Mr Russen submits) in fact no entitlement in law to make the demands which NIDCO made under the letters of credit, there was nevertheless a strongly arguable case as to such entitlement and the question whether as to the facts, there is a real prospect of establishing
“that the only realistic inference is that [NIDCO] could not honestly have believed in the validity of its demands”
virtually answers itself. I should, however deal with the matters relied on by the bank and itemised at paragraph 15 above.
The president’s evidence to the Public Accounts (Enterprises) Committee of the Trinidad and Tobago Parliament was given before NIDCO gave notice of termination under clause 15.2 of the construction contract and thus while the contract was still continuing. It was nevertheless at a time when no work had been done on the road for a number of months. The project was a project of great concern to the people in the south of the island and was (and is) one of the biggest projects undertaken by the government. It was thus entirely natural for the Public Accounts (Enterprises) Committee to take a major interest in what was going on. No doubt NIDCO’s president, Mr Garibsingh, did not have an entirely comfortable ride from the committee while giving his evidence. The bank relies on a passage in which the committee was endeavouring to discover how much payment had been made to OAS for the work done to date and whether OAS had done less work than that for which they had been entitled to payment. They established that the contract sum was $5.2 billion and that 61% of the work had been done and that $3.7 billion had been paid, which was around 71% of the contract sum and the evidence then proceeded:-
“Mr Garibsingh: Yes, that is around 71 per cent of the budget. However, that would include the advance payment. So therefore when – you have to retract the advance payment from that figure.
Dr Gopeesingh: So you have 61 per cent of the work, let us say 60 per cent of $5.2 billion, which is $3.12 billion, and you have paid $3.6 billion?
Mr Garibsingh: $3.7 billion.
Dr Gopeesingh: But that $3.7 billion includes a significant part of the advance payment.
Mr Garibsingh: Correct.
Dr Gopeesingh: So, therefore, the State and the OAS are at the same situation, where no one really owes anybody any money or anything, basically.
Mr Garibsingh: More or less.”
It is this single answer on which the Bank relies to assert that, when demands on the letters of credit were made on 11 July 2016 after NIDCO terminated the contract on 21 June 2016 and confirmed that termination on 6th July 2016, the directors did not believe that they were entitled to recover substantial sums for OAS’s repudiation of the contract.
The short response is that neither the Committee nor Mr Garibsingh were talking of the consequences of a termination which had not then occurred. They were only talking of the financial position before termination when payments had been made which did not entirely match the work done because parts of the payments were made by way of payments in advance. That was the context in which Mr Garibsingh agreed that no one owed anybody any money “more or less”.
That is then confirmed by the immediately following exchange:
“Dr Gopeesingh: So, if OAS decides to terminate their work now on the original contract, it means then that about $1.5 billion work has to be done still to that extent? Yes?
Mr Garibsingh: That will be the remaining budget, yes.
Dr Gopeesingh: You said you have reached a critical stage, a sensitive stage in your negotiation with them. We would not want to go into that because that is between your client and the other one. I just want to thank you very much. I wanted to get an appreciation and I think the country and, of course, we would have liked – everyone would want to know where we are.
So in summary, the original contract is $5.2 billion for the highway, $3.7 billion has been paid, 61 per cent of the work has been done, and you all are still discussing the way forward on the completion of the highway? Yes?”
The cost of completing the highway is thus an altogether different matter which would have to be met, if possible, by getting OAS to complete the highway or paying damages if they do not. There is just no evidence of fraud at all.
The fact that NIDCO’s letter of 21 June 2016 did not make any financial claim at that stage is, if anything, still less indicative of fraud. The confirmation letter of 6th July did make financial claims before notice of entitlement under the letters of credit was given on 11 July 2016. It is true that the letter did draw a distinction between debts that were due and “debts” that required quantification but that is no evidence of absence of belief that NIDCO were entitled to draw down the letters of credit.
Mr Russen submitted that there was no evidence that personnel at NIDCO had addressed their minds to the question whether sums were presently “due and owing” or would become “due and owing” at some future date and that he should be entitled to cross-examine them to try to establish that they were reckless as to that distinction, such recklessness amounting to fraud in the Derry v Peek sense. No doubt lawyers can have a debate as to whether a current entitlement to claim damages for repudiation entitles one to say that the amount of such damages is due and owing (and I have summarised my own views on that interesting question above) but it borders on the absurd to say that the only realistic inference from the fact that businessman did not have (or may not have had) that debate is that they could not have believed in the validity of their demands.
Sums due under retention letters of credit
These letters of credit were set so that OAS would not have to submit to sums being retained from the purchase price in the ordinary way to constitute security for contractual performance of the work. The bank is able to point to a document of 14 January 2016 stating that the certified entitlement to retention as at that date was $31 million, if retention in cash had been exercised. That document cannot, however, be conclusive of that matter since it expressly adds:-
“Total amount of Retention covered by SBLC equals $35,359,590.56”
In fact demands of $35 million were made under the retention letters of credit. The bank says that a demand could only have been made for $31 million and that the excessive demand shows NIDCO’s fraudulent intent or that, at least, the claim under this head should be reduced to $31 million.
While it is true that there are different letters of credit for “performance security” and “retention security”, that is only because the underlying contract so required; performance security was axiomatic for a big construction contract; retention in some form or another would also be axiomatic. OAS was entitled, if it did not wish to submit to cash retention, to procure letters of credit in respect of that retention so that it could be paid instalments in full during the operation of the contract. That did not mean that the retention letter of credit could not be operated for the same purpose as that for which retention in cash would have been utilised if there had been a cash retention. Mr Russen had to accept that if there had been a cash retention it could have been used as security for any claim for wrongful repudiation by OAS, in the sense that any such claim would be diminished by the amount of the retention. There is no reason to think that letters of credit put up in place of a cash retention should be treated any differently. It would be most odd if a contractual provision existing for the benefit of the contractor (in that it obtains the full amount of any instalment without deduction for retention) entitled it to say that letters of credit put in place for retention purposes could not be used as security for any claim but could only be operated so as to enable the beneficiary to claim the amount of retention to which he would have been entitled but for the letter of credit option being used by the contractor. If that had been intended, the letter of credit could easily have said so.
Even if all that is wrong, I still cannot see that the demand in fact made can only be referable to fraud on the part of NIDCO; it is equally (if not more) referable to a genuine belief that NIDCO were entitled to make the relevant demands.
The facts and matters put forward as evidence of fraud to my mind just do not amount to fraud at all; the judge was therefore right to order summary judgment in the sum which he did.
Ability to cross-examine NIDCO personnel
I have dealt with this in paragraph 38 above as part and parcel of the fraud allegations. As a free-standing ground of appeal it amounts to no more than a hope that something might turn up at a trial which cannot be identified now. As such it is no reason for the case to go to trial.
Stay?
The bank submits that if it pays the sums required by the judgment it will be in breach of the injunction granted by the Brazilian Court of Appeal and will be liable to pay a fine of 10% of the judgment. It also submits that the arbitrators in the LCIA arbitration have power under Brazilian Law to discharge the injunction and are likely to do so. The first submission cannot prevail. If the bank chooses to do business in any particular jurisdiction it has to submit to any order of courts, in such jurisdictions. The second submission is difficult to understand. Even if the arbitrators sitting in Trinidad technically have jurisdiction to discharge the injunction granted in Brazil, there is no reason to suppose that they will do so. There is not even any reason to suppose that OAS will ask them to do so.
In general terms it is inappropriate for a court to stay its judgment in a letter of credit case. Letters of credit are part of the lifeblood of commerce and must be honoured in the absence of fraud on the part of the beneficiary. The whole point of them is that beneficiaries should be paid without regard to the merits of any underlying dispute between the beneficiary and its contractor. In Power Curber Intl Ltd v National Bank of Kuwait [1981] 1 WLR 1233, the seller of goods had obtained an order from the courts of the place where the bank was registered and had its head office preventing payment under a letter of credit. In the light of that order Parker J had granted a stay of execution of the judgment he had given in favour of the seller/beneficiary. But this court set aside the stay. Lord Denning MR said (page 1241D)
“If the court of any of the countries should interfere with the obligations of one of its banks (by ordering it not to pay under a letter of credit) it would strike at the veryheart of that country’s international trade. No foreign seller would supply goods to that country on letters of credit – because he could no longer be confident of being paid. No trader would accept a letter of credit issued by a bank of that country if it might be ordered by its courts not to pay. So it is part of the law of international trade that letters of credit should be honoured – and not nullified by an attachment order at the suit of the buyer.
…
Yet another consideration occurs to me. Many banks now have branches in many foreign countries. Each branch has to be licensed by the country in which it operates. Each branch is treated in that country as independent of its parent body. The branch is subject to the orders of the courts of the country in which it operates; but not to the orders of the courts where its head office is situate. We so decided in the recent case about bankers’ books in the Isle of Man: Reg v Grossman, the Times, March 6, 1981. In this case I think that the order for “provisional attachment” operates against the head office in Kuwait, but not against the branch office in London. That branch is subject to orders of the English Courts.”
Griffiths LJ agreed:-
“We should do the Bank of Kuwait a grave disservice if we were not to remove this stay for it would undoubtedly seriously damage their credibility as an international bank if it was thought that their paper was not worth holding because an ex parte application to their domestic courts could prevent payment under an expressedly irrevocable obligation.
There is no recognised rule of international law that compels this court to recognise this ex parte order of the Kuwaiti court. It is of course entitled to be treated with respect and wherever possible this court will in the interests of comity seek to recognise and uphold the order of the court of a friendly state. But unhappily in this case the approach of the Kuwaiti court appears to be so out of step with that of our own courts and the courts of other trading nations that I fear we cannot recognise it. The choice lies between upholding the world-wide practices of international commerce or the order of the Kuwaiti court. I choose the first option and would remove the stay.”
The argument for a stay in the present case is even weaker than it was in Power Curber since the order of the Brazilian Court is not even an order of the place where the bank has its head office (namely Spain) but merely an order of the place where the contractor has its own place of business.
Conclusion
For all these reasons, although the judge may have applied too generous a test in favour of NIDCO as the claimant, I would nevertheless uphold his orders entering summary judgment in favour of NIDCO and refusing any stay. I would, therefore, dismiss this appeal.
Lord Justice Christopher Clarke :
I agree.
Tradigrain v State Trading Corporation of India
[2005] EWHC 2206 (Comm) [2006] 1 Lloyd’s Rep 216, [2006] 1 All ER (Comm) 197, [2005] 2 CLC 589
Clarke J
The authorities
In Cargill International S.A. & Another v Bangladesh Sugar & Food Industries Corporation [1996] 2 Lloyd’s Rep 524 Cargill had agreed to sell to the defendants a cargo of sugar and arranged for the Dhaka branch of Banque Indosuez to provide a letter of guarantee for $526,273.15. The contract contained a provision that the guarantee was liable to be forfeited by the buyer if the seller failed to fulfil any of the terms of the contract or if any loss or damage occurred to the buyer due to any default of the seller; and a further term that, if the seller failed to adhere to the arrival period/time, the buyer would be entitled to recover liquidated damages at 2% of the contract value of the undelivered goods for each month or part of a month during which delivery was in arrears or to terminate the contract and forfeit the bond. There was a dispute between the parties as to whether the vessel’slate arrival at the discharge port and the fact that an overage vessel was used was due to the seller’s or the buyer’s default. The preliminary issues that the Court had to decide, on the assumption that the sellers were in breach of contract in one or both respects, and the answers eventually given were as follows:
“(1) Whether the defendant was entitled to make a call for the full amount of the performance bond if the breach or breaches of contract (a) caused no loss to the defendants; (b) caused some loss to the defendants which was less than the amount of the performance bond; (c) caused some loss to the defendant which was equal to or greater than the amount of the performance bond.
Yes, in all cases
(2) Whether, in the event of the defendant having obtained payment under the performance bond as a result of any such call as it was entitled to make the defendant was entitled to retain (a) all of the moneys received by it; (b) only such amount as was equal to the amount of the loss suffered by it; or (c) some other, and if so what amount.
The answer is (b).”
It is not clear from the report of the case whether Banque Indosuez had received a counter guarantee from another bank. The letter of guarantee recited that Cargill had requested Banque Indosuez “through the Chase Manhattan Bank, London” to issue a guarantee, so there may well have been one. Banque Indosuez had not paid up under the guarantee. By an agreement between the parties the original guarantee was cancelled and a new guarantee was substituted upon the footing that the rights of the parties in relation thereto were to be governed by the terms of the original guarantee and the contract of sale.
In the course of his judgment Morison J said this:
“I start with the commercial purpose of a performance bond. There is a wealth of authority concerned with the question whether and in what circumstances an interlocutory injunction may be granted (1) against the bank which issued the bond to restrain it from paying in accordance with its terms; (2) against the beneficiary of the bond to prevent it from calling the bond.
The Court will not grant an injunction in either case unless there has been a lack of good faith. The justification for this lies in the commercial purpose of the bond. Such a bond is, effectively, as valuable as a promissory note and is intended to affect the “tempo” of parties’ obligations in the sense that when an allegation of breach of contract is made (in good faith) the beneficiary can call the bond and receive its value pending the resolution of the contractual disputes. He does not have to wait the final determination of his rights before he receives some monies. On an application for an injunction, it is, therefore, not pertinent that the beneficiary may be wrong to have called the bond because, after a trial or arbitration , the breach of contract may not be established; otherwise the Court would be frustrating the commercial purpose of the bond. The concept that money must be paid without question, and the rights and wrongs argued about later, is a familiar one in international trade, and substantial building contracts. A performance bond may assume the characteristics of a guarantee, especially, if not exclusively, in building contracts, where the beneficiary must show, as a prerequisite for calling on the bond, that by reason of the contractor’s non-performance he has sustained damage: Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co. Ltd., [1966] 1 A.C. 199.
However, it seems to me implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an “accounting” between the parties in the sense that the rights and obligations will be finally determined at some future date. The bond is not intended to represent an “estimate” of the amount of the damages to which the beneficiary may be entitled for the breach alleged to give rise to the right to call. The bond is a “guarantee” of due performance. If the amount of the bond is not sufficient to satisfy the beneficiary’s claim for damage, he can bring proceedings for his loss”
Then, after considering a number of authorities and text books he said:
“”As a matter of general principle, therefore, in the light of the commercial purpose of such bonds, the authorities to which I have referred and the text-book comments, I take the view that if there has been a call on the bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank, (where, for example, the bank has not been paid by him) but that does not affect his right to bring the claim in his own name. In the normal course of events, the bank will have required its customer to provide it with appropriate security for the giving of the bond, which would be called upon as soon as the bank was required to pay. On the facts of this case, no question of a trust or agency will arise. In principle, I take the view that the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary.”
He then turned to consider whether two particular terms of the contract then under consideration indicated that the seller could not recover any overpayment. Having decided that they did not, he said:
“The basis upon which recovery may be made in respect of anoverpayment is, I think, contractual rather than quasi contractual. It seems to me that it is necessary to imply into the contract that moneys paid under the bond which exceeded the buyer’s actual loss would be recoverable by the seller. I am content to adopt Mr Males’ formulation of the term which is to be implied into the sale contract, as a matter of necessity or on the basis that the implication of such a term was so obvious that its incorporation in the contract went without saying:
“…that the buyer will account to the Seller for the proceeds of the bond, retaining only the amount of any loss suffered as a result of the Seller’s breach of contract.”
He then answered the questions at issue in the manner that I have set out above.
In Comdel Commodities Ltd v Siporex Trade S.A. [1997] 1 Lloyd’s Rep 424 Lord Justice Potter, giving the judgment of the Court, expressly approved the decision of Mr Justice Morison in Cargill in the following words:
“The law in this respect has recently been the subject of an illuminating decision of Mr Justice Morison, in Cargill International S.A. v Bangladesh Sugar and Food Industries Corporation [1996] 2 Lloyd’s Rep 524 in which the authorities are reviewed, most notably decisions in two Australian cases and dicta of Lord Denning, M.R. in State Trading Corporation of India Ltd v E.D. & F. Man (Sugar) Ltd., July 17 1981.
Those authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an “accounting” between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller’s claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand if the amount of the bond is more than enough to satisfy the seller’s claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller’s damages.
It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an “accounting” between the parties in the sense that their rights and obligations would be finally determined at some future date”.
The Cargill case itself reached the Court of Appeal – [1998] 1 WLR 461 – where the reasoning of the judge’s decision that, if the amount of the bond exceeded the true loss sustained, the party who provided the bond was entitled to recover the overpayment (I adopt the summary given by Potter LJ) was not challenged. In TTI Team Telecom International Ltd v Huthcison 3G UK Ltd [2003] EWHC 762. [2003] 1 All ER (Comm) 914 Cargill was applied.
The wrongful call
The Board of Appeal determined that the call upon the bond was wrongful for the reasons set out in paragraph 8 above and there has been no appeal from that decision. I do not, in those circumstances, propose to say much about it. However, the passages in the Board’s award which state that the claim under the bond was a breach of contract because the claim for damages for poor quality was bad appear to be inconsistent with the general principle that a claim under the bond is not, itself a breach of the sale contract, if made in good faith. (See also, to like effect, the dicta of Phillips J, as he then was, in Deutsche Ruckversicherung v Walbrook Insurance Co. [1995] 1 W.L.R. 1017, 1030 in relation to payment under Letters of Credit)[1]. The Board do, of course, go on to say that, in respect of $126,660.45 the claim made was one that the Buyers knew they had no basis for making.
Mr Paul Downes, for the Buyers submitted that the Sellers’ claim was properly characterised as a claim for compensation arising from an unwarranted call on the bond or an unwarranted failure to return the monies; for which the remedy must necessarily be a claim in damages. The Board had rightly recognised that, although the Sellers might suffer damage if and when they were called upon to pay UBS, they had not yet done so and were not entitled to recover as if they had. The only “windfall” which the Buyers enjoyed was the right to retain the monies called until such time as the Sellers proved that they had suffered damage, and that was a right that arose from the liberal terms of the guarantee which they had received in their favour. He went so far as to say that this was a benefit to which his clients were entitled even if the claim under the guarantee had been fraudulent.
Mr Downes further submitted that an obligation to make repayment could only arise as an implied term of the contract of sale and there was no implication that was either necessary or obvious. Firstly, there was the question as to when any such obligation arose: was it when a wrongful call was made and what constituted a wrongful call[2]. What then was the position if the call was initially valid? Did an obligation to repay arise if, after the call, the Buyer came to know that the call was invalid; or did that obligation arise only upon the determination of the arbitral tribunal and what, then would be the position if there was an appeal? All these difficulties, he submitted would vanish if the implied term was, as he suggested that it should be, namely that the Buyers would hold the sellers harmless to the extent that any call they made exceeded the buyer’s true loss. This would equate the position of the sellers, who would have to prove loss before recovery, with that of the buyers, who would have to prove any loss if they sought to recover more than the amount of the bond. And it would have the practical benefit that the stronger the Sellers’ case the more quickly would they recover. It would also have the practical benefit that Sellers would not recover until they had established a loss, and would thus avoid the possible result that the Buyers found themselves liable to repay Sellers and also liable to SBI.
Such a solution would, he submitted, also avoid the problems inherent in accepting that, if Sellers recover, they would hold the monies on trust for either UBS or SBI. As to those, firstly, it was not clear which of these banks would be the beneficiary of any trust. Secondly it was not clear whether there would be successive trusts, whereby a trust arose in favour of UBS when the Sellers received payment from the Buyers, and a trust in favour of SBI, when UBS received payment from the Sellers; or a trust and sub trust whereby, on payment by the Buyers Sellers held the money on trust for UBS who held it on trust for SBI. Thirdly, he pointed out that the relationship between the Sellers and UBS and between UBS and SBI was probably not governed by the Law of England, in which case the trust analysis might well be inapplicable.
In Mr Downes’ submission the authorities do not compel any different conclusion. In Cargill the question was whether or not the Buyers were entitled to keep the proceeds of the guarantee. The issue as to what should happen if a call is made and honoured, but neither the seller nor his bank has paid the bank that honoured the call, did not arise.
Mr Stephen Males QC, for the Sellers, submitted that there are two distinct questions to be addressed (a) whether the call on the guarantee was wrongful and (b) whether the retention of the money called was wrongful. As to the latter, the authorities to which I have referred, made it plain that, in the light of the findings of the Appeal Board, the overpayment has become due and owing as a debt to the Sellers.
Conclusions
In my judgment Cargill (and the citations in it) are authority for the proposition that there is an implied term in the contract of sale that the Buyers will account to the Sellers for any amount that has been paid under the bond to the extent that the amount paid exceeds the true amount of the Buyer’s loss. The amount is due to the Sellers as a debt, whether or not the sellers have indemnified either the paying bank or the indemnifier of the paying bank. In essence this is because, by calling for too much under the bond, the Buyers have procured payment to themselves from the paying bank (acting, for this purpose, on the Sellers’ behalf) of an amount that is not due, and must, obviously, return it to their contractual counterparty from whom they should not have procured it in the first place. Otherwise they will have retained a windfall in the form of money to which they were not entitled since, to the extent of the overpayment, there has been either no breach or no loss entitling them to retain it. This conclusion appears to me to be correct in principle and has been approved by the Court of Appeal.
Morison J did not have to decide when exactly the obligation to return the payment arises. Mr Males submitted that it was either after the dispute had been resolved by arbitration or, as he would prefer, after the lapse of a reasonable time for the purpose of enabling the parties to determine what was truly due. He does not presently seek an award of interest, reserving his right to do so hereafter. In those circumstances and since, on either basis, the amount is now due anything that I say on this subject is obiter.
I incline, however, to the view that the overpayment is due when the fact that it is an overpayment has been established either by agreement or judgment. Such a conclusion appears to me consistent with a number of passages in the judgment of Morison J i.e.:
“it seems to me implicit in the nature of a bond .. that … when the bond is called, there will, at some stage, be an “accounting” between the parties in the sense that their rights and obligations will be finally determined at some future date.”
and, citing Lord Denning in State Trading Corporation of India Ltd v E.D & F Man (Sugar) Ltd v The State Bank of India, July 17 1981
“If he receives too much, that can be rectified later at arbitration”
and, citing the 11th ed. of Hudson’s Building and Engineering Contracts:
“It is generally assumed .. that the Courts will provide a remedy by way of repayment to the other contracting party if a beneficiary who has been paid under an unconditional bond is ultimately shown to have called on it without justification”
and, referring to the particular clauses under consideration in that case:
“But in either event, there will be an “accounting” at trial or arbitration to ensure that the buyer has not been underpaid or overpaid”
To similar effect is the following passage in the judgment of Potter LJ, in Comdel v Siporex:
“It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an “accounting” between the parties in the sense that their rights and obligations would be finally determined at some future date”.
The decision of the majority of the Appeal Board
The Board recited the argument of the Buyers in terms which included the following in paragraph 8.3:
“The call on the Bond made by Buyers was made against their own bank, SBI, and not against either Sellers’ bank or Sellers. [Sellers[3]] have not at this stage suffered any loss other than legal costs… For this reason it is not considered appropriate that Buyers should be ordered to pay the net proceeds.. to Sellers for Sellers to hold on trust either for SBI or UBS. That is not to say that there should not be an accounting at some future date when the parties rights and obligations will finally be determined but so far as matters stand at present such final accounting cannot take place – the reason being the interlocking nature of the cross guarantees. As distinct from the facts in the Cargill and Comdel cases above cited Buyers made an unjustified call against their own bank, SBI and not against the Sellers bank, UBS or Sellers. Sellers will become liable for losses if proceedings by SBI against UBS to recover the sums paid by SBI to Buyers …cause UBS to initiate recovery proceedings against Sellers. In anticipation of such action there is justification now for directing Buyers to provide Sellers with an indemnity in respect of any sums for which Sellers are or become liable to any third party consequent upon Buyers’ unjustified call on the Bond”.. There is no justification for requiring Buyers to pay the net proceeds of the Bond to Sellers”
The majority do not expressly adopt this reasoning and there are a number of things wrong with it. Firstly, it is inconsistent with the reasoning in Cargill. Secondly, the fact that Sellers have not suffered loss may be a reason for determining that they hold any money recovered on trust; but is not a reason, on the Cargill analysis, for disentitling them to receive the money now. Thirdly, the “accounting at some future date” to which the passage refers is not a determination of the amount due (or not due) to the Buyers under the contract of sale but a quite different determination namely as to what liability Sellers have to UBS. Fourthly, whilst SBI may well be the Buyers’ Bankers, for present purposes they were acting on behalf of the Sellers. Fifthly, the principles enunciated in Cargill are not dependent on their being only one bank involved rather than, as is commonly the case, two.
The Board also summarised the argument of the Sellers in the following terms in paragraph 8.2:
“Sellers submitted that, in the absence of express wording in the contract to the contrary it is implicit in the contract that one party must account to the other party after the Bond has been called if the amount of the Bond differs from the losses incurred by Buyers. If the amount of the Bond is greater than the losses suffered by Buyers then Buyers have to account to Sellers for the amount that exceeds its losses and to which it is not entitled. In the Court of Appeal in Comdel Commodities Limited vSiporex Trade S.A. [1997] 1 Lloyds Rep 424 Potter LJ sates (first column on p 431) “…it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the Bond is called, there will at some stage in the future be an “accounting” between the parties to the contract of sale in a sense that their rights and obligations will finally be determined at some future date”. In a further decision of the Court of Appeal in Cargill International S.A. v Bangladesh Sugar & Food Industries Corporation [1998] 1 WLR 461 Potter LJ states (pp 468H-469A) “… Not only does the Buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the Bond, but payment can be obtained from the seller’s bank on demand without proof of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages. In these circumstances the obligation to account later to the seller in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties”. Sellers contend that Buyers must pay to Sellers the proceeds of the Bond. There was no breach of contract by Sellers and no losses suffered by Buyers. Sellers, therefore, are entitled to receive payment of the entirety of the proceeds of the Bond pursuant to the accounting after deduction of the despatch monies of USD100,669,55. Support for this position is provided in the judgment of Mr Justice Morison in the Commercial Court in the above cited Cargill/Bangladesh Sugar case [1996] 2 Lloyds Rep 524 when he states (second column p 530) “If there has been a call on the bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party my hold the amount recovered in trust for the bank (where, for example the bank had not been paid by him) but that does not affect his right to bring the claim in his own name … the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary.” In this arbitration, contend Sellers, the vehicle for accounting is the Appeal Award itself in which the over-payment or under-payment should be determined and awarded. On the determination of the over-payment Buyers should pay to Sellers this sum. However following the above dicta of Morison J upon receipt of the funds Sellers would hold the funds in trust for SBI/UBS and would in due course have to reimburse SBI/UBS for the over-payment.”
The expressed reasoning of the majority is in paragraph 8.4:
“The majority of the Board in reaching this conclusion took full regard of the words of Morison J cited in 8.2 above but noted that this part of the Judgment of Morison J was not adopted in the Court of Appeal. The words of Potter LJ, as also cited in 8.2 above, only focused upon the requirement for there to be an “accounting” between the parties at some “future” or “later” date when the monies in the Bond exceeded the losses suffered by the party calling on the Bond. It also noted that these words of Morison J were observations and, not as such, part of his judgment. The Board’s majority view, therefore, is that the accounting should only take place when the account [sic] party has suffered loss which, at present, Sellers have only suffered in relation to their legal fees in the New Delhi Court proceedings. Thus for Sellers now to receive the proceeds of the Bond less the despatch monies would provide Sellers with a windfall benefit of the bond monies without having suffered loss. The fact that Buyers continue to have the “windfall benefit” of the bond monies is a matter, for the present between the Buyers and SBI and not between Buyers and Sellers.”
With due respect to the majority, they have, in my judgment fallen into error. First, the passages cited from the judgment of Morison J were not “observations and not, as such, part of his judgment”. They were part of the ratio. Secondly the Court of Appeal did not adopt only part of his judgment. On the contrary it described his judgment, including his review of the authorities, as illuminating and adopted language very similar to his own in summarising the effect of the authorities. There is nothing whatever in the judgment of Potter LJ, to indicate that the Court of Appeal did not accept the passages in Morison J’s judgment cited at paragraph 8.2 of the Appeal Award, which are some of the most important parts of it. Thirdly, it may also be the case that the majority were making the same mistake about what was meant by “accounting at some future date” as is inherent in the argument of the Buyers as summarised by the Board in paragraph 8.3 of the Award. The Court of Appeal was plainly referring to an accounting between the parties to the contract of sale. Fourthly, there is no windfall benefit if Sellers hold the amount due back in trust for, or are otherwise liable to make payment of that amount to, either UBS or SBI. Fifthly, the fact that the Buyers continue to have a windfall benefit from the bond monies cannot be regarded as, at present, only a matter between the Buyers and SBI.
Penalty
Mr Downes submitted at one stage of his argument that, if the obligation to make repayment arose in the manner contended for the result would be penal and unenforceable. In my view no question of penalty arises. The overpayment is due to Sellers as a debt and they will be obliged to restore that money to SBI (directly or indirectly).
Trust
It is not necessary for present purposes for me to determine the precise nature of the obligation owed by the Sellers upon receipt of the overpayment, just as in Tomlinson (A) Hauliers Ltd v Hepburn [1966] A.C. 451 Lord Reid did not find it necessary to decide whether the obligation of a bailee with a limited interest in goods, who has insured up to the full value of the goods entrusted to him, to account to the owner for their value when received from insurers, was a trust in the strict sense. Nor is it necessary to determine whether the Sellers are bound to account to UBS who will account to SBI, or to SBI directly. I incline to the view that, in circumstances where UBS had not paid SBI, the Sellers’ obligation is to make payment to SBI, since the Sellers requested SBI to issue the guarantee and payment to them would satisfy their implied obligation (or, if there was one, any express obligation) to indemnify them for the cost of so doing as well as any obligation to UBS (apart from in respect of costs).
In the result, therefore, I shall allow the appeal. The Award of the Board should be varied by adding a provision that the Buyers must pay to the Seller the sum of US $807,580.45.
Jurisdiction
The Buyers disputed the jurisdiction of the arbitrators. On 15th April 1999 the first tier arbitration tribunal issued its award on jurisdiction in favour of Sellers. The Buyers did not challenge that Award under section 67(1) of the Arbitration Act 1996 either within the prescribed period (28 days from the date of notification of the decision) or at all. The Board of Appeal found that the contract of sale was entered into between the parties on 4th February 1997; that it contained a GAFTA arbitration clause; and that they had jurisdiction. They also upheld the finding of the first tier tribunal that the latter had jurisdiction. Lastly they held that the latter finding was, in any event, binding on them and that under GAFTA 125 Arbitration Rules effective 31st January 1997, incorporated into the contract of sale, no appeal on jurisdiction lay to the Board. The Buyers did not seek to obtain permission to appeal to this Court from the Board’s decisions on jurisdiction.
By a letter dated 9th September 2005 the Buyers’ solicitors, Messrs Ince & Co, stated that their clients had always maintained that GAFTA did not have jurisdiction and disputed the jurisdiction of the Commercial Court to decide the Sellers’ appeal. They pointed out, as is correct, that the time limit for contesting GAFTA’s jurisdiction had long since passed and that the Court’s permission would be required in order to reopen the issue. They stated that they had advised their clients that the prospects of the Court allowing this were so remote that they did not recommend making the application. They went on to record that, in those circumstances their clients had instructed them to defend the appeal and not to request permission to challenge the jurisdiction, but said that this should not be construed as an admission that GAFTA and the Commercial Court had jurisdiction. As is apparent the Buyers have defended the appeal.
As a matter of English law it is not now open to the Buyers to object to the
Appeal Award or the original award on the ground that the arbitrators lacked substantive jurisdiction.
Note 1 “Where a letter of credit is issued by way of conditional payment under an underlying contract, I do not consider that it is correct to imply a term in the underlying contract that the beneficiary will not draw on the letter of credit unless payment under the underlying contract is due. On the contrary, I consider that the correct inference that should normally be drawn is that the beneficiary will be entitled to draw on the letter of credit provided that he has a bona fide claim to payment under the underlying contract”. [Back]
Note 2 In the course of argument various possibilities were canvassed viz that a call might be bad if (a) made in bad faith; (b) made in good faith but without reasonable grounds; (c) if there was in fact no breach; (d) if there was a breach but the claim for damages was knowingly excessive; (e) if there was a breach but the call was for more than the true loss. [Back]
Note 3 The Award by mistake says “Buyers”. [Back]
Taurus Petroleum Limited v State Oil Marketing Company of Iraq
[2017] UKSC 64 [2017] UKSC 64, [2017] WLR(D) 701, [2017] 3 WLR 1170
LORD SUMPTION:
60. I agree with the disposal proposed by Lord Clarke, and with his reasons. I also agree with the concurring judgment of Lord Hodge. I add a judgment of my own because the Court is divided and it appears to me to be useful in response to some highly intricate arguments to identify the salient points of principle which have led me to this conclusion. In doing so, I shall use the same abbreviations as Lord Clarke.
61. The first question is whether there is a “debt due or accruing due to the judgment debtor [SOMO] from the third party [Credit Agricole]” for the purposes of CPR Part 72, which regulates Third Party Debt Orders. This turns on the construction of a most unusual form of letter of credit. For all its unusual features, however, the instrument must be construed as a whole, and as far as possible in such a way as to make each part of it consistent with every other part. Moreover, it must as far as possible be read consistently with the UCP, which are expressly incorporated into it. The UCP may be modified or excluded in specified respects by the terms of the credit, but otherwise it is a code of rules which enables letters of credit to be routinely dealt with by banks across the world on a common basis. It is therefore fundamental to their acceptability in international commerce.
62. The essential obligation of the issuing bank is to pay, conditionally on the presentation of conforming documents. Under the terms of this credit, it is I think clear that SOMO is the sole beneficiary of the issuing bank’s obligation to pay. The credit is expressed to be issued “in favour of” SOMO. Under UCP article 2, the party in whose favour a letter of credit is issued is the beneficiary. The purpose of the credit is to secure a debt identified in the commercial invoice, which is usually one of the documents to be presented, as it was in this case. UCP article 18 provides that the commercial invoice required to be presented, “must appear to have been issued by the beneficiary”, ie SOMO. The specified documents in this case included “SOMO’s duly signed original commercial invoice”. Nothing in Conditions A and B purports to alter the identity of the beneficiary as that expression appears in the credit itself or in the UCP. Indeed, Condition B is framed as an engagement on the part of the bank with “the beneficiary and Central Bank of Iraq”, a formulation which necessarily identifies SOMO and not CBI as the beneficiary. The letter of credit is expressed not to be assignable or transferrable. The effect of this is to exclude the provision expressly made in UCP article 38 for transfer to another beneficiary.
63. In the context of a credit in favour of SOMO, what is the effect of the irrevocable undertaking in Conditions A and B to honour the credit by paying into CBI’s account with the Federal Reserve Bank New York? There are two possibilities. The first is that the parties have thereby agreed to treat CBI as the issuing bank’s debtor, subject to the presentation of conforming documents. But that cannot be inferred from the mere fact that the money is contractually payable to CBI. This is because the second possibility is that the parties have agreed that the debt is owed to SOMO as beneficiary, but that the manner of its discharge is to be by payment into CBI’s account with the Federal Reserve Bank. In my opinion the latter is the better construction of Conditions A and B in this case. It accords better with the insistent identification of SOMO as the beneficiary and the exclusion of assignment or transfer of the credit to any one else.
64. One can infer from the fact that the promise to pay into CBI’s account is irrevocable and is made to CBI as well as SOMO that CBI must have had some interest of its own in the debt being discharged in that particular way. But nothing can be inferred from the terms of the credit about the nature of that interest. There are a number of possibilities: (i) CBI may have a proprietary interest in the conditional debt created by the credit, in effect by way of equitable assignment of the credit; or (ii) CBI may have stipulated for an equitable interest in the proceeds once they have been paid or, which amounts to the same thing, for there to be no liability to account to SOMO for the proceeds once it has reached CBI’s New York account; or (iii) it may have a purely commercial, administrative or political interest in receiving the funds. The issuing bank would be directly affected by (i) but not by (ii) or (iii). Since either (ii) or (iii) would sufficiently explain the existence of the direct undertaking to CBI, I see no reason to assume that there was more to it than that. If the parties had wanted to make CBI the debtor, the obvious way of doing it would have been to make the credit transferrable in accordance with UCP article 38, a possibility which they have ostentatiously excluded. This is why, quite apart from the absence of any basis for it in the terns of the credit, I am unable to accept Lord Neuberger’s suggestion that Conditions A and B record an assignment or novation of the credit itself. In my view the credit gave rise to a debt due to SOMO as beneficiary which was required to be discharged by payment into CBI’s New York account. It did not give rise to a debt owed to CBI itself.
65. It follows, in my view, that the undertakings given jointly to CBI and SOMO are correctly analysed by Mr Pollock as collateral undertakings sounding in damages. I do not find this result odd, let alone “pretty strange” or “mystical”. As it happens, we know that the interest of the CBI was not in fact in the debt, but in the mechanics of its discharge. It had an interest in the use of its account with the Federal Reserve Bank of New York as the prescribed mode of receipt by SOMO, because of the political arrangements made by the state of Iraq to comply with the United Security Council resolution governing the use of Iraqi oil revenues. CBI’s account in New York was no more than the conduit pipe used for that purpose. This fact is not relevant to the construction of the credit, which is an autonomous instrument. But it provides a condign warning of the dangers of treating Conditions A and B as a transfer of the conditional debt arising under the credit when that is in reality no more than a speculation about why Conditions A and B might have been (but were in fact not) required under arrangements to which the issuing bank was not privy.
66. On that footing, the next question is whether a purely contractual obligation owed to CBI as to the manner in which the debt owed to SOMO would be discharged is a ground for declining to make a Third Party Debt Order. The argument is that the judgment creditor steps into the shoes of the judgment debtor and cannot succeed to any right the he did not have. If therefore the judgment debtor’s right to dispose of some asset is restricted by his contractual engagements to third parties, the judgment creditor cannot be any better off. The principal authority cited for this proposition is the statement of Chitty J in In re General Horticultural Co (1886) 32 Ch D 512, 515 that a garnishee order “charges only what the judgment debtor can himself honestly deal with.” I would not accept this statement without reservation. The context in which it was made was the attachment of a debt that had been assigned to a third party, but without notice being given to the debtor. The court held that the assignment was still binding as between the assignor and the assignee, and that notice to the debtor was relevant only to the priorities between competing assignees. It followed that the assignor had parted with his interest in the debt, and the rights of the garnishor were defeated.
67. In Merchant International Co Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy [2014] EWCA Civ 1603, the position was substantially the same. The debt sought to be attached was said to be owed by a bank to the judgment debtor Naftogaz. But the bank had received the money from Naftogaz as the agent bank under a loan agreement for distribution to the loanholders. It was not therefore, in the bank’s hands, a debt payable to Naftogaz. By comparison, in Rekstin v Severo Sibirsko Gosudarstvennoe Aksionernoe Obschestvo Koseverputj and the Bank for Russian Trade Ltd [1933] 1 KB 47 the result was different because the debt sought to be attached represented moneys deposited by the judgment debtor with a bank which had merely received a revocable instruction from the judgment debtor to pay it to another bank. The garnishee order was held to operate as a revocation of that instruction.
68. These cases reflect what is in my view the general rule, namely that the essential condition for the effectiveness of a Third Party Debt Order, as with any process of enforcement against assets, is that there should be a subsisting debt owed to the judgment debtor. They are authority, on more or less complex facts, for the straightforward proposition that execution cannot be levied against a debt if the judgment debtor has parted with his interest in it.
69. In my opinion it is necessary to distinguish between an arrangement between (i) the judgment debtor and a third party which passes a proprietary interest, legal or equitable, in the relevant asset to a third party, and (ii) a purely personal obligation owed to a third party as to the disposal of that asset. The essential point about a Third Party Debt Order is that it modifies purely personal obligations. A third party owes money to the judgment debtor. He has a personal obligation to pay the judgment debtor. The Third Party Debt Order overrides that obligation by requiring it to be paid to the judgment creditor instead. Otherwise a judgment debtor could defeat any process of execution against his assets simply by undertaking for good consideration not to comply with an order by way of enforcement. It is different if the judgment debtor has parted with his interest in the debt by assigning it, in law or equity, to another. In that case, he no longer has the asset against which enforcement is sought to be made.
70. In the present case, on the footing that the debt created by the letter of credit was owed to SOMO, as I think it was, the issuing bank had a personal obligation to SOMO to pay it by crediting CBI’s New York account. That obligation was modified by the overriding effect of the Third Party Debt Order. On the footing, which I also think correct, that the obligation owed by the issuing bank to CBI was to discharge the debt owed to SOMO by crediting CBI’s New York account, that obligation depended on the continued existence of the debt owed to SOMO. Once it had been discharged by operation of law by payment to the judgment creditor in accordance with the Third Party Debt Order, there was no subsisting debt to be paid by the issuing bank into the New York account.
71. I would agree with Lord Neuberger and Lord Mance that a Third Party Debt Order ought not to be made unless compliance with it would discharge the third party debtor. But this argument is only a reformulation of the one which I have already considered. The obligation owed by the issuing bank to SOMO is a debt and the obligations owed to both SOMO and CBI is an obligation as to the manner in which that debt is to be discharged. The subject-matter of both obligations is one and the same debt. Upon its discharge neither obligation has any further content. It follows that compliance with the Third Party Debt Order would discharge the issuing bank as against both SOMO and CBI.
LORD HODGE:
72. I agree with Lord Clarke and Lord Sumption that this appeal should be allowed. In this short judgment, I will use the acronyms and abbreviations which Lord Clarke has used. I gratefully adopt Lord Clarke’s summary of the relevant facts in the interest of brevity. While there is agreement as to the situs of the debt, the question of state immunity (which was not argued in the appeal) and the making of a receivership order, this court is divided on (a) whether Crédit Agricole’s debt under the letter of credit is owed to SOMO or to CBI and (b) whether the contractual commitment to CBI in the letter of credit prevents the making of a TPDO. I confine my comments to the questions which divide us.
To whom the debt is owed?
73. The answer to the first question is found by construing the unusual terms of the letter of credit. A letter of credit has to be construed according to its terms which establish the nature and conditions of the bank’s duty to pay. Like other contracts, a letter of credit must be construed as a whole: individual clauses must be interpreted in their contractual context. In ascertaining the meaning of a particular clause or clauses, especially in an unusual contract such as this letter of credit, it is helpful and often necessary to adopt an iterative process by which an initial prima facie view as to meaning is tested against indications of another meaning or other meanings which the document gives when considered as a whole. It is well-established law that a letter of credit creates an obligation to pay which is independent of and detached from the underlying contract between a seller and a buyer. The autonomous nature of a letter of credit means that, subject to qualifications which are irrelevant in this case, the conditions governing the issuing bank’s obligations to pay are to be found exclusively in the terms of the letter of credit. The background to the letter of credit is the international sanctions against Iraq following the invasion of Kuwait and the later continuation by the government of Iraq of the arrangement for the payment of the proceeds of sales of oil by Iraq of which a portion was used to finance the UN compensation fund for Kuwait. But I agree with Moore-Bick LJ that that background in this case does not assist the construction of the letter of credit, not least as there does not appear to have been evidence of the banks’ knowledge of those arrangements. The focus therefore is exclusively on the terms of the letter of credit.
74. Lord Clarke has set out the relevant parts of the letter of credit in para 9 of his judgment. In carrying out an iterative interpretation I choose in this case to start at the beginning. The letter of credit is addressed to CBI and asks CBI to advise SOMO that it has established the documentary credit by order of Shell in SOMO’s favour. In that regard CBI is to act as the advising bank. The letter of credit envisages that CBI would also be the confirming bank, but in the event no such confirmation was given. Payment under the letter of credit is to be made on presentation of SOMO’s duly signed original invoice. The letter of credit is stated to be neither assignable or transferable. Thus far, the letter of credit is straightforward and follows a familiar pattern: a documentary credit is created by Crédit Agricole on the order of the buyer in favour of the seller, suggesting that the debt thereby created is owed to the seller, SOMO.
75. But the letter of credit then contains the two conditions [A] and [B] which the parties have added and which differ from the standard letter of credit, by constituting, in condition [A], an irrevocable undertaking in favour of CBI that the proceeds of the letter of credit will be paid into its (CBI’s) “Iraq Oil Proceeds Account” with the Federal Reserve Bank, New York, and in Condition [B], an engagement to both SOMO (described as “the beneficiary”) and CBI so to pay the money on presentation of the documents which comply with the letter of credit. I agree with each of Lord Clarke, Lord Neuberger and Lord Mance, that the undertaking in Condition [A] is addressed to CBI. Read by itself or along with Condition [B], it might constitute a debt in favour of CBI.
76. It is necessary to reconcile the provisions which I summarise in para 74 above with those in para 75 above. In my view that reconciliation is assisted by the paragraph of the letter of credit which follows the added conditions. It makes the credit subject to UCP 600, which seeks to facilitate the flow of international trade by creating a set of international rules that establish uniformity in the practice (ie the handling) of letters of credit. To my mind, it is both legitimate and necessary to look at UCP 600 as a guide to the interpretation of the letter of credit both because of its incorporation into the letter of credit and because the letter of credit reflects an established structure of documentary credit, which is consistent with UCP 600, but with the two conditions added. As Lord Clarke points out (para 19) UCP 600 (article 2) defines “beneficiary” as the party in whose favour a credit is issued. Further, as Lord Clarke observes, the term “beneficiary” is used repeatedly in UCP 600, including in article 18, which requires, subject to an irrelevant exception, that a commercial invoice “must appear to have been issued by the beneficiary”. There is no doubt in my mind that SOMO is the beneficiary of the letter of credit as envisaged by UCP 600. The use in Condition [B] of the word “beneficiary” to describe SOMO is consistent with this understanding. It is also consistent with the view that Conditions [A] and [B] are not intended to alter the person in whose favour the credit was issued.
77. On this approach there is no need to struggle to give content to the use of the term “beneficiary” in the added Condition [B] or to the idea, which the use of that word encapsulates, that the letter of credit is in favour of SOMO. I construe the added conditions in their contractual context, which is that SOMO is the beneficiary of the letter of credit and that the credit in its favour is not assignable (para 74 above). Those two provisions are to my mind critical to the interpretation of the letter of credit and dictate a narrow view of the effect of the added conditions. Absent an assignment of the credit to CBI, which the letter of credit expressly forbids, CBI has no proprietary interest in the debt due by Crédit Agricole. But that does not denude the added conditions of content. The added conditions entail an undertaking by Crédit Agricole to SOMO and CBI jointly as to the mode of payment of SOMO’s debt. It is not possible to discover from within the four corners of the letter of credit what was the relationship between SOMO and CBI which explains why SOMO’s debt had to be paid into CBI’s bank account and whether CBI had to account to SOMO for its receipt. It appears that one public body has required that its debt be paid into the bank account of another public body, for a purpose which the letter of credit does not disclose. But I see no basis for inferring from the terms of the letter of credit that SOMO has transferred any beneficial interest in the debt to CBI.
78. In agreement with Lord Clarke and Lord Sumption, I conclude that the Crédit Agricole’s debt was owed to SOMO.
Does the contractual commitment to CBI exclude a TPDO?
79. If I am correct in concluding that the letter of credit created a debt in which SOMO had both the legal interest and the beneficial interest, the TPDO would, if made, override and discharge Crédit Agricole’s obligation to SOMO. Were that to occur, I do not see how there would be any content in the obligation as to the mode of payment of that debt which Crédit Agricole owed to both SOMO and CBI. The discharge of the debt would discharge the ancillary obligation as to the mode of its payment, leaving CBI with no claim for damages or otherwise against the issuing bank. I therefore agree that CBI’s rights under the added conditions do not bar the making of a TPDO.
The contrary views
80. In so concluding, I find myself in respectful disagreement with Lord Neuberger and Lord Mance. In relation to Lord Neuberger’s judgment, we differ as I attach more significance to the established practice of documentary credits in construing the letter of credit and in particular to the incorporated terms of UCP 600, to which Condition [B] indirectly refers in its description of SOMO as the beneficiary. I see no basis for inferring an assignment by SOMO to CBI of the beneficial interest in the debt. In relation to Lord Mance’s judgment, the principal difference again appears to be that I attach more significance to the established structure of letters of credit upheld by UCP 600 and the use of its terminology in Condition [B] in providing the contractual context of the added conditions, to which he and Lord Neuberger have given priority over the other terms. To my mind, our differences are not ones of principle but of the construction of an unusual document, which on my reading (a) creates a debt in favour of SOMO but (b) requires that the money to discharge that debt be paid into CBI’s bank account. On such a reading, no violence is done to the law of garnishee orders or third party debt orders.
Conclusion
81. In summary, I conclude (i) that Crédit Agricole’s debt was and is owed to SOMO, (ii) the separate and ancillary obligation owed to CBI as well as SOMO was merely an obligation as to the manner of payment of SOMO’s debt, and (iii) on the discharge of SOMO’s debt by the making of the TPDO, the ancillary obligation as to the mode of payment also would be discharged.
82. I would therefore allow the appeal.
LORD MANCE: (dissenting)
Situs
83. I agree with Lord Clarke for the reasons he gives that the situs of the debts constituted by the letters of credit should be held to be at the London branch of Crédit Agricole which issued the letters of credit.
Debt capable of being subject of a third party debt order
84. I am however unable to agree that there was or is any debt owed or due to SOMO under either letter of credit opened by Crédit Agricole, capable of being attached by a third party debt order under CPR72. Under that rule, it is a pre-requisite to the making of a third party debt order that there should be a “debt due or accruing due to the judgment debtor from the third party”. Here, that means a debt due or accruing due from Crédit Agricole to SOMO. It is of no relevance to refer to any debt by way of the price of oil which may, or may not, have been owed by a company in the Shell group to SOMO outside or apart from the letter of credit. If there is a fundamental principle which is presently relevant, it is that a letter of credit is a contract separate from any underlying sale contract: UCP 600, article 4. So it must be construed according to its own terms.
85. The issue whether a third party debt order can be made in respect of Crédit Agricole’s undoubted indebtedness to someone under each letter of credit has two at points related aspects. The first is the correct construction of the letters of credit. The second is a correct understanding and application of the principles governing the making of third party debt orders. As to construction, the difference between the majority and minority conclusions may, in the grand scheme, be relatively unimportant. But, in my view, the majority judgments of Lord Clarke, Lord Sumption and Lord Hodge are forcing the present arrangement, in Procrustean fashion, into a pre-conceived model (reflecting the conventional position when conforming documents are presented by a named beneficiary under a letter of credit) into which it in no way fits. In doing so, they are in this instant case also over-riding rights clearly given to CBI. As to the principles governing third party debt orders, the majority judgments raise a more general concern. They fail in my view to give proper effect to the governing principles, they risk creating confusion and, on the facts of this case, they prejudice, without justification, the deliberately agreed rights of a fourth party (CBI). I add that it is in retrospect surprising (though it may reflect the respondents’ view about the obviousness of the principles involved) that not all the relevant authorities on third party debt orders were put before the Court, and that their case only addressed the caselaw in two short paragraphs and a footnote.
Principles governing construction of the letters of credit
86. As to construction, the general principles of construction are, I hope, well-established to the point where they need little discussion. As Lord Hodge, speaking for the Supreme Court, said in Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] 2 WLR 1095:
“10. The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. …
11. … Interpretation is … a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause …; and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: … Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.
12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated … To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.”
Principles governing the making of a third party debt order
87. There is no magic about the general concept of a debt. Jowett’s Dictionary of English Law (3rd ed) defines it as “A sum of money due from one person to another”, points out that “A debt exists when a certain sum of money is owing from one person (the debtor) to another (the creditor)”, and adds that “‘Debt’ denotes not only the obligation of the debtor to pay, but also the right of the creditor to receive and enforce payment”. In The Scottish Law of Debt, W A Wilson, Lord President Reid Professor of Law at Edinburgh University, quotes the definition of debts in Bell, Commentaries, II, 15, as “mere rights to demand payment of money at a stipulated time”, going on to distinguish a debt from an obligation to account.
88. The concept of a debt for the purposes of a third party debt order, or its predecessor the garnishee order, is particularly well-settled by authority. First, “The test of ‘debt due’ is whether it is one for which the creditor could immediately and effectually sue”: Paget’s Law of Banking 14th ed (2014), para 31.8; see also Allinson’s Enforcement of a Judgment 12th ed (2016), para 8-03. The test goes back at least to Webb v Stanton (1883) 11 QBD 518. There a garnishee order was obtained against a trustee purporting to attach the beneficiary’s share of the trust income. No income was however in the trustee’s hands which he was at that time due to pay to the beneficiary. The garnishee order was set aside, on the basis that the trustee could not be said to be a debtor “unless he has got in his hands money which it is his duty to hand over to the cestui que trust” (p 526, per Lindley LJ); see also p 530, per Fry LJ). The Court of Appeal pointed out that an available and appropriate course in this situation would be to apply for the appointment of a receiver.
89. The trustee’s receipt of income is in this situation a pre-condition to the existence of a debt. So too the fulfilment of any other pre-condition, such as the obtaining of an architect’s certificate as a pre-condition to a contractor’s entitlement to be paid for works completed: see Dunlop & Ranken Ltd v Hendall Steel Structures Ltd [1957] 1 WLR 1102.
90. Secondly, and as a concomitant of the first principle, a judgment creditor cannot stand in a better position than the judgment debtor did in relation to the third party against whom the third party debt order is sought: Ferrera v Hardy [2015] EWCA Civ 1202; [2016] HLR 9, para 13, per Floyd LJ, approving the commentary to rule 72.2.1 in the Civil Procedure White Book to that effect. In In re General Horticultural Co (1886) 32 Ch Div 512, 515, the issue was whether a judgment creditor could by garnishee order attach a third party debt which the judgment debtor had assigned in equity, although the assignee had given no notice of the assignment to the third party. In holding that notice was irrelevant in this context (as opposed for example to a situation of competing assignments), Chitty J said that a garnishee order:
“… charges only what the judgment debtor can himself honestly deal with; that rule is now settled. … [Counsel argues] that I ought not to apply the well-settled rule to this case. But I see no reason why any Act of Parliament or Rules of Court should be so interpreted as to make a man do a dishonest act, and yet if I were to allow [counsel’s] argument the judgment creditor would obtain, not the property of the judgment debtor, but that of some one else.”
In parenthesis, this principle means that the court will look at the judgment debtor’s actual entitlement to sue for the money. What the third party debtor in In re General Horticultural Co would have said about the identity of the person to whom he owed money, before he had notice of the assignment, was irrelevant.
91. Thirdly, and again as a further concomitant of the previous two principles, where a judgment debtor has precluded itself contractually from having any immediate right to recover what would otherwise be a third party debt, a third party debt order cannot be obtained. There is in this respect no difference in principle between a fetter which arises contractually and for proprietary reasons. A requirement for an architect’s certificate (para 89 above) is a form of contractual fetter. In Merchant International Co Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy [2014] EWCA Civ 1603, Merchant International Co Ltd (“MIC”) had an outstanding judgment against Naftogaz. Naftogaz had, by agency agreement, engaged BNYM as its principal paying agents for the purposes of loan notes under which Naftogaz owed interest instalments to loanholders. Naftogaz made a payment to BNYM to meet one such instalment, but its use for that purpose was interrupted by a third party debt order obtained by MIC against BNYM. Naftogaz then arranged for the interest instalment to be paid by a second payment. The first payment would have been repayable but for a Supplemental Agreement covering the second payment. This provided that the first payment should, notwithstanding the discharge of the relevant interest instalment, be retained by BNYM for the purposes of the agency agreement, pending a court order in the third party debt proceedings or further written agreement in terms acceptable to BNYM. By a second third party debt order MIC sought to attach the repayment which it alleged was in substance due from BNYM to Naftogaz. MIC submitted that, despite the Supplemental Agreement, the first payment was in BNYM’s hands no different to moneys in a bank account repayable on demand. The Court of Appeal rejected the submission on the basis that the Supplemental Agreement had a commercial purpose; it was designed to preserve the status quo in view of the unexpected impact of, inter alia, the first third party debt order (para 48). The parties’ mutual arrangements negated any “immediate and unconditional obligation” on BNYM’s part to make a repayment.
92. Another – in relation to the circumstances of the present appeal, very telling – authority is Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj and the Bank for Russian Trade Ltd [1933] 1 KB 47. There, the judgment debtors instructed their bank to close a current account, and transfer the moneys in to another body, to whom they owed nothing. The bank closed their account, but had not yet made or informed the other body of the proposed transfer. The judgment creditors at that stage obtained a garnishee order against the bank. The instructions were held still to be revocable, and to have been revoked by service of the garnishee order, which was therefore valid. What had been done by the bank, by way of closing the account, was “mere internal machinery for recording what was to be done”. But what is for present purposes significant is the Court of Appeal’s identification of the relevant test of the existence of a debt as being whether the direction was revocable, and not subject to any contrary commitment towards the other body: see per Lord Hanworth MR, at p 64, Slesser LJ at p 69 and Romer LJ at pp 71-72. In this connection, Lord Hanworth MR cited with approval a note at the end of Gibson v Minet (1824) 1 Car & P 247, 250 on the case of Williams v Everett (also reported at (1811) 14 East 582 in slightly different terms), according to which note Lord Ellenborough said:
“The remitter may give and countermand his directions, as often as he pleases, and the persons to whom it was remitted, may hold the bill, or its amount, for the use of the remitter himself, until by some engagement entered into by themselves, with the person who is the object of the remittance, they have precluded themselves from so doing, and have appropriated the remittance to the use of such person. After such a circumstance, they cannot retract the consent they have once given.”
In short (a) “a mere naked authority to pay” given to a banker can be revoked, but (b), once the banker has not only been authorised to pay but has committed itself to pay a fourth party, there is no debt which can form the basis of a garnishee or third party debt order. The present case falls precisely within (b), and the majority are in error in treating it as if it fell within (a).
93. Finally, a basic principle governing third party debt orders was underlined by the House of Lords in Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30; [2004] 1 AC 260. It is, as stated in the headnote to that case: “an integral feature of the procedure, established by legislation and the rules of court, that where a final order [is] made the third party, in making payment in compliance with the order, [is] discharged from his liability in respect of the debt to the extent of his payment”, and “it [is] not open to the court to make an order where it appear[s] that such discharge would not be available under the law which govern[s] the debt”.
Construction of the letter of credit
94. Each letter of credit identified SOMO as the beneficiary of the letter of credit as well as the relevant seller whose invoice in that capacity was among the documents required for presentation under the letter of credit. However, it is important not to be mesmerised by the term beneficiary or by the normal expectations which it generates. What matters is, as the citations from Wood v Capita Insurances Services Ltd (para 86 above) state, the effect of the particular arrangements which parties have put in place, viewed as a whole. I of course accept that, under a more normal form of letter of credit, the expectation arising from the description “beneficiary” would be that SOMO would also be the person to whom the proceeds of such presentation would be owed or due and who could sue in debt if they were not paid. This would be so, even if the letter of credit stipulated for their payment to a particular bank account in the name of someone other than the beneficiary; that would correspond with the simple situation identified by Lord Hodge at the end of his para 80. The potential recipient would not have or be given the benefit of any promise of payment to itself under the credit. Any payment to it would simply represent the means agreed between the issuing bank and the beneficiary for discharge of a debt which remained due to the beneficiary alone.
95. Here matters go much further, because of two special and unusual provisions, which have been set out and identified by Lord Clarke as conditions A and B. Each letter of credit contains contractual arrangements made between three parties, Crédit Agricole by whom it is issued, Central Bank of Iraq (“CBI”) to whom it is in the first place directed, and SOMO to whom CBI was asked by Crédit Agricole to advise (and, although this did not happen, confirm) the credit. There is not, and could not consistently with important and well-established principles governing letters of credit be, any suggestion that these arrangements were not supported by consideration or that they are not binding according to their terms, as between all these three parties.
96. As I read the special conditions, the first, condition A, contains a promise made to CBI. Moore-Bick LJ erred in reading it as containing a promise to SOMO. There is common ground between Lord Clarke’s and my judgment on this point. My reasons for this conclusion are as follows. The reference to payment “to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’” must to my mind be a reference to CBI’s account at that Bank in New York, to which the second, condition B, expressly refers. It is most improbable that the two conditions were referring successively to the same account as being both SOMO’s and CBI’s, quite apart from the fact that the reference “Iraq Oil Proceeds Account” points towards an account of CBI, rather than SOMO.
97. A second reason for concluding that “your” in the first special condition refers to CBI, to whom each letter of credit is addressed, is that this is so on all the other occasions when the letter of credit uses the word “your” or “you”: see the first paragraph of the credit, the special instructions to CBI (following shortly after the two special conditions) whereby Crédit Agricole undertook to pay “as per your instructions” after receipt of confirmation “that you have taken up documents …” and the next paragraph with its five further references to CBI by the words “you” or “your”.
98. A third reason is that the first special condition makes little if any sense, read as an undertaking confined to SOMO. It would amount to an engagement to SOMO to pay the proceeds of the credit to a particular Federal Reserve Bank account “irrespective of any conflicting instructions contained in the seller’s [ie SOMO’s] invoice or any transmitted letter”. What is the sense, or legal force, of an undertaking to X to do something even if X gives contrary instructions? In contrast, an undertaking to CBI to pay CBI even if SOMO gives contrary instructions is comprehensible and valuable.
99. Fourthly, the fact that the first special condition is addressing primarily CBI and its (“your”) account, rather than SOMO or any account of its, is highlighted by the contrasting use of the phrase “seller’s commercial invoice” when reference did come to be made to SOMO in that condition.
100. So read, the two special conditions are mutually reinforcing. They constitute a tri-partite agreement between Crédit Agricole, CBI and SOMO that the proceeds of the letter of credit will be paid, and paid only by irrevocable agreement, to CBI. It is, as I have indicated, now accepted, realistically, that whatever contractual arrangements are contained in the letters of credit are binding, and that no problem relating to absence of consideration arises.
101. That being so, I am unable to see how any debt can, upon presentation of the required documentation, be said to be owed by Crédit Agricole to anyone save CBI. No doubt, Crédit Agricole is party to a binding and irrevocable agreement with both SOMO and CBI that payment will be made to, and only to, CBI. No doubt SOMO might seek an order for specific performance of that obligation on Crédit Agricole’s part towards CBI, or damages for its non-performance, if SOMO could show any. But the only party which can be said to have a right to the payment, upon and following such presentation, is CBI. The only debt which can be said to be due is to CBI.
102. When three parties have agreed between themselves, irrevocably and bindingly, that a debt which would otherwise have been payable by A to S will instead be paid, and paid only, by A to C, I cannot see how it can be said that the debt still remains, in some metaphysical world, due from A to S and that payment to C remains a means of discharging a continuing liability to S. The tripartite nature of the agreement means that it is goes beyond simple assignment, in two respects: first, the debt never becomes due by the third party debtor (Crédit Agricole) to SOMO in the first place; it is from the outset due to CBI; and, second, Crédit Agricole has promised CBI, directly and irrevocably, to pay CBI the proceeds. The first reason also means that the situation goes beyond novation. But these respects make it even less permissible for a court to conclude that any debt exists in favour of SOMO.
103. Taurus’s submission that each letter of credit can be analysed as giving rise, upon presentation of the required documents, to, first, a debt in favour of SOMO, coupled with a “collateral” agreement that the debt would be met by paying, and paying only, CBI is, to my mind, extremely odd. Whatever the position under any sale contract (which is here irrelevant: see para 84 above), there is under the letter of credit no antecedent debt or Urschuld. This is a composite letter of credit, creating one set of rights, which must be construed as a whole. There is no question of any right to payment by Crédit Agricole arising prior to or outside the terms of the credit, and the only right to payment which the credit creates is, by agreement of all concerned, in favour of CBI. I can think of no precedent for an analysis (see per Lord Clarke in para 23 of his judgment) which would mean that, under one and the same tri-partite contract, Crédit Agricole owed and could be obliged to pay moneys to SOMO (which is the precondition for a third party debt order by Taurus), but would, by performing this obligation towards SOMO, be in breach of contract towards, and become liable to pay damages to, CBI. Why an obligation to pay CBI money should only sound in damages, rather than debt, is also unexplained. I address later in this judgment the majority’s further suggestion that Crédit Agricole’s obligation to CBI to pay CBI, or to pay damages in default, to CBI would somehow be conditional upon no third party debt order having been made against SOMO: see paras 109 and 110 below.
104. I add, for completeness and not because it is critical in this case, that, even if CBI was to receive the sum of money as trustee for SOMO, still it would be CBI that would be owed the sum, not SOMO. Even if it could be suggested that the irrevocable tripartite agreement was for CBI to receive the sum simply as SOMO’s banker (rather than by virtue of some arrangement giving CBI its own interest in receiving the moneys and in the moneys received), still the terms of the letter of credit make it impossible for SOMO to intervene and insist on payment to itself; the only debt due to SOMO, and capable of being the subject of a third party debt order, would on this hypothesis be the debt due by CBI as banker to SOMO, once CBI had received the proceeds of the credit.
105. In fact, however, it is clear that CBI was not simply receiving the moneys as SOMO’s banker or for the credit of SOMO, but in order to hold them for the credit of the State of Iraq in the Oil Proceeds Account, from which 95% of such moneys would be transferred to the State’s Oil Development Fund, while 5% would go to the United Nations Compensation Fund Account for reparations to Kuwait. It is common ground, as Field J records in para 69 of his judgment, and it was also expressly accepted by Mr Gordon Pollock QC for Taurus in his submissions before the Supreme Court, that, once the money reached CBI, it was gone, and SOMO would have no interest or rights in or over it.
106. The effect of the parties’ tripartite and irrevocable agreement is, without more, to give CBI an interest of its own in the debt being discharged by payment to it. It also clear, as Lord Sumption accepts (para 64) that this must been created to protect a wider general interest in the ultimate disposition of the proceeds. Whether that wider general interest engaged CBI itself or only those for whom it was to hold the proceeds is however irrelevant. It is irrelevant to engage in speculations about possibilities, as Lord Sumption goes on to invite in para 64. The enforceable interest given to CBI sounds in debt, whether it was given to protect CBI itself or those to whom CBI was to account for the proceeds. However, if we do look at the facts, the State of Iraq and/or the United Nations Compensation Fund had the clearest interest in CBI being entitled to receive as well as receiving the moneys which it was CBI’s role to hold to their credit. One can readily infer that it was to protect that interest that it was ensured that each credit contained the tripartite agreement irrevocably committing Crédit Agricole to pay the letter of credit moneys to the credit of CBI, rather than of SOMO. To attach relevance to the possibility that CBI was not thereby ultimately going to benefit itself ignores the fact that contractual arrangements are frequently made for the benefit of third parties. That does not make them any the less valid or enforceable. If the arrangements involve the creation of an obligation to CBI to pay CBI a specific sum of money, that it enforceable as such – as a debt. If (contrary to the position here) the arrangements take some other form, their breach will give rise to a claim for whatever damages may flow, and be recoverable in law, as a result of that breach. (Under the doctrine of transferred loss such damages might in some cases even embrace loss suffered by the other parties for whose benefit the arrangements were made, but, whether that is so or not is irrelevant to the binding nature of the contractual arrangements themselves).
107. References to the possibility of a transfer of the credit under UCP 600, article 38 (Lord Sumption, para 64) carry matters nowhere. Article 38 concerns transfer of the benefit of a credit to a different beneficiary, to enable it to present in its own name conforming documents in respect of all (or, where a credit is divisible, some) of the transactions to which the credit relates. It has nothing to do with and in no way impacts upon either (a) an assignment to a person other than the named beneficiary of the debt resulting from the presentation of conforming documents by the named beneficiary or (b) the present case, where all parties to the credit agreed from the outset that payment of the debt should be due, and due only and irrevocably, to such a person (here CBI).
108. The majority’s suggestion is that a “debt” which remains owed to SOMO can be severed from a “collateral” obligation existing to pay it to CBI. The first point about this is that it begs the question to describe the obligation to pay CBI as “collateral”. It is the obligation to pay under the letter of credit. That is a point which takes one back to the proper construction of each credit. The second point is, however, that the suggested collateral obligation is said to entitle CBI, if it does not receive payment, at least to claim damages against Crédit Agricole (para 23 of Lord Clarke’s judgment). But that on its face at once exposes Crédit Agricole to double liability contrary to Société Eram.
109. The answer which Lord Clarke and Lord Sumption apparently give to this objection is that the making of a third party debt order against the “debt” owed to SOMO would in some way or another discharge Crédit Agricole’s liability to pay CBI: see their paras 56 and 69-70. Lord Sumption speaks of a third party debt order as modifying or over-riding personal obligations. That is fair enough if one is talking about the effect of such an order in requiring a third party debtor, who actually owes money to a judgment debtor, to pay the money instead to the judgment creditor. As long as the third party debt is sited in the jurisdiction making the third party debt order, the effect of such payment will be to discharge the third party debtor. The third party debtor’s obligations are only modified to the extent of the destination of its payment. As long as whatever payment it makes discharges its liability, the modification is of no concern to the third party debtor; it is not disadvantaged.
110. Lord Sumption’s proposition is, in contrast, that a third party debt order can modify the rights of an unconnected fourth party to whom the judgment debtor and the third party have in fact contracted that the third party will pay any indebtedness. That is a completely novel proposition and contrary to principle. No feature of the legislation, rules or case law relating to third party debt orders exists, or has hitherto ever been suggested to exist, that could in this way discharge the contractual rights of a person in CBI’s position owing no debt whatever to Taurus.
111. Lord Sumption suggests (para 69) that: “Otherwise a judgment debtor could defeat any process of execution against his assets simply by undertaking for good consideration not to comply with an order by way of enforcement”. This suggestion is, with respect, difficult to follow. A judgment debtor clearly cannot contract with anyone not to comply with a court order. Such a contract would, among other things, be contrary to public policy. But a judgment debtor can part with assets or enter into arrangements which give another person rights that would in other circumstances be the judgment debtor’s. If, as here, a judgment debtor has effectively agreed that a contractual asset that might otherwise have been his, should enure solely and irrevocably to another person, the judgment debtor does not possess that asset.
112. Lord Clarke (para 56) suggests an alternative route to his desired answer, viz that Crédit Agricole’s “obligation to pay in accordance with its promised method is necessarily subject to the implicit qualification that the funds have not been intercepted by judicial intervention”. But “implicit qualifications” are no exception to the usual rules of contractual implication. There is no basis (still less any necessity) for implying that CBI (still less those to whom it was to channel the moneys) would be prepared to forego CBI’s contractual right to payment, merely because a judgment creditor of SOMO happened to seek or obtain a third party debt order. The legal position is quite the opposite. It is integral to the principles governing third party debt orders, and clear beyond doubt in the caselaw discussed above, that the making of a third party debt order depends on the existence of contractual indebtedness by the third party to the judgment debtor alone, in which no fourth party has any other legally enforceable interest.
113. Lord Sumption’s more developed suggestion is that, since “the obligation owed by the issuing bank to CBI was to discharge the debt owed to SOMO by crediting CBI’s New York account, that obligation depended on the continued existence of the debt owed to SOMO” (para 70). This again takes one back to construction of the credits. But in doing so it highlights the extent to which the majority’s construction ignores the agreement by all parties to the credits that CBI (and indirectly those for whom CBI would be receiving the proceeds) should have an interest protected by an irrevocable promise in payment being made, and made only, to CBI. One may ask: what is left of that promise if its enforcement is conditional on “the debt owed to SOMO” not being discharged? The logic of Lord Sumption’s suggestion is, indeed, that, if, quite irrespective of any third party debt order, Crédit Agricole had chosen to pay SOMO rather than CBI, any right which CBI had to receive payment would have ceased to exist. If, on the other hand, Lord Sumption would, in some way, seek to distinguish between voluntary discharge by Crédit Agricole of the supposed “debt to SOMO” and forced discharge by payment to Taurus under a third party debt order, the distinction is neither explained nor justified. It would give a third party debt order a priority over the rights of innocent fourth parties which is, again, contrary to the caselaw and unprincipled.
Summary
114. In the present context, and in the light of the terms of each letter of credit and the well-established principles governing construction and the meaning of “debt” for the purposes of third party debt orders, I am quite unable to see how SOMO itself can be said to have been owed a debt, when the terms of the letter of credit constitute an irrevocable agreement between Crédit Agricole, CBI and SOMO that (i) any payment under the credit should be made to CBI, and that (ii) SOMO should have no right itself to demand, receive from or enforce against Crédit Agricole any such payment (except no doubt a right to demand that Crédit Agricole make any payment to CBI).
115. More particularly, the majority’s emphasis on SOMO’s role as “beneficiary” is incapable of justifying the majority conclusion. SOMO as beneficiary has rights, which it is entitled to enforce. It can insist on performance of the letter of credit terms. But its rights do not, under the terms of this letter of credit, include the right to require or obtain payment to itself. This right it has foregone, by a binding contractual engagement, which it committed itself contractually not to revoke.
116. Further, to hold, in these circumstance, that Crédit Agricole owes SOMO a debt, which can be the subject of a third party debt order, is in direct contradiction with the principle that a judgment creditor cannot stand in a better position than the judgment debtor did in relation to the third party against whom the third party debt order is sought: Ferrera v Hardy [2015] EWCA Civ 1202; [2016] HLR 9, para 13, per Floyd LJ, cited in para 90 above. This is, as I see it, precisely the same principle as Chitty J put in slightly more moralistic terms, when he said (para 90 above) that a third party debt order:
“… charges only what the judgment debtor can himself honestly deal with; that rule is now settled. … [Counsel argues] that I ought not to apply the well-settled rule to this case. But I see no reason why any Act of Parliament or Rules of Court should be so interpreted as to make a man do a dishonest act, and yet if I were to allow [counsel’s] argument the judgment creditor would obtain, not the property of the judgment debtor, but that of
Deutsche Bank AG, London Branch v CIMB Bank Berhad
[2017] EWHC 1264 (Comm) [2017] WLR(D) 368
Mr Justice Blair:
This is a dispute under a series of ten letters of credit (“L/Cs”) between the claimant, the confirming bank (“CB”), and the defendant, the issuing bank (“IB”). CB is the London branch of Deutsche Bank AG, a German bank. IB is the Singapore branch of CIMB Bank Berhad, a Malaysian bank.
The dispute arises out of a formal request for further information (“RFI”) made in these proceedings by IB as to CB’s claim to have made payment under the L/Cs to the beneficiary, a customer of CB called Global Tradinglinks Ltd.
In short, CB contends that IB has no right to this information. It contends that as a matter of principle, the issuing bank under a letter of credit must accept on its face the statement by a confirming bank that it has paid the beneficiary. It has no right to inquire further.
IB, on the other hand, contends that the issuing bank cannot be obliged to make any reimbursement to the confirming bank if the latter has not in fact paid the beneficiary, and that since this is an essential element of the claim against it, it is entitled to the information which it seeks. I have to decide this as a question of principle.
For present purposes, the facts can be stated shortly. The underlying contract concerned the sale of Indian cotton for shipment to China between the seller, Global Tradinglinks Ltd., and the buyer, Cashcot Industries Pte Ltd., which was IB’s customer, and which has subsequently gone into liquidation, leaving the bank substantially uncovered. There were 23 presentations of documents in all. IB claims that the transactions were sham transactions entered into for the purpose of obtaining payment under the letters of credit. Fraud proceedings are ongoing in Singapore.
In the English proceedings, CB seeks reimbursement of the sums it has paid under the L/Cs, being US$9,959,452.57. IB’s challenge to the court’s jurisdiction was rejected by Teare J on 25 January 2017 (see [2017] EWHC 81 (Comm)). On the pleadings, IB’s defence is that the documents presented under the L/Cs were discrepant, presented late, and did not comply with the terms and conditions of the L/Cs. Payment by CB to the beneficiary is not admitted by IB.
Expressed diagrammatically, the relationship between the parties is as follows.
image
This case is concerned with the top two boxes, that is, the issuing bank’s undertaking to reimburse the confirming bank.
The L/Cs were set up as follows. On 25 September 2015, IB sent CB a Swift message MT 700 as to the issue of a documentary credit. The credit was stated to be irrevocable, and subject to “UCP latest version”, which is UCP 600. The communications between the banks as to the other L/Cs used the same format.
The L/Cs stipulated the documents to be presented. Those documents included the commercial invoice, the bills of lading and various certificates relating to the quantity and quality of the cotton.
Field 47A(5) of the Swift messages dealt with reimbursement between banks providing that:
“TT reimbursement is allowed, in which case, negotiating bank is required to send an authenticated swift to issuing bank certifying that documents have complied with all L/C terms and conditions, and that documents have been despatched to issuing bank by courier service, indicating L/C number, amount claimed name of courier, air waybill number and date of despatch. We shall cover the negotiating bank as requested value 3 (three) working days after date of receipt of claim.”
There seems to be some dispute between the parties as to whether CB was the “negotiating bank” for these purposes. In my view, it was, or was in the position of, a negotiating bank within the meaning of Field 47A(5), though nothing turns on this.
Field 47A(6) of the Swift messages provided:
“L/C advising bank is authorised to add its confirmation to the L/C at beneficiary’s request and cost. Upon confirmation the credit becomes available by payment and draft to be drawn on advising bank.”
As expressly authorised, CB as advising bank added its confirmation to each of the L/Cs.
In February 2016, CB sent Swift messages to IB in MT 754 format (“Adv of Payt/Acceptance/Nego”) advising that “Principal Amt Paid/Accepted/Negd”. Nothing turns on the distinction between payment, acceptance and negotiation, and it is common ground for present purposes that this message states that CB had paid the beneficiary under the L/Cs.
The message goes on state to that the documents were en route to IB by courier, and claimed reimbursement from IB. The hard copy documents followed under a covering schedule.
IB refused reimbursement on the basis of asserted discrepancies in the documents. No query was raised by IB at this stage about CB’s payment arrangements with the beneficiary.
These proceedings were begun in October 2016, and following its unsuccessful jurisdiction challenge, IB served its defence in March 2017. Payment of the beneficiary by CB is not admitted in the defence, and CB is “put to strict proof that it honoured … presentations by Global under the L/Cs …”.
CB then set out its case as regards payment in some detail in the reply. In summary, it pleads that pursuant to the beneficiary’s financing agreement with it, CB advanced loans to the beneficiary. The obligation to repay those loans was discharged upon the compliant presentation of documents under the letters of credit. Such discharge “is to be treated as having made payment”.
IB served a relatively lengthy RFI in March 2017 asking for details of how CB says it made payment to the beneficiary. CB’s response that the court should not order the information requested, because IB must accept CB’s statement that it paid: it says that, “This is not a matter of the Court’s case management discretion in relation to further information or disclosure: rather, it is a point of principle as to the operation of L/Cs”. That is why I have had to decide it as a point of principle.
The parties’ cases
CB’s case in summary is as follows:
i) The principle is that an issuing bank under an L/C must accept on its face the statement by a nominated bank (here the confirming bank) that it has paid the beneficiary.
ii) It follows that:
a) when a nominated bank forwards complying documents to an issuing bank and states that it has paid the beneficiary then the issuing bank must, without more, fulfil its undertaking under UCP 600 Art. 7(c) to reimburse the nominated bank;
b) if an issuing bank fails to reimburse the nominated bank then the nominated bank can sue upon the undertaking;
c) to obtain judgment on such a claim, the nominated bank need only show that the issuing bank was obliged at the time and on the basis of the information and documents then available to the issuing bank to reimburse the nominated bank.
iii) UCP 600 Art. 7(c) must therefore be construed as an undertaking “to reimburse a nominated bank that states it has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank”. The reading-in to Art. 7(c) of the two underlined words reflects the inexorable logic of the L/C machinery and the “cash principle”.
iv) By contrast, the effect of IB’s argument is that the undertaking is to “reimburse a nominated bank that satisfies the issuing bank or a competent court it has honoured or negotiated…”. This is uncommercial, unworkable and plainly not what the parties must be taken to have intended.
IB’s case in summary is as follows:
i) The honouring of the presentations made by the beneficiary is a fundamental element of these proceedings since CB claims reimbursement from IB of payments that it allegedly made to the beneficiary.
ii) IB cannot be obliged to make any reimbursement to CB if CB has not in fact honoured the presentations made to it by the beneficiary.
iii) CB seeks to treat its statement as to payment as conclusive, but conclusive evidence provisions are to be strictly construed.
iv) There is no warrant for reading words into UCP 600 article 7(c), and if the drafters of this provision had wished to achieve this effect they could simply and easily have done so.
v) Challenging the question of payment does not infringe the autonomy principle, which has to do with the autonomy of the credit from the sale or other contract on which it may be based.
vi) Field 47A(5) of the Swift messages does not seek to re-write the nature of the issuing bank’s reimbursement obligation, but is concerned merely with the method and timing of payment.
vii) The spectre that the requirement a bank prove that it has honoured a presentation would create chaos is fanciful.
Discussion and conclusions
It is common ground that payment could be made in the way that CB pleads in the reply. It is perfectly possible for payment to be made by a bank to the beneficiary of a letter of credit by way of set off against the beneficiary’s obligations under an existing facility (as to the concept of “payment” see in a different context Charter Reinsurance v Fagan [1997] AC 313 at 384). This is not the present issue. The issue is whether the issuing bank can inquire at all as to whether the confirming bank has made payment, or whether it must simply take the confirming bank’s word for it.
As both parties recognise, the starting point is Art. 7 of UCP 600. Art. 7 deals with the issuing bank’s undertaking to the nominated bank, here the confirming bank.
Although CB submitted that Field 47A(5) of the Swift message MT 700 of 25 September 2015 gave rise to a parallel right to payment within 3 working days, it did not suggest that it could be read inconsistently with Art. 7, or lead to a different result. I agree with IB that it is concerned with the method and timing of payment, and does not affect the matter for decision.
As regards the substance of the issuing bank’s obligation, the relevant provision is Art. 7(c) which provides that:
“An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’sundertaking to the beneficiary.”
The relevant operative words in Art. 7(c) are that an “issuing bank undertakes to reimburse a nominated bank that has honoured … a complying presentation” (italics added). So far as relevant, the term “honour” is defined in Art. 2 to mean “pay at sight”.
CB seeks to read into Art. 7(c) the words, “states that” it has honoured. In treating the confirming bank’s statement as conclusive, or at least conclusive in the absence of fraud, CB seeks to equate its reimbursement obligation to that arising under a first demand bond, where the issuer’s obligation to the beneficiary arises on a compliant demand. (As the parties said in emails to the court after the hearing, such instruments are covered by ICC Uniform Rules for Demand Guarantees 758.)
CB points to Art. 13 of UCP 600 in support. Art. 13 deals with the situation in which reimbursement is to be obtained by the claiming bank (here the confirming bank) from a party other than the issuing bank (described as the “reimbursing bank”).
That however is not the present situation. There is no third party bank of this kind concerned here. So whilst it is correct that Art. 13(b) provides that an issuing bank will be responsible for loss of interest and expenses incurred “if reimbursement is not provided on first demand by a reimbursing bank”, it does not follow that the same applies as between issuing bank and confirming bank where no such bank is involved, and where the wording of the relevant provision of the UCP is different.
It is also correct (as CB points out) that the case law draws a close comparison between letters of credit and first demand bonds in the context of the bank’s liability to pay the beneficiary—this liability arises on presentation of conforming documents or a compliant demand independent of disputes between the buyer and the seller under the underlying contract (see Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, at 170-1, cited in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bankof Greece SA [2012] EWCA 1629 at [27], and see a later decision in the Wuhan case, [2013] EWCA Civ 1679 at [21]).
As CB points out, Art 7(c) similarly recognises that “An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.” However in my view this does not advance its argument. The present case does not concern the undertaking to the beneficiary. It concerns the relationship between the two banks, and specifically the question whether payment to the beneficiary by the confirming (i.e. nominated) bank is a prerequisite of the obligation of the issuing bank to reimburse the confirming bank.
CB submits that its cause of action for reimbursement accrues when a conforming demand is made upon IB. But as IB said, this is essentially the same point—the question being whether the confirming bank must have paid the beneficiary to have the right to reimbursement, or whether a statement to that effect is enough. CB relied on Wuhan, supra, [2013] EWCA Civ 1679 at [22], but the court was there considering when the position crystallises as between beneficiary and bank.
CB accepted that no authority or commentary has been found which directly supports its contention, though it submits that in general terms it is consistent with the cash principle (Solo Industries UK Ltd v Canara Bank [2001] EWCA Civ 1041 at [31]), and upholding it would avoid the possibility of abusive inquiries into the confirming bank’spayment arrangements intended to cause delay.
There are however statements in the authorities which directly support IB’s contentions:
i) In United City Merchants v Royal Bank of Canada [1983] 1 AC 168, a leading authority in this field, it was held at p.183 in analysing the variouscontractual relationships that, “If payment is to be made through a confirming bank, the contract between the issuing bank and the confirming bank authorising and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit.”
ii) In Credit Agricole Indosuez v Generale Bank [1999] 2 All ER (Comm) 1009 it was held that once an authorised payment had been made under a letter of credit, the paying bank was entitled to the reimbursement promised by the issuing bank. I agree with IB that Rix J’s judgment proceeds on the assumption that the question whether the presentation of documents has been honoured by payment is a relevant matter for investigation: see especially p. 1012-1013.
iii) In Fortis Bank v Indian Overseas Bank [2009] EWHC 2303 (Comm) at [64], Hamblen J said that, “Under the UCP the obligation to reimburse the nominated bankarises if it honours or negotiates a complying presentation and forwards the documents to the issuing bank. In the present case Fortis did negotiate what on their case was a complying presentation and did forward the documents to IOB. What matters is the fact of honouring or negotiating a complying presentation.” (This point did not arise on appeal.)
iv) The textbooks are consistent with this view:
a) Jack, Documentary Credits, 4th edn, (2009) at 9.54 (“if the bank pays in accordance with the terms of the credit, then it is entitled to reimbursement ….”);
b) Brindle and Cox, The Law of Bank Payments, 4th edn at 8-051 (“if the nominated bank honours the credit or negotiates drafts and/or documents that strictly comply with the terms of the credit, it will be entitled to reimbursement from the issuing banker.”);
c) Encyclopaedia of Banking Law at F[303] (“An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.”).
Further, as has been noted, the relevant operative words in Art. 7(c) of UCP 600 are that an “issuing bank undertakes to reimburse a nominated bank that has honoured … a complying presentation” (italics added). This supports the finding in Fortis Bank (supra) that “What matters is the fact of honouring or negotiating a complying presentation.”
CB seeks to read into Art. 7(c) the words, “states that” it has honoured. But as was said by Thomas LJ on appeal in the Fortis Bank case, “… a court must recognise the international nature of the UCP and approach its construction in that spirit” ([2011] EWCA Civ 58 at [29]). Though not expressing a concluded view, he said at [55] that “there would be real difficulties in using a rule of national law as to the implication of terms (if distinct from a method of construction) to write an obligation into the UCP”.
Similarly in the present case, I do not think it is right in principle to construe Art. 7(c) of UCP 600 by writing in words that materially change its sense. The UCP is revised periodically, and that is the occasion for introducing changes if thought desirable. In my view, by Art. 7(c), read with the definition of “honour” in Art. 2, an issuing bank’sundertaking to reimburse the confirming bank arises where the confirming bank has honoured a complying presentation by making payment under the credit. To repeat what is said above, “payment” is not of course limited to making a cash credit to the beneficiary’s account.
It follows that I accept IB’s contentions on this point. There is in my view no basis on which to equate the reimbursement obligation owed by the issuing bank to the confirming bank under Art. 7(c) UCP 600 to that arising under a first demand bond. There was some reference in submissions to the position if a bank has negotiated documents within the meaning of Art, 7(c), but this does not arise on these facts.
This conclusion is consonant with the position on the pleadings in the present case. I set this out above. In summary, in the defence IB does not admit payment by CB which is put to proof that it honoured presentations by the beneficiary under the L/Cs. In the reply, CB meets that by pleading a detailed case as regards payment. It is that pleading which is the subject of IB’s RFI asking for details of how CB says it made payment to the beneficiary. In my view, the claimant having made assertions as to payment, the defendant is entitled to ask for further information in the usual way.
However, there is a significant qualification. The width of the RFI served by IB in some respects has the air of a fishing expedition. It is important that the RFI vehicle is not used to replicate the old “Requests for Further and Better Particulars” which were all too often an excuse for tactical time wasting. In the present context, the court should not entertain requests seeking unduly to investigate the confirming bank’s payment arrangements in the hope that something by way of a defence will turn up.
In that regard, paragraph D15.1(c) of the Admiralty & Commercial Court Guide explains that, “The court will only order further information to be provided if satisfied that the information requested is strictly necessary to understand another party’s case” (emphasis added). This was an issue explored in oral argument. The parties should be able to agree the order.
The issues at trial will be limited to the conforming documents issue and the payment issue (if pursued). As regards further directions, I understand the parties to be in agreement that the case will be transferred into the Shorter Trials Scheme (except that there is no need for a designated judge). There is no need for a disclosure order, because the RFI already contains a request for relevant documents relating to payment. The legitimate scope of what should be produced was also explored in oral argument, and again the parties should be able to agree the order.
I am grateful to the parties for their assistance.
Fortis Bank SA/NV & Anor v Indian Overseas Bank
[2011] 2 All ER (Comm) 288, [2011] 1 CLC 276, [2011] EWCA Civ 58, [2011] 2 Lloyd’s Rep 33, [2012] Bus LR 141
Thomas LJ
II. THE PRECLUSION ISSUE
The issue on preclusion gave rise to a dispute both as to the law and the application of that law to the facts.
(1) The legal issues
(a) The disputed issue of law
Sub-article 16 (c) of UCP 600 makes clear provision as to what an issuing bank must do if, after examination of the documents, it decides to reject them:
“When … the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.
The notice must state:
i. that the bank is refusing to honour or negotiate; and
ii. each discrepancy in respect of which the bank refused to honour or negotiate; and
iii. a) that the bank is holding the documents pending further instructions from the presenter; or
b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or
c) that the bank is returning the documents; or
d) that the bank is acting in accordance with instructions previously received from the presenter.”
Sub-article 16(d) provides for the time within which the notice must be given:
“The notice requirements in sub-article 16(c) must be given …no later than the close of the fifth banking day following the date of presentation.”
Fortis and Stemcor contended that if the issuing bank gave notice that it would return the documents then, on the proper construction of article 16 it was under an obligation to return them promptly. If it failed to do so, then sub-article 16(f) applied:
“If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.”
In the alternative they contended that, if article 16 could not be construed in this way, then a term to similar effect should be implied into article 16.
IOB disputed this construction. Its primary case was that the issuing bank was under no obligation on a proper construction of article 16 to return the documents; the only obligation of the issuing bank was to give a notice; nor should any term be implied into article 16 of the UCP to that effect. Any obligation to return the documents was outside the scope of the UCP. If, contrary to its primary contention, there was an obligation to return the documents, then that obligation arose under an implied term of the letter of credit and not under article 16; if that were so, then Fortis and Stemcor could not rely on sub-article 16(f) as they could only do so if the issuing bank were in breach of its obligation under article 16.
It is plain that Fortis and Stemcor can only rely on preclusion under article 16(f) if the obligation to return arose under article 16. As it cannot realistically be disputed for the reasons set out below that an issuing bank which rejects documents and states it is returning them, must return them, the real issue is in fact whether the obligation to return arose under the UCP or outside the UCP.
(b) The approach to the UCP
The generally accepted approach a court should take to the construction of the UCP is set out in the judgment of Sir Thomas Bingham MR in Glencore v Bank of China [1996] 1 Lloyd’s Rep 135 at 148.
“Practice is generally governed by … the UCP, a code of rules settled by experienced market professionals and kept under review to ensure that the law reflects the best practice and reasonable expectations of experienced market practitioners. When courts, here and abroad, are asked to rule on questions such as the present they seek to give effect to the international consequences underlying the UCP.”
In Schutze and Fontane’s Documentary Credit Law throughout the World (2001, ICC), there is a helpful discussion at paragraph 2.2.4 of the relationship of national law and the UCP where the meaning of the UCP is in dispute or UCP does not contain an express provision for the issue that is before a national court.:
“While the UCP aim to harmonise worldwide trade practices and aim to safeguard the interests of the international trade and banking community, national laws vary from country to country. The application of national laws to issues not expressly addressed by the UCP can result in a de-internationalisation of the rules and conflict with their purpose. The application of national laws and doctrines needs to be handled carefully. If the UCP generally address an issue in question but do not provide for an explicit solution to a particular aspect of it, there is also the option of considering whether a solution can be found in a general rule contained in the UCP. An interpretation of the UCP in accordance with their aims and evaluations is generally preferable.”
Similar views are expressed in Brindle and Cox on the Law of Bank Payments, paragraph 8-005:
“As to the interpretation of the UCP itself, while some courts have tended to construe its provisions according to traditional English cannons of interpretation, a more purposive approach is appropriate to a document which after all does not have its origin in English law, but represents international banking opinion and practice.”
and Dr Kurkela’s Letters of Credit and Bank Guarantees under International Trade Law at paragraph V.I.4
“The interpretation of such rules should be global and universal and should avoid parochial concepts and meanings.”
In my view, a court must recognise the international nature of the UCP and approach its construction in that spirit. It was drafted in English in a manner that it could easily be translated into about 20 different languages and applied by bankers and traders throughout the world. It is intended to be a self-contained code for those areas of practice which it covers and to reflect good practice and achieve consistency across the world. Courts must therefore interpret it in accordance with its underlying aims and purposes reflecting international practice and the expectations of international bankers and international traders so that it underpins the operation of letters of credit in international trade. A literalistic and national approach must be avoided.
I turn therefore to consider first the commercial practice of international bankers and traders which arises when an issuing bank rejects documents, as that is essential to identify any underlying aim and purpose relevant to the issue.
(c) The practice upon rejection
The evidence of practice was clear. As I have mentioned, the judge heard expert evidence from two bankers; Stemcor and Fortis called Mr Gary Collyer, a technical adviser to the ICC since 1996, a member of the ICC Banking Commission and Chairman of the ICC Drafting Group responsible for the revision of UCP 500 to create UCP 600. IOB called Mr Roger Jones, a retired banker who is chairman of the ICC UK Banking Committee and also a member of the ICC Banking Commission. Their reports contained evidence of practice. They also set out their views on the drafting of the UCP, its scope and other matters to which I refer at paragraph 50. Their oral evidence encompassed the issues raised in the reports.
The judge succinctly summarised their evidence on practice at various paragraphs of his judgment:
“20. Mr. Collyer stated that where “return” is indicated, the return of documents “should occur immediately or at the very latest during the course of the following working day” and that where “hold” is indicated and the presenter instructs the issuing bank to return documents “it is international banking practice to comply promptly with instructions received from the presenter, especially instructions relating to the disposal of documents”.
21. Mr. Jones said that “best practice” entails the “speedy” return of documents and, based on his own experience of UK practice, that would normally be “within a day or two unless there is a good reason why not”. However, Mr. Jones also said that “there is certainly room for limited divergence in market practice dependent on local conditions” and referred in this context to matters such as weather conditions, religious holidays, the means by which the documents are in fact returned and courier pick-up times.
23….. I was referred to a number of ICC Opinions under UCP 500 in which it was recognised that the issuing bank would be liable if it failed to act in accordance with the required statement it had made, although none of them specifically addressed the issue of preclusion. The experts said that that the requirement to act in accordance with the disposal statement made related back to the 1963 revision of UCP, although it was thought that the consequent preclusion was introduced in the 1970’s. It has therefore long been the position under UCP that the issuing bank is required to act in accordance with its disposal statement…..
52. It was the evidence of both experts that the reasonable expectation of a presenting bank which received an Article 16 disposal notice would be that the issuing bank would act as stated. That would be not only good practice, but normal and expected practice.
73. … The expert evidence in this case is that it is normal and expected international banking practice for documents to be returned and document disposal instructions to be complied with promptly”
It is clear from this evidence that there was no difference in view as to the practice of acting in accordance with the notice and, if there was notification of return, of returning the documents promptly – as Mr Jones put it “within a day or two”; the only difference related to a minor difference as to how the practice of acting promptly was applied.
A clear illustration of this practice is DOCDEX Decision 242; DOCDEX decisions are decisions by experts selected by an ICC committee from a list maintained by the ICC Banking Commission on disputes referred for non- binding resolution according to the ICC DOCDEX Rules. Decision 242 related to UCP 500 article 14(d) and (e) (corresponding to article 16 (c) – (f) of UCP 600). Article 14 of UCP 500 provided:
“d. i. If the Issuing Bank …decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means without delay, but no later than the close of the seventh banking day following the day of receipt of the documents. …”
ii Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
iii The Issuing Bank… shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.
e. If the Issuing Bank…fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank … shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.”
Decision 242 pointed out that neither the UCP nor any ICC paper provided a specific time or a time such as “without delay” or a means by which the documents should be returned:
“Notwithstanding the absence of a specific requirement or specific guidance in this regard, there is a market expectation that, consistent with the reading of Articles 13 and 14, international standard banking practice and the importance associated with possession of the documents, especially title documents, the timely return of dishonoured commercial documents requires priority processing, as delay in returning the documents may prejudice the beneficiary’s rights and security.
While the Experts do not have the authority to establish such a standard concerning an exact time period to return the documents once notice is sent, the Experts agree that once the notice is sent stating that the documents are being returned, documents should be returned without delay and by expeditious means.”
It was common ground that there had been no change in practice since UCP 500.
It therefore seems to me indisputable that the practice of bankers and international traders is that, on rejection, the issuing bank must hold the documents in accordance with the instructions of the presenter or return them promptly and without delay.
(d) Is an obligation to act in accordance with the notice to be found in sub-article 16(c) of UCP 600 as a matter of construction?
In my view construing the UCP in accordance with the approach to construction I have set out at paragraphs 26-29, sub-article 16 (c) contains an obligation to act in accordance with the notice. These are the principal reasons for my view:
First, the issuing bank has no option but to comply with the option it has chosen. It is fundamental to the operation of letters of credit that, when the issuing bank determines that the documents do not conform, it may reject them. If it does, then it cannot be entitled to retain the documents, as it is implicit in rejection that it has refused to accept them. It must either hold them at the disposal of or in accordance with the instructions of the presenter or return them. Therefore once the issuing bank has rejected the documents, it cannot do anything else but act in accordance with its chosen option. Thus, it was not necessary to spell out in the sub-article the issuing bank’s obligation to act in accordance with the notice. It was implicit in the wording of the article.
Second, the obligation to act in accordance with the notice is what is required by the standard international banking and trading practice set out at paragraphs 31-35 above. It is necessary to make letters of credit work in practice so that the presenter can deal with the goods which are represented by the documents which the issuing bank has rejected. The consequences of the inability of the presenter to deal with the documents are too well known to need enumeration; illustrations are obvious such as in the case of a perishable cargo, or where the market falls or where the ship arrives and seeks to discharge the cargo.
Submissions were made on behalf of IOB that there was no need for such an obligation, as letters of indemnity might be used to procure delivery. The fact that one consequence might in certain circumstances be overcome by the presenter providing a letter of indemnity to the carrier cannot be relevant to the existence of the obligation. Another submission made on behalf of IOB was that the presenter would have a remedy by bringing an action for conversion of the documents, if they were not returned. However, that submission implicitly accepts and confirms the position that the issuing bank has no right to retain the documents; if it has no right to retain, it is impossible to understand what the issuing bank is entitled to do other than to return the documents or hold them at the disposal of the presenter in accordance with its instructions or pending instructions.
It would make no commercial sense, contrary to the submissions of IOB, if having made an election to return the documents, the issuing bank was not obliged to do anything. It would have the absurd consequence that the documents of title would remain with the bank which had rejected them and the presenter would be unable to deal with them. It was hardly surprising that Mr Jones, the expert called by IOB, could not think of any reason why the issuing bank should not be obliged to act in accordance with the notice given under sub-article 16(c). Furthermore, as the UCP is intended to be a self-contained code for the areas which it covers, it would make no sense to interpret the UCP in such a way that the obligation to act in accordance with the notice was omitted from its scope.
It is also clear from the evidence of practice to which I have referred that an issuing bank that elects to return documents is expected to do so promptly and without delay. Taking into consideration the necessity for the presenter to be able to deal with the documents, it is clear in my view that if the issuing bank elects to return the documents, it must do so with reasonable promptness. I accept that the notice under sub-article 16(c) has to be given within the specified time of 5 banking days and what is reasonable promptness does not produce an equivalent exact time. However, I cannot accept that interpreting the provision in this way is likely to give rise to any real uncertainty. It is likely to be very clear whether the issuing bank has acted with reasonable promptness.
My third reason for my conclusion that the obligation is contained within article 16 of the UCP is that the provisions of sub-article 16(e) are necessary only if article 16 is construed in this way. The sub-article provides:
“A nominated bank acting on its nomination, a confirming bank if any or the issuing bank may, after providing notice required by sub-article 16(c)(iii) (a) or (b), return the documents to the presenter at any time”
It was submitted by IOB that sub-article 16(e) was necessary as an exception to the notice provision or simply set out for clarity and convenience a practice on which all were agreed. However, it seems to me clear that sub-article 16(e) is only necessary if an obligation to act in accordance with the notice is imposed by sub-article 16(c); the sub-article permits the issuing bank having given notice under (a) or (b) that it is holding the documents to act in a different manner; this provision would not be necessary if the issuing bank was under no obligation whatsoever.
It was submitted by Miss Cockerill on behalf of IOB that this construction is wrong as all sub-articles 16 (c) and (d) require is what is set out on its face, namely:
i) sets out the four available options as to what an issuing bank which refuses to honour can do.
ii) requires the issuing bank to give notice of which of the four options it has elected within 5 days.
The submission that the issuing bank is not required to go any further by article 16 and to carry out what it has elected to do was supported by a number of arguments:
i) First, if the issuing bank was under an obligation under the UCP to act in accordance with the choice it had elected, it would have been easy to express in article 16 the obligations to act in accordance with the elected choice. This was not done. I cannot accept this submission. It is plain from the practice to which I have referred that it was the expectation that an issuing bank would return the documents; such a bank would do what it said it would do. There was no need to spell it out.
ii) Second, there was no uniform practice as to the time content of the obligation; using a term such as “reasonable time” or “promptly” or “with reasonable promptness” would cause uncertainty and be contrary to one of the objectives of the UCP which was to provide for certainty, consistency and ease of application. I cannot accept this; there is nothing to suggest requiring return “promptly” or with “reasonable promptness” would cause any uncertainty.
iii) Third, there were no words in sub-article 16(f) which expressly provided for the sanction of preclusion if there was a failure to act in accordance with the notice. Preclusion would be a harsh sanction where the content of the obligation was not spelt out in the article. I again cannot accept that submission as, for the reasons I have given, there is no uncertainty as to the obligation and the sanction is not uncommercial. The effect of not returning the documents or doing as the presenter instructs has very similar consequences to a delay in making a decision on the documents – the presenter cannot deal with the goods.
In my view, therefore, in agreement with the judge, sub-article 16 (c) can and must be read as expressing an obligation that the issuing bank would act in accordance with the option it elected. Thus, as in most of the presentations in this case, where a bank elects to return the documents, the bank is required to return the documents with reasonable promptness.
(e) The revision to UCP: a comparison with Article 14 of UCP 500
As I have set out at paragraph 34 above, the corresponding article of UCP 500, article 14, expressly provided that the issuing bank was precluded if the issuing bank failed to hold the documents at the disposal of or return them to the presenter. Although it was IOB’s primary case that the wording of UCP 500 was inadmissible as an aid to the construction of UCP 600, it was contended by IOB, that as these words had been omitted in the revision which produced UCP 600, it was clear that the drafters intended that not only was there no obligation to act in accordance with the notice given, but preclusion did not in any event arise if there was a breach of the obligation.
In considering this alternative submission of IOB and what can be derived from a comparison between UCP 500 and UCP 600, it is important to start from the position that neither article spelt out an obligation to act in accordance with the notice. The most that can be said is that it must have been implicit from the terms of sub-article 14(e) of UCP 500 that there was an obligation to act in accordance with the notice. However there was (and could be) no suggestion that the practice to which I have referred had in any way changed; it was, on the contrary, common ground that practice was unchanged. There is no reason therefore to read article 16 of UCP 600 as making any different provision to that in article 14 of UCP 500 as to the obligation to act in accordance with the notice. Viewed in that way, the omission in sub-article 16(f) of the words in sub-article 14(e) in no way changes the content of the obligation to act in accordance with the notice contained in article 14 of UCP 500 and article 16 of UCP 600.
It was also suggested by IOB that the provision in sub-article 14(e) was superfluous, as the problem had never arisen. The decision of the US District Court Missouri in Amwest Security 248F Supp 2d 867 (2003) however shows that such a case has arisen; the court was there concerned with a letter of credit subject to UCP 500. Article 5-108 (h) of the Uniform Commercial Code (which had been incorporated into the law of Missouri) contains an explicit obligation, on dishonour, to return the documents or hold them at the disposal of the presenter pending instructions, in addition to giving notice to that effect. The judge held that the effect of UCP 500 and s.5-108 was the same – the bank had an obligation to return.
It was submitted by IOB that it was significant that a period of five banking days within which the issuing bank had to make its decision was specified in UCP 600 in place of “a reasonable time, not exceeding seven banking days” specified in UCP 500. This demonstrated, it was submitted, that there was a drafting decision to move away from the uncertainty inherent in a “reasonable time” to a prescribed period. It would therefore not be consistent with this decision to read article 16 as containing any obligation which was required to be performed in a time not precisely expressed. However, for the reasons I have already given at paragraph 42, I do not consider this a realistic objection where one is looking at an obligation to return with reasonable promptness.
(f) Other evidence in relation to the revision of the UCP
It was common ground that it was permissible to receive evidence both of banking practice and of the fact that the general purpose of the revision (as stated in the introduction to UCP 600) was to bring the UCP up to date with developments in practice and to make the operation of letters of credit run more smoothly. However the expert evidence before the judge was much more extensive; it encompassed evidence in relation to the drafting process, the ICC commentary on the drafting of UCP 600 and the views of the experts on the scope of the UCP and on the significance of the omission from Article 16(f) of the words contained in Article 14(e).
The circumstances in which evidence in relation to the negotiation of international conventions is admissible are set out in Fothergill v Monarch Airlines [1981] AC 251. At page 278 Lord Wilberforce made clear that travaux preparatoires can be used where two conditions were fulfilled – the material involved is accessible and that it points clearly and indisputably to a definite legislative intention; in Effort Shipping Co Ltd v Linden Management SA (The Giannis NK) [1998] AC 605 at 623 Lord Steyn put it pithily: “Only a bull’s eye counts. Nothing less will do.” Although the documents representing a commentary on the drafting and the intentions of the drafting committee were public, there was no bull’s eye.
It is clear that the views of the experts on the scope of the UCP and on the significance of the changes to the wording are inadmissible; such evidence is subjective opinion on the meaning of the UCP.
(g) An obligation to return as an implied term of the letters of credit?
It became clear to IOB in the course of argument that there were substantial difficulties in maintaining the position that an issuing bank was under no obligation to return. It therefore put greater emphasis on its alternative argument, that if there was an obligation to return, that obligation should be implied into the letters of credit, as distinct from the UCP the scope of which did not extend that far. As I have pointed out at paragraph 25, if the obligation was implied into the letters of credit, as distinct from the UCP, neither Fortis nor Stemcor could rely on sub-article 16(f).
However, as there was nothing in these letters of credit which differentiated them from other letters of credit as regards the obligation to return, it would be an uncommercial result to conclude that, even though an obligation to return had to be implied as a matter of necessity, it did not form part of the UCP obligations under article 16 for the reasons I have given.
(h) Implication of a term into the UCP?
The judge was prepared to hold, in the event that he was wrong about the construction of article 16, that a term should be implied into the UCP. In Seaconsar v Bank Markazi, this court implied a term into the UCP, as did Hirst J in Bankers Trust v State Bank of India [1991] 1 Lloyd’s Rep 587, following an earlier decision of Gatehouse J in The Royan [1987] 1 Lloyd’s Rep 345. In the light of my views on the construction of article 16, it is not necessary to express a view on whether a term can be implied into the UCP, to the extent that a question of implication is different to a question of construction – see the opinion of the Privy Council delivered by Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988 at paragraphs 16-27. Whether a term can be implied into the UCP was not an issue specifically considered in the cases to which I have referred. It is not necessary to reach a concluded view in this case on this issue, though in my view there would be real difficulties in using a rule of national law as to the implication of terms (if distinct from a method of construction) to write an obligation into the UCP.
(2) The factual issue
(a) The findings made by the judge
In respect of L/C 1, 2 and 4 and one presentation under L/C3 IOB rejected the documents; it sent SWIFT notices stating “Return”; it was common ground that this was the conventional means of expressing the exercise of the option under sub-article 16(c)(iii)(c) of the UCP. Most were sent on 4 November 2008; some were sent on 11, 15, or 19 November 2008.
The response of Fortis was to tell IOB that it should not return the documents, but to accept them and pay. The response of 4 November 2008 was:
“Documents must not be returned, but must be paid without further delay”
That of 11 November 2008 was:
“We insist that you hold the documents at your counters and that you effect payment as per L/C terms.”
On 21 November 2008, Fortis sent a further message relating to the rejections and to the presentations under consideration by IOB in these terms:
“In any event you must continue to hold the documents at your counter. They must not be returned to us, or released to any party, without our further explicit instructions.”
On 26 November 2008, IOB rejected five of the presentations under L/C3; it sent a SWIFT message stating “HOLD”. It was common ground that this was the conventional means of exercising the option under 16(c)(iii)(a) to hold pending further instructions from the presenter.
On 23 December 2008 IOB stated that it had been trying to obtain the applicant’s (i.e. MSTC’s) acceptance of the documents and suggested that Fortis use its “good offices” with Stemcor to resolve the matter.
On 1 January 2009 IOB requested Fortis to advise Stemcor
“to do the needful to protect their interest in respect of the merchandise shipped under the contract/LCs in question”.
On 13 January 2009 Fortis requested IOB that the bills of lading be endorsed to Fortis’ order and “return them to our office via urgent courier”.
On 19 January 2009 Fortis requested IOB to
“Please urgently confirm that you have acted in accordance with said instructions to endorse bills of lading to our order and return all documents to our counters…”
On 9 February 2009 IOB replied to say
“We are not in position to endorse the bills of lading to your order in the absence of written authority to this effect from the shipper/beneficiary of LC. … we continue to hold the documents at your risk and responsibility.”
Hitherto there had been no indication to Fortis that there was any difficulty about the endorsing of the bills of lading or about its demand for the return of the documents.
On 9 and then on 11 February 2009 Fortis told IOB that its failure to return the documents constituted an affirmation of the presentations as complying presentations in accordance with sub-article 16(f) and accordingly that it had no further interest in the documents.
The documents were returned on 16 February 2009. None had been endorsed.
(b) The contentions
There were two particular periods of delay relied upon by Stemcor and Fortis: first, the period beginning immediately following the “return” notices in November 2008, and second, in relation to both the “return” and the “hold” notices, the period after 13 January 2009.
IOB contended that, if it was under an obligation to return, the responses given by Fortis to its “return” notices, namely that IOB was to retain the documents, had the consequence that IOB was not in breach of its obligation. I cannot accept this contention for the reasons given by the judge at paragraph 83 of his judgment on the preliminary issues. It is clear that what Fortis was saying was that IOB had no right to reject the documents and should accept them; Fortis’ request that the documents be retained was solely for the purpose of IOB accepting them. As IOB continued to reject the documents, it was not entitled to retain them on the basis that it was holding them pending instructions from Fortis. It was obliged to return them. It did not do so for a substantial period of time and was therefore clearly in breach of the obligation under article 16.
As set out at paragraph 59 above, IOB’s notice on the rejection of five of the presentations under LC/3 was a “hold” notice under Article 16(c)(iii)(a). Fortis submitted that their instruction on 13 January 2009 (set out at paragraph 62) was an instruction to return with which IOB had failed to comply. IOB contended that it was not in breach as the instruction by Fortis was an instruction to return after endorsement and Fortis had no right to insist on an endorsement. The judge concluded that, as Fortis had negotiated the documents and was therefore their owner, it was entitled to give the instruction, but even if it was not, there was no reason why IOB did not return them unendorsed.
The judge was plainly correct in his conclusion that IOB was obliged to return the documents; on the assumption most favourable to IOB that it was right in its contention that Fortis were not entitled to require endorsement, IOB had, on that assumption, no right to retain the documents. It should simply have returned them unendorsed. IOB was therefore in breach of its obligation to return.
III: THE BILL OF LADING DATE
The final issue was a short issue raised by IOB in relation to L/C3. That letter of credit provided in Field 48 that:
“Period for presentation: within 21 days from B/L Date but within the validity of L/C”
At the summary judgment hearing, IOB contended during the course of argument that a presentation made under L/C 3 on 25 November 2008 was more than 21 days after the Bill of Lading Date; this was not a point taken at the time of presentation of the documents or at any time prior to the oral argument.
The facts can be briefly summarised:
i) The Bill of Lading on its face contained the following:
Place and Date of Issue: MSC(UK)Ltd – Ipswich 14 November 2008
Shipped on Board Date: 31 October 2008
ii) Although a presentation under L/C3 was made on 18 November 2008, one of the documents, the Consolidated Certificate was not in an acceptable form. A new presentation with a Consolidated Certificate in proper form was made on 25 November 2008.
iii) If the “Bill of Lading Date” was 31 October 2008, that presentation was more that 21 days after that date; if the “Bill of Lading Date” was 14 November 2008, the presentation was within the 21 days.
The judge in a very short paragraph of his judgment held that the “Bill of Lading date” was the date the bill of lading was issued – 14 November 2008.
It was contended on behalf of IOB that the judge was wrong; the bill of lading date was the date of shipment. The judge had failed to give sufficient weight to the provisions of the UCP 600 and that his construction was therefore out of step with the approach of the UCP:
i) Sub-article 14(c) provided
“A presentation including one or more original transport documents …. must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.”
ii) This mirrored the provision in Field 48 of LC/3 by providing for presentation to be within 21 days of the bill of lading date.
iii) Sub-article 20 (a)(ii) of the UCP provided that:
“The date of issuance of the bill of lading will be deemed to be the date of shipment unless the bill of lading contains an on board notation indicating the date of shipment, in which case the date stated in the on board notation will be deemed to be the date of shipment.”
iv) The date of shipment was the date that the goods were “shipped on board” and not the date of issue of the bill of lading; there was a clear obligation under the UCP to present within 21 days of the actual shipment date as recorded in the bill of lading.
v) As LC/3 was subject to the UCP, it should be construed consistently with the UCP unless its terms evidenced a clear intent to vary the provisions of the UCP: Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631, 639.
I cannot accept this submission. It is clear that the judge was right. L/C 3 expressly referred to presentation within 21 days from the date of the bill of lading, not the date of shipment. The date of the bill of lading was, as it stated on its face, 14 November 2008.
There is nothing in the UCP that can displace this clear provision. Sub-article 14(c) which requires presentation to be 21 days from the date of shipment simply makes a provision which is different; the express terms of L/C 3 prevail. Furthermore the definition in sub-article 20 (a) (ii) “The date of issuance of the bill of lading will be deemed to be the date of shipment” is a deeming provision for the date of shipment for the purpose of sub-article 14(c); it is not relevant to the construction of L/C3 which is on its face clear. In any event, even if it were relevant, it is not a provision deeming the date of the bill of lading.
Conclusion
I would therefore dismiss the cross-appeal and the appeal.
Lord Justice Etherton:
I agree.
Lady Justice Arden:
I also agree.
Standard Chartered Bank v Dorchester Lng (2) Ltd
[2013] 1 CLC 797, [2013] EWHC 808 (Comm), [2013] 2 Lloyd’s Rep 338
Teare J
In case I am wrong in the conclusion which I have reached I should consider at least one of Mr. Tselentis’ alternative cases. If, as submitted by Mr. Downes, SCB did not accept delivery of the bills until it decided that there had been a valid presentation and that the letter of credit should be honoured, then Mr. Tselentis submitted that delivery must have occurred on 7 July 2010, at the latest, when SCB paid the sum due under the letter of credit.
It was common ground that by 7 July 2010 the bills had been “spent”, that is, they no longer gave a right as against the carrier to possession of the goods to which the bills related. They had been spent once discharge commenced on 15 June 2010. Accordingly Mr. Tselentis accepted that SCB had to show that it had become the holder of the bills, pursuant to section 2(2)(a) of COGSA 1992,
“by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill……”
Mr. Tselentis submitted that SCB had become the holder of the bills by virtue of a transaction effected in pursuance of the transfer letter of credit which was a contract made before the bills had been spent.
Mr. Downes submitted, first, that there was no completion of the indorsement of the bills by the delivery of the bills on 7 July 2010. The presentation had been rejected. It was never accepted. Second, if, contrary to that submission, SCB did become the holder of the bills on 7 July it did so pursuant to the agreement made on 7 July 2010 to settle the proceedings issued by Gunvor.
There was also a dispute as to whether SCB had rejected the presentation made on 4 June 2010 as non-compliant by its SWIFT message of 9 June 2010. Mr. Tselentis on behalf of SCB, submitted that it had not done so because the message was not an unambiguous rejection as was required by UCP 600 Article 16 and that once 5 working days had elapsed from presentation it had lost the right to reject the presentation and so must be deemed to have accepted the presentation. Mr. Downes, on behalf of the Shipowner, submitted that the SWIFT message was a rejection because it was in the form of MT 734 which is a notice of refusal and that properly construed it was a notice of refusal by SCB, albeit not one by the applicant, Cirrus. The Shipowner’s case in this regard was supported by SCB’s witness Mr. Meyern who agreed that the SWIFT message was a rejection by SCB.
I accept that on 9 June 2010 SCB rejected the documents as discrepant. I have reached that conclusion, not because SWIFT message MT 734 was used, but because of the contents of that message. Two discrepancies were alleged. There can have been no purpose in identifying alleged discrepancies if SCB had not rejected the presentation. At the same time SCB made clear that the applicant, to whom it said the documents had been referred, had not rejected them and so held out the possibility that the discrepancies might be waived. In the meantime SCB held the documents to the order of Gunvor. Had SCB accepted the presentation as compliant it would not have held the documents to the order of Gunvor. Finally, the text said in terms that the message was sent in accordance with Article 16(c) of UCP 600 which provides for a refusal to honour.
I accept that the SWIFT message does not say in terms that SCB is refusing to honour but it appears to me to be the inevitable inference from the text of the message that SCB had refused to honour (whilst holding out the possibility that if the alleged discrepancies were waived by the applicant the letter of credit might be honoured thereafter).
It may be that the absence of an express refusal to honour renders the message non-compliant with UCP 600 Article 16 (c) (though the DOCDEX decision No.303 would suggest not). But if it is non-compliant, any such non-compliance would have been relevant if there had been a discrepant presentation. The absence of a notice of rejection which complied with Article 16 would have meant that SCB would be unable to rely upon the discrepancies; see Article 16(f). However, it is common ground that the documents were compliant and not discrepant. In those circumstances there was, to use Mr. Tselentis’ phrase, “an inescapable obligation to pay”. Societe Generale, Gunvor and Ince & Co. had been making that point since 11 June 2010. SCB, which had denied any obligation to pay as late as 21 June 2010, recognised and accepted its obligation on 7 July 2010 at the latest when it paid the sum due under the letter of credit.
Thus if, as submitted on behalf of the Shipowner, delivery of the bills of lading did not occur until SCB had taken up the documents as compliant and had honoured the letter of credit, delivery must have occurred on 7 July 2010. I accept that SCB did not say in terms on that day that it was taking up the documents as compliant and would honour the letter of credit. But it is the inevitable inference from the fact that payment was made of the full sum due under the letter of credit that the documents presented on 4 June 2010 were compliant, that they were being “taken up” and that the letter of credit was honoured. I am unable to accept Mr. Downes’ submission that there was no admission that SCB’s previous position was wrong. Such admission appears to me to be implicit in the fact that the full sum due under the letter of credit was paid and that SCB made sure that the payment was made in accordance with the mechanism provided by the letter of credit. I accept that the payment, together with payment of interest and costs, also settled the proceedings which had been issued by Gunvor but that is consistent with an implicit admission of liability by SCB.
The further question is whether SCB can bring itself within the proviso in section 2(2)(a) of COGSA 1992. The meaning of the phrase “effected in pursuance of” in section 2(2)(a) of COGSA 1992 has been considered in at least three cases, the David Agmashenebeli [2003] 1 Lloyd’s Reports 92, the Ythan [2006] 1 Lloyd’s Reports 457 and the Pace [2010] 1 Lloyd’s Reports 183.
In the David Agmashenebeli Colman J. said, at p.118 rhc, that:
“In essence, the transference of the bill of lading after it has ceased to be a document of title has to be a transference provided for by the antecedent contractual or other arrangements. If it is a transference called for by contractual or other arrangements made after the bills of lading ceased to be documents of title vis-à-vis the ship, proviso (a) has no application.”
In the Ythan [2006] Aikens J. (as he then was) said at paragraph 84 that the contractual or other arrangements in section 2(2)(a) refer to the “reason or cause” for the transfer. On the facts of that case (which concerned the compromise of an insurance claim on cargo which had been lost as a result of an explosion on board the vessel) Aikens J. held, also at paragraph 84, that the reason for the delivery of the bills was because it was “contemplated” that underwriters would pay under the compromise agreement which was made long after the cargo had been lost. He accepted, in paragraph 85, that it could be said that the delivery of the bills “arose out of the open cover” but in his view “the immediate reason and proximate cause of the transfer of the bills” was the compromise agreement.
In the Pace at paragraphs 45-48 I referred to both of those cases and agreed with Aikens J. that the words “in pursuance of” can most appropriately be understood to mean that the contractual or other arrangements must be the reason for or cause of the transfer or delivery of the bills.
In the Ythan Aikens J. referred to the immediate reason for and proximate cause of the transfer of the bills. I do not doubt that that was an appropriate description in circumstances where Aikens J. wished to differentiate between a “but for” cause (the open cargo cover in existence before the cargo was lost) and what was in his judgment the real or effective cause, (the later compromise agreement with the underwriters). However, I am not persuaded that section 2(2)(a) always requires the court to identify the immediate reason or the proximate cause because, in a case where, as here, there are competing reasons or causes, that would or might tend to identify the later cause as the real or effective cause. That may of course be the right answer, as it was on the facts of the Ythan, but it need not always be. Depending on the circumstances of the case the earlier cause may be the real and effective cause. For this reason, in a case of competing reasons or causes, I consider it more appropriate to ask what is the real and effective cause. Identification of that cause will enable the court to determine whether the delivery of the bills was effected “in pursuance of” contractual or other arrangements made before the time when the bills were spent.
In the present case the question therefore is whether the real and effective cause of the delivery of the bills to SCB on 7 July 2010 (assuming that that was when delivery occurred rather than on 4 June 2010) was the transfer letter of credit confirmed on 30 April 2010 (before the bills were spent on 15 June 2010) or the settlement of Gunvor’s action on 7 July 2010 (after the bills were spent).
There is, in my judgment, a powerful case that the real and effective cause of the delivery of the bills on 7 July 2010 was the transfer letter of credit. The principal sum paid by SCB was the sum due under the transfer letter of credit. SCB implicitly conceded that Gunvor’s claim under the letter of credit was good and paid the sum due (together with interest and costs to compensate Gunvor for the delay in payment and for the costs of having to issue proceedings). The payment of the principal sum was made in accordance with the mechanism of the letter of credit.
But Mr. Downes submitted that the immediate reason for and proximate cause of the delivery of the bills was the settlement on 7 July 2010. The settlement was reached, he submitted, because SCB wished to avoid the reputational damage that flowed from having been sued and from having been on the receiving end of an unanswerable claim in which SCB had acted incompetently and dishonourably. Had SCB wished merely to pay the sum due, no discussions concerning, in particular, the need for the proceedings to be discontinued, would have been required.
I accept that the settlement was made in part because SCB needed to avoid damage to its reputation. But the cause of any such damage would have been a refusal by SCB to honour an inescapable obligation under a letter of credit. That, to my mind, illustrates that the reason for and cause of the settlement was the letter of credit and the inescapable obligation which had accrued pursuant to its terms. I accept that litigation would draw attention to SCB’s conduct and heighten the reputational damage but I consider it unrealistic to regard the settlement which ended that litigation as the reason for and cause of the payment of the sum due under the letter of credit.
The settlement was also reached because SCB had failed in its attempt to get Gunvor and UIDC to discuss a more favourable commercial settlement which rescued SCB from the position into which it had got itself into, namely, facing an obligation to pay Gunvor with no recourse against UBA. But I do not consider that that prevents the transfer letter of credit from being the reason for and cause of the payment of the sum due under the letter of credit.
In my judgment the transfer letter of credit was the real and effective cause of the payment of the sum due under the letter of credit and hence (on the assumption that the Shipowner’s case on what amounts to acceptance of delivery under COGSA is correct) of delivery of the bills.
For these reasons, if the Shipowner’s case on what amounts to delivery of a bill under COGSA is correct, I would have held that SCB had title to sue pursuant to sections 5(2)(b) and 2(2)(a) of COGSA 1992.
Breach and damage
Mr. Downes submitted that the Shipowner did not commit a breach of the contract contained or evidenced by the bills of lading when it discharged and delivered the goods without production of the bills of lading but on production of a letter of indemnity. This was a bold submission; see the discussion of the authorities in East West Corporation v DKBS by Thomas J. at paragraphs 120-129 which commences as follows:
“It has been made clear in decisions of the highest authority that a carrier must under the usual terms of a bill of lading deliver the goods only against presentation of an original bill of lading.”
Mr. Downes submitted that the Shipowner had discharged the goods in accordance with the instructions of Gunvor who was the true owner of the goods and the lawful holder of the bill of lading. No authority was cited which supported the suggestion that discharge without the production of the bill of lading pursuant to the instructions of a shipper who was neither the named consignee nor the indorsee was not a breach of the contract of carriage contained in or evidenced by the bill of lading. But the discharge was said to fall squarely within the exception to the carrier’s obligation to discharge on production of the bill of lading recognised by Clarke J. (as he then was) in the Sormovskiy 3068 [1994] 2 Lloyd’s Reports 266, namely, where it is proved to his reasonable satisfaction that the person seeking possession of the goods is entitled to possession of them and that there is some reasonable explanation of what has become of the bills of lading. The existence of this exception is controversial. Rix J. (as he then was) has disagreed with Clarke J. that there is such an exception; see Motis Export v Dampskibsselkabet [1999] 1 Lloyd’s Reports 837. Thomas J. in East West Corporation v DKBS agreed with Rix J and Mance LJ in the same case doubted whether there is such an exception. But even if the existence of such an exception is assumed there is no evidence that the Shipowner could bring itself within it. In circumstances where the bills had been consigned to the order of Societe Generale and then indorsed to SCB and the goods were being discharged to Chase and UBI it is difficult to see how the Shipowner could believe that Gunvor or Chase and UBI were entitled to possession of the goods or what the reasonable explanation for the absence of the bills might have been. In any event there was no evidence from the Shipowner that it was proved to its reasonable satisfaction that the person seeking possession of the goods was entitled to possession of them and that there was some reasonable explanation of what had become of the bills of lading.
Thus the Shipowner, by discharging and delivering the goods without production of the bill of lading, committed a breach of the contract of carriage contained in or evidenced by the bill of lading.
Mr. Downes next submitted that if there was a “technical” breach of contract no loss was caused because discharge had been to the person entitled to possession of the goods, or rather at the direction of such person. It may be that where delivery is made to the person entitled to possession of the goods no loss is caused, as where delivery is made to a buyer who has paid for the goods but where the bills, indorsed to him and en route to him, are still in the banking system and have not reached the discharge port. But those were not the facts of this case. In the present case the goods were delivered to Chase and UBI at the direction of the Gunvor. It was Mr. Downes’ submission that Gunvor was entitled to possession of the goods at the time of delivery by the Shipowner. But Gunvor was not the indorsee of the bills and so could not claim to be entitled to possession of the goods from the Shipowner. SCB was the indorsee of the bills who was entitled to possession of the goods from the Shipowner.
Mr. Downes then submitted that no loss was caused to SCB by the Shipowner’s breach of contract because if SCB had taken delivery of the goods it would not have been entitled to sell the goods. Any such sale would have been a conversion of the goods actionable at the suit of the true owner of the goods. SCB would be bound to deliver up the goods or the proceeds of sale to the true owner.
It is true that SCB was not the owner of the goods but the security of a bank which agrees to finance an international sale of goods under a letter of credit lies, in part, in its rights as holder of the bills of lading and thereby to possession of the goods. The indorsement of the bill in favour of the financing bank will usually be intended to confer a security by way of pledge. That was no doubt the intention in the present case. That pledge enables the bank to obtain delivery of the goods and if necessary realise them for the purposes of the security; see Scrutton on Charterparties and Bills of Lading 22nd.ed. at article 116 and Sewell v Burdick (1884) 10 App. Cas. 74 at p.82. Before COGSA 1992 the transfer of contractual rights in the bill of lading pursuant to the Bills of Lading Act 1855 was linked with the passing of property. A bank financing the international sale of goods would not have those rights transferred to it because the property in the goods would not be intended to pass to the bank; see Sewell v Burdick. However, under COGSA 1992 the indorsement and delivery of the bill to the financing bank will now result in the transfer of the rights under the bill of lading contract to it. There is no reason to suppose that that change, which was brought about to simplify the law as to the transfer of rights under a bill of lading, in fact removed the financing bank’s traditional security. On the contrary, by enabling the rights under the bill to be transferred to the financing bank where it is the indorsee of the bill, its security interest in the bill is strengthened. In so far as the cause of action in conversion may not be effective where the carrier has discharged the goods before the bank has acquired its security interest (see Scrutton, again at article 116), the rights of suit in contract, if transferred under COGSA 1992, can be exercised even if the indorsement was completed by delivery after the goods had been discharged. Just as the financing bank could realise its security before the passing of COGSA 1992 by obtaining delivery of the goods and if necessary selling them so, in my judgment, the financing bank can do so after the passing of COGSA 1992. Such sale cannot be a conversion as against the shipper for it was the shipper who, by indorsing the bills in favour of the bank, pledged the goods in favour of the bank and thereby created its security interest. The shipper cannot complain if the bank realises the security which the shipper had created. The financing bank would not be bound to hold the proceeds of sale to the order of the owner of the goods, save to the extent that they exceeded the sum required as security. Mr. Downes said that until SCB had paid out under the letter of credit it had no security interest. Mr. Tselentis’ answer to this, which I accept, is that once a compliant presentation of documents was made on 4 June 2010, SCB was under an inescapable obligation to pay and from that time it could exercise the security interest it acquired by reason of the pledge of the goods.
I am therefore unable to accept Mr. Downes’ submission that SCB has suffered no loss. If it were correct it would have deprived SCB of the security provided by the bills and would undermine the manner in which the financing of the international sale of goods has long been secured.
For these reasons there must be judgment for SCB in the sum of US$6,132,355.74, that being the agreed sum which SCB could have realised by selling the cargo together with interest and costs.
WJ Alan & Company Ltd v El Nasr Export & Import Co
[1972] EWCA Civ 12 [1972] 2 QB 189, [1972] EWCA Civ 12, [1972] 2 All ER 127, [1972] 1 Lloyd’s Rep 313, [1972] 2 WLR 800
LORD JUSTICE MEGAW:
The sellers, W.J. Alan & Co. Ltd., are merchants in Nairobi, and the buyers El Nasr Export & Import Company are an Egyptian state trading company. The sellers and the buyers, the latter through their Dar-es-Salaam branch, made two contracts on 12th and 13th July 1967, for the sale of coffee, F.O.B. Mombasa. The first contract was for 250 tons, with shipment date September/October 1967. The second contract, out of which the present dispute arises, was for a further 250 tons, with shipment date October/November 1967. Apart from the different shipment dates, the two contracts were in identical terms.
The price clause in each contract was:
“Price: Shs. 262/- (two hundred and sixty two) per cwt. of 112 lbs. nett F.O.B. Mombasa”.
The payment clause read:
“Payment: By confirmed, irrevocable letter of credit to be opened at sight one month prior to shipment as stipuled in this contract”.
It was provided in each contract that it was made under the terms and conditions of the London Coffee Trade Association. There is no doubt but that the proper law of the contracts was English law. The Association’s conditions expressly provided that English law should govern.
At the time when the contracts were made there was parity between sterling and Kenyan currency. Twenty Kenyan shillings were of identical value with one pound sterling. The dispute in this case has arisen because, while shipment of part of the coffee under the second contract was actually in process of being made, but before payment for that shipment had been made or was due, sterling was devalued, whereas Kenyan shillings were not devalued. Thereafter one pound sterling was not worth 20 Kenyan shillings, but was worth only 85.7% of 20 Kenyan shillings. It therefore becomes necessary to decide whether the money of account — that is, the currency by reference to which the amount of the contractual payment is to be calculated — is Kenyan shillings or sterling.
Meanwhile, before the devaluation of sterling, various relevant events had happened. The buyers, it would appear, had re-sold the coffee to sub-buyers in Spain. Those sub-buyers had established an irrevocable transferable letter of credit in favour of the buyers in a Spanish Bank in Madrid. It would seem that the credit had been established in sterling. The buyers, in purported performance of their obligations to the sellers under the contracts of 12th and 13th July, had arranged for the transfer of a part of that Madrid credit to the National Bank of Commerce, Tanzania, in Dar-es-Salaam. That bank, by letter of 20th September 1967, notified the sellers of the availability to them of that transferred letter of credit, and the Bank itself confirmed the credit. In so doing, the bank, of course, was acting on the buyers’ instructions.
Apart from any question as to the currency in which the credit was expressed, the credit fell short in various respects of compliance with the buyers’ obligations under the contracts of sale. It was established late. Each contract called for a separate letter of credit, not, as was offered, one single credit for the two contracts. The credit did not extend over the whole of the shipment periods. It stipulated for at least one certificate of quality which the contracts did not require. It might be construed as calling for the whole of the shipments under both contracts to be made by one named vessel. It is not necessary to consider these discrepancies further, because the sellers took no objection to them; though they did thereafter ask for and receive certain amendments, including an extension of date.
So far as concerns the currency involved, there can be no doubt whatever that the confirmed letter of credit was expressed to be in sterling and that the only obligation which it imposed upon the bank was an obligation to make payment in, and measured by, sterling. The confirming bank’s letter expressly stated that the credit was ”up to an amount of £131.000 (Sterling one hundred thirty one thousand pounds)”. Clause 7 of the letter may not be of much significance in other respects, since it relates merely to a cable to be sent to the buyers “for insurance purposes”. It is, however, of some significance, in respect of the currency question, that there is a reference in that clause, in the Spanish language, to “the price of Stg. £262 per long ton”. So the contractual 262 shillings per cwt. had become, at least, for purposes of the confirmed credit, £262 per ton. So far as that transaction was concerned, sterling was the money of account. Sterling had been made the money of account in the bank’s offer of payment. That offer was made by the bank on the instructions of the buyers. It was an offer for the purpose of providing the payment, and the only payment, stipulated by the contracts of sale.
The sellers did not raise any complaint as to the confiration of the letter of credit in those terms. They did not complain about the currency. Instead, they at once took advantage of the confirmed credit by operating on it. By 20th September 1967, 88 tons of coffee, under the first contract, had been shipped in the “Vinland Saga” at Mombasa. The sellers presented documents and obtained payment from the bank. The documents included an invoice, No. 17, dated 20th September. It expressly referred to the credit. It used the words “£262 per long ton”. While the resulting sum was initially shown in shillings, the total was expressed as “£23064 3. 9.” In other words, it was a sterling invoice. We have not seen the documents relating to payment, but it is safe to assume that the draft corresponded with the invoice total, showing pounds, shillings and pence: so that payment was by sterling draft. A further 191 tons were shipped on 20th September, further bills of lading for that quantity being issued on that date. This shipment completed the 250 tons of the first contract and also comprised 29 tons towards the fulfilment of the second contract. The invoice, No. 18, was unambiguously a sterling invoice, expressed in pounds, shillings and pence. Again, no doubt, the draft was in sterling to correspond with the invoice and the terms of the credit.
221 tons still remained to be shipped under the second contract. That quantity was loaded in the “Maria Teresa” and bills of lading were issued on 16th November 1967. An invoice for 221 tons (Invoice No. 28) had been prepared by the sellers with the date 18th November. Once again, it was a sterling invoice: the computation was expressed as “£262 per long ton”: it was all in sterling: the total was £57,877 15. 9. Before the documents were presented for payment came the news of the devaluation of sterling. It was still not known if Kenyan shillings would follow sterling. The sellers, leaving the invoice in other respects as originally prepared, added the words: “Part payment of balance due…..” As is clear from the terms of a letter dated 22nd November from the sellers’ bank in Nairobi, the Ottoman Banks to the confirming bank in Dar-es-Salaam, the sight draft which accompanied Invoice No. 28 was expressed as £57,877 15. 9. Payment in accordance with the draft was ultimately made to the sellers by the confirming bank. However, when it became known on 21st November, that the Kenyan currency was not going to be devalued, the sellers prepared a further invoice, No. 28B, in the sum of Shs. 165,530/45. This sum is the difference between the amount of Kenyan shillings referable to 221 tons at Shs.262/- per cwt. and the amount of Kenyan shillings which would have been realised in exchange for £57,877.15.9. after devaluation. Invoice No. 28B was accompanied by a sight draft, drawn, not on the confirming bank (who clearly could not be made liable to pay anything more) but on the buyers, for Shs.165,530/45. The buyers refused to accept or pay the draft on the ground that they did not owe the sellers anything. The sellers protected that refusal. Battle was joined.
The first issue is whether in the original contract, the contract of 13th July 1967, the money of account was initially Kenyan currency or sterling, to my mind, Mr. Justice Orr was right, for the reasons given by him, in holding that when that contract was made the money of account was Kenyan. The fact that it was expressed in a form which was appropriate for Kenyan currency and was not appropriate for sterling must outweigh, and far outweigh; the various indications relied upon by the buyers as pointing to sterling.
However, in my judgment the currency of account was subsequently varied from Kenyan currency to sterling. That being so, the sellers have been paid the full amount to which they are entitled and they have no valid claim against the buyers.
The contract of sale contained its own express provision for payment, which I have already quoted in full. I repeat the essential words: “Payment: by confirmed, irrevocable letter of credit…..”. There is nothing else in the contract, at least in its express terms, which adds to, subtracts from, or qualifies that contractual provision as to payment of the price. It was the buyers’ obligation to procure that a bank should offer to the sellers its confirmation of an irrevocable credit which would provide for payment of the contract price as specified in the contract of sale, against delivery to the bank of the proper documents.
The offer made by the confirming bank, as I have already said, did not comply, in several respects, with what the sellers were entitled to require. However, the only non-conforming aspect of the offer which I regard as relevant for the purposes of this appeal is the term of the offer in respect of currency. That, in my view, is not only relevant: it is vital.
The confirming bank’s offer, made to the sellers with the knowledge of, and on the instructions of, the buyers, was an offer which involved sterling, not merely as the currency of payment, but as the currency of account, in respect of that transaction. The sellers accepted the confirming bank’s offer, including its terms as to currency, by submitting invoices and drafts with the form and contents which I have already described.
As I see it, the necessary consequence of that offer and acceptance of a sterling credit is that the original term of the contract of sale as to the money of account was varied from Kenyan currency to sterling. The payment, and the sole payment, stipulated by the contract of sale was by the latter of credit. The buyers, through the confirming bank, had opened a letter of credit which did not conform, because it provided sterling as the money of account. The sellers accepted that offer by making use of the credit to receive payment for a part of the contractual goods. By that acceptance, as the sellers must be deemed to have known, not only did the confirming bank become irrevocably bound by the terms of the offer (and by no other terms), but so also did the buyers become bound. Not only did they incur legal obligations as a result of the sellers’ acceptance – for example, an obligation to indemnify the bank – but also the buyers could not thereafter have turned round and said to the sellers (for example, if Kenyan currency had been devalued against sterling) that the bank would thereafter pay less for the contractual goods than the promised sterling payment of £262 per ton. If the buyers could not revert unilaterally to the original currency of account, once they had offered a variation which had been accepted by conduct, neither could the sellers so revert. The contract had been varied in that respect.
The sellers, however, contend that they were, indeed, entitled to make use of the non-conforming letter of credit offered to them without impairing their rights for the future under the original terms of the contract, if and when they chose to revert. They seek to rely on the analogy of a sale of goods contract where the goods are deliverable by instalments, and one instalment falls short of the prescribed quality. The buyer is not obliged, even if in law he could do so, to treat the contract as repudiated. He is not, it is said, even obliged to complain. But he is in no way precluded from insisting that for future instalments of the goods the seller shall conform with the precise terms of the contract as to quality. That is not, in my opinion, a true analogy. The relevant transaction here is not one of instalments. It is a once-for-all transaction. It is the establishment of a credit which is to cover the whole of the payment for the whole of the contract. Once it has been accepted by the sellers, the bank is committed, and is committed, in accordance with its accepted terms, and no other terms. Once the credit is established and accepted it is unalterable, except with the consent of all the parties concerned, all of whose legal rights and liabilities have necessarily been affected by the establishment of the credit. Hence the sellers cannot escape from the consequences of the acceptance of the offered credit by any argument that their apparent acceptance involved merely a temporary acquiescence which they could revoke or abandon at will, or on giving notice. It was an acceptance which, once made, related to the totality of the letter of credit transaction; and the letter of credit transaction was, by the contract of sale, the one and only contractual provision for payment. When the letter of credit was accepted as a transaction in sterling as the currency of account, the price under the sale contract could not remain as Kenyan currency. For the buyers it was submitted further that, if there were not here a variation of the contract, there was at least a waiver, which the sellers could not, or did not properly revoke.
I do not propose to go into that submission at any length. On analysis, it covers much the same field as the question of variation. In my view, if there were no variation, the buyers would still be entitled to succeed on the ground of waiver. The relevant principle is, in my opinion, that which was stated by Lord Cairns in Hughes v. The Metropolitan Railway Company ( (1876-77) LR 2 App. Cas. 439 ), at page 448. The acceptance by the sellers of the sterling credit was, as I have said, a once-for-all acceptance. It was not a concession for a specified period of time or one which the sellers could operate as long as they chose and thereafter unilaterally abrogate: any more than the buyers would have been entitled to alter the terms of the credit or to have demanded a refund from the sellers if, after this credit had been partly used, the relative values of the currencies had changed in the opposite way.
We were invited to consider a large number of authorities cited from the Courts of Australia, New Zealand and the United States as well as of this country; and on the basis of those authorities to formulate propositions of general principle as to the effect upon a buyer’s liability of the establishment of a confirmed letter of credit. Does the mere establishment of the credit, completed by confirmation, discharge the buyer’s liability completely? Or does it discharge it provisionally, and, if so, subject to precisely what provision? With all respect, I do not think it is necessary, nor would it be helpful, to seek to formulate general principles on these fascinating topics. As became apparent from the numerous cases cited, the relevant factors, particularly as to the relevant terms of the individual sale contracts, vary so widely that it would be dangerous to state general principles, unless the statement were to be so hedged about with reservations and qualifications as to render the principles useless. However, without seeking to formulate general principles, I am satisfied that the discussion which we have heard on this topic, when it is related to the particular facts of this particular case, indicates an-other ground for deciding this appeal in favour of the buyers.
On the simple form of contractual provision for payment in this sale contract with which we are concerned, the sellers, in my view, have no right of requiring payment (i am not, of course, speaking of damages for breach) otherwise than in accordance with, and by means of, a confirmed irrevocable letter of credits so long, at any rate, as no default is made by the bank in its performance of the letter of credit obligations. There are cases in which a contract on its true construction imposes on the buyer a potential liability to make payment direct to the seller in certain circumstances, outside or in addition to payment by the bank under a duly established letter of credit. An example is to be found in the facts of Urquhart Lindsay & Co. Ltd v. Eastern Bank Ltd. ( [1922] 1 K.B. 318). But there is no scope for such an implication in the present contract of sale. Here the contractual obligation is “payment by confirmed, irrevocable letter of credit….”. If such a credit is duly established, and if payment is duly made in accordance with its terms, I see no scope for any liability on the part of the buyers to make, or on the part of the sellers to require, any other or additional payment. Here the credit was, it is true, not duly established. But the non-compliance of the credit with the contract of sale was, in my opinion, unquestionably waived, and irrevocably waived, by the sellers. On the facts of this case, then the credit which was established has to be treated as a conforming credit. On the terms of this contract of sale, there remains no obligation on the buyers to make any payment to the sellers, because they have discharged the whole of their contractual obligation as to payment when a conforming credit has been established and payment has actually been made under that credit, in accordance with its terms, to the full extent that the sellers have properly sought to draw upon it. It follows that, even if there were no variation or relevant waiver in respect of the terms of the con-tract of sale, I should hold that the sellers’ claim fails on that quite separate and independent ground.
It is apparent, and indeed we have been told, that some of the arguments before Mr. Justice Orr followed a very different line in certain respects from the arguments which have been presented to us. The learned Judge, in a very lucid and careful judgment, disposed of a difficult and complex question which has not been further argued on this appeal, the parties having accepted the Judge’s decision. He also dealt with the question of the original currency of account in a manner to which I should wish, respectfully, to pay tribute. Certainly no blame can attach to him because he did not, on some of the issues which have been put forward as being important in this Court, have the opportunity of considering the merits of the arguments now presented.
For the reasons which I have given, I am of opinion that the buyers have made all the payment which was due from them. I would allow the appeal.
Banco Santander SA v Bayfern Ltd
[1999] EWHC 284 (Comm
Mr Justice Langley:
THE QUESTION
This judgment relates to the trial of certain preliminary issues arising only between the Plaintiff, Banco Santander, and the Third Defendant, Banque Paribas in these proceedings. In a nutshell the question is whether the risk of fraud on the part of the beneficiary of a confirmed deferred payment letter of credit is to be borne by the issuing bank (and so possibly the applicant for the credit) or by the confirming bank where the confirming bank has discounted its own payment obligations to the beneficiary and paid over the discounted sum to it and the fraud is discovered only after it has done so but before the maturity date of the letter of credit. “Santander” was the Confirming Bank and “Paribas” the Issuing Bank. The applicant was Napa Petroleum Trade Inc and the Beneficiary, Bayfern Limited.
THE LETTER OF CREDIT
By a telex dated June 5, 1998 Paribas requested Santander to release a letter of credit to Bayfern adding Santander’s confirmation. Santander had previously agreed with Bayfern that it would confirm such a credit on certain terms.
The letter of credit (so far as material) provided that:
We, Banque Paribas, Paris, open our irrevocable confirmed documentary credit NR. 151734G
By order and for account of:
Napa Petroleum Trade Inc.
….
In favour of :
Bayfern Limited
….
Validity :
At the counters of Banco Santander London until the 15th September 1998
Amount
USD 18,469,000 +or- 10%.
This documentary credit is available with yourselves in London by deferred payment at 180 days from Bills of Lading date against presentation of the following documents:
1/ … Commercial Invoices …
2/ … Bills of Lading …
3/ Original Certificates of Quality and Quantity issued or countersigned by Saybolt …
4/ Cargo Insurance Certificate
Covering:
200,000 Metric Tons + or – 10%
Product :
Russian Export Blend Crude Oil …
This documentary credit is subject to the UCP for documentary credits (1993 Revision) of the International Chamber of Commerce …
Please advise the beneficiaries adding your confirmation by fax or courier of this credit.
At maturity we undertake to cover Banco Santander … in accordance with their instructions.
On June 8 Santander duly advised Bayfern of the letter of credit by attaching a copy of it to an advice of that date in which Santander also stated that:
We confirm this credit and hereby agree that documents presented under and in compliance with the Credit terms and conditions will be duly accepted and honoured at maturity if presented to us on or before the stipulated expiry date. Discounting of bills accepted under this letter of credit may be possible by prior arrangement;
and that:
…As previously agreed our Confirmation commission is 1.25% p. a., our Deferred payment or Discount Commission is 1.25% p. a. plus out of pocket expenses ….
DISCOUNTING
Whilst not intending to suggest that what follows is necessarily agreed, so far as the issues before the court are concerned the essential facts appear from the documents to be as follows.
By June 15, Bayfern had presented documents to Santander which Santander had examined and found to be conforming. Santander took up the documents and under the terms of the letter of credit thereby incurred a liability to pay Bayfern on November 27, 1998 the sum of US$ 20,315,796.30. November 27 was the date 180 days from the date of the Bills of Lading.
On June 9 Bayfern had confirmed a request to Santander “to discount the full value of the credit at the agreed rate of 1.25% p.a.” asking for payment to be made directly to “our bankers” Royal Bank of Scotland PLC.
On June 16, Santander replied to Bayfern’s letter of June 9 and wrote:
… in accordance with the terms of our agreement we have discounted amount of documents and credited the sum of USD 19,667,238.84 value 17th June 1998 into your account with Royal Bank of Scotland ….
….
Please complete and return to us the attached letter requesting discount and assignment of proceeds under the above mentioned Letter of Credit.
The sum of US$ 19,667,238.84 was shown calculated as the sum of US$ 20,315,796.30 less LIBOR plus 1.25% for 163 days (ie from 17th June to 27th November) and less a confirmation fee of 1.25% from 8th June to 17th June and a small fee relating to handling discrepant documents. The amount of the discount, ignoring the fees, was US$ 641,023.33.
The “attached letter” was duly signed and returned by Bayfern to Santander. It was also dated June 16. It set out short particulars of the letter of credit and continued:
We refer to the above-mentioned letter of credit and hereby request you to discount your deferred payment/acceptance undertaking to us as follows … (the figures were stated) …
In consideration we hereby irrevocably and unconditionally assign to you our rights under this letter of credit.
The request for and agreement to an assignment was made in accordance with Santander’s Operational Procedures Manual which included the following under “Corporate Settlements : Trade Finance”:
Where documents under a usance letter of credit are found to be in strict conformity with all the letter of credit terms and conditions, the Bank may be prepared to offer the Beneficiary a discount of the proceeds due, providing the letter of credit is either:
a) Issued by the Bank; or
b) Confirmed by the Bank.
In most cases agreement to discount, ie a ‘facility’ would have been reached between the Beneficiary and the Bank prior to the presentation of the documents ….
Providing the Beneficiary has a facility to discount and remains within the authorised limit, proceed as follows :
….
6. If the Beneficiary agrees to discount, request that they send to the Bank a Notice of Assignment confirming that the funds due under the letter of credit have been assigned to the Bank in return for the discount. This must be signed by the company officials.
….
18. If the letter of credit is in a foreign currency and reimbursement must be claimed from a Reimbursing Bank … payment instructions must be given three days prior to the value date by telex.
19. ….
THE ISSUES
By an Order dated February 12, 1999 on an application by Santander for summary judgment against Paribas and an application by Paribas for the determination of certain questions under R.S.C. Order 14A, Rix J ordered that there be a trial of the issues raised in Paribas’ order 14A application and in paragraphs 20A, 20B and 20C of Santander’s Re-Amended Points of Claim. Those are the issues to which this judgment relates and I should therefore set out the terms of them.
Paribas’ Order 14A application sought a determination of the following questions:
1. i. The effect of the “discounting” agreement between the Plaintiff (“Santander”) and the first defendant (“Bayfern”) contained in the letters dated 8th, 9th and 16th June annexed hereto.
ii. In particular, whether the payment by Santander of US$ 19,667,238.84 to Bayfern on 17th June 1998 was a payment made purportedly under the letter of credit or a payment outside the letter of credit in consideration of an assignment to Santander of Bayfern’s rights under the letter of credit.
iii. Whether Santander’s rights, if any, against Paribas are limited to such rights, if any, that Bayfern had to claim payment on 27th November 1998 from Paribas under the letter of credit.
2. In the light of the answers to (1) judgment for Paribas together with the costs of the action.
Paragraphs 20A, 20B and 20C read as follows:
20A. In the premises, as between the Plaintiff and the Third Defendant:
(1) The Plaintiff was the Nominated Bank under UCP Article 10(b)(i) and it had the Third Defendant’s authority to incur a deferred payment undertaking to the First Defendant against documents which appeared on their face to be in compliance with the terms and conditions of the Letter of Credit.
(2) By UCP Articles 10(d) and 14(a) the Third Defendant undertook and was bound to reimburse the Plaintiff in the event of the Plaintiff incurring such a deferred payment undertaking.
(3) On 15th June 1998 the Plaintiff duly incurred a deferred payment undertaking to the First Defendant to pay the sum of US$ 20,315,796.30 on 27th November 1998.
(4) The Plaintiff duly discharged its deferred payment undertaking to the First Defendant by effecting a payment to the First Defendant of US$ 19,667,238.84 on 17th June 1998.
(5) By reason of the foregoing, the Third Defendant became bound to reimburse the Plaintiff by a payment of US$ 20,315,796.30 on 27th November 1998
20B. The Plaintiff will if necessary contend that it had the Third Defendant’s authority to discharge its deferred payment undertaking by a discounted payment in that :
(1) It is routine banking practice for a bank to discount its own future payment obligation at the request of the party to whom the obligation is owed. This practice operates both generally and in the specific context of deferred payment letters of credit and acceptance letters of credit.
(2) There would be no commercial purpose in a bank’s refusal to discount its own future payment obligations because such obligations can be discounted in the market in any event by third parties.
(3) In the specific context of letters of credit, the discounting of deferred payment undertakings and acceptances facilitates international trading by assisting the beneficiary’s cash flow while preserving the credit period which such letters of credit give to the applicant.
(4) Accordingly, a Nominated Bank authorised to incur a deferred payment undertaking has implied and/or usual and/or customary authority to discharge any such undertaking by a discounted payment to the beneficiary.
20C. Further or alternatively, authority is to be inferred from the following additional facts and matters:
(1) The Third Defendant was at all material times the issuer of a substantial number of deferred payment letters of credit. It issued such credits intending that Nominated Banks should act on their authority to incur deferred payment undertakings.
(2) At all material times the Third Defendant knew that the potential for earning a profit on discounting is a material inducement to Nominated Banks to act on their authority to incur a deferred payment undertaking under such credits.
(3) It was the likely consequence of issuing the Letter of Credit, and the Third Defendant so intended, that the Plaintiff would incur a deferred payment undertaking and discount the same if so requested by the First Defendant.
SUBSEQUENT HISTORY
Santander sent to Paribas the documents received from Bayfern under the letter of credit. Santander paid the sum of US$ 19,667,238.84 into Bayfern’s account at the Royal Bank of Scotland on June 17. On June 24 Paribas informed Santander of a message received from Saybolt via Napa Petroleum that the Saybolt certificates of quality and quantity “should be considered to be false”. Santander obtained asset freezing relief against Bayfern that evening with the consequence that approximately US$ 14m is frozen in Bayfern’s account at the Royal Bank of Scotland.
There are several issues in the proceedings (which have been discontinued against Royal Bank of Scotland ) including whether there was any fraud, if so when it was known, and as to other alleged discrepancies in the documents. For the purpose of the issues before me it is to be assumed that Santander was not aware of any fraud when it confirmed the letter of credit or on June 17 when it paid the discounted sum to Royal Bank of Scotland but that there was fraud and it was known to both banks prior to November 27, 1998 the maturity date of the letter of credit.
THE EVIDENCE
The evidence was short. Santander called the head of Structured Trade and Commodity Finance of the bank’s London branch, Mr MacNamara. Each side called an expert banking witness with particular experience in trade finance. Mr Turnbull gave evidence for Santander. Mr Turnbull is currently Managing Director of UBK Trade and Export Finance Ltd a wholly-owned subsidiary of the United Bank of Kuwait. He has widespread experience of trade finance, and is well-known and highly respected in his field. Mr Savage gave evidence for Paribas. I mean no disrespect in saying , as Mr Savage himself readily accepted, that his experience is more limited and substantially confined to his experience with his employers, Credit Agricole Indosuez, where he is now and has been since 1994 the Manager of the Trade Finance Department at the London Branch.
THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (UCP)
The letter of credit was subject to the UCP (1993 Revision). Articles 3 and 4 of the UCP provide for the well known rules that credits are separate transactions from the sales or other contracts on which they are based and that the parties deal with documents and not the performance of those contarcts. Article 3a provides in part that:
Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
Part of the difficulty in construing this Article and all the provisions of the UCP is that, at least in this jurisdiction, they have to be read subject to or qualified by the exception for established fraud to which I shall have to refer further.
Articles 9 and 10 reflect the four types of letter of credit recognised in the UCP.
Article 9 is entitled Liability of Issuing and Confirming Banks and so far as material provides:
a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:
i. If the Credit provides for sight payment – to pay at sight;
ii. If the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the credit;
iii. If the Credit provides for acceptance:
a. By the Issuing Bank – to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,
or
b. ….
iv. If the Credit provides for negotiation – to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit ….
b. A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or reqest of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
i. If the Credit provides for sight payment – to pay at sight;
ii. If the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;
iii. If the Credit provides for acceptance:
a. By the Confirming Bank – to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity,
or
b. ….
iv. If the Credit provides for negotiation – to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit ….
Thus:
(A) The obligations of the Issuing Bank and the Confirming Bank mirror each other and are cumulative (in addition to);
(B) In the case of a deferred payment Credit (as here) the obligation is to pay on the maturity date in contrast to payment at sight;
(C) In the case of acceptance credits or credits available by negotiation the obligation is to accept and pay Drafts or to negotiate documents presented under the credit. Negotiation is defined in Article 10.b.ii.
Article 10 is entitled Types of Credit. It provides:
a All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
b.i. Unless the credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the “Nominated Bank”) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate ….
ii. Negotiation means the giving of value for Draft(s) and/or documents by the Bank authorised to negotiate ….
c. ….
d. By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.
Read in context, the Issuing Bank’s authority to the Confirming Bank to pay must I think be meant to cover both payment at sight and payment under a deferred payment undertaking at maturity. That is the obligation of the Confirming Bank under a deferred payment credit (Article 9.b.ii.) and it is the discharge of that obligation which the Issuing Bank is to “reimburse” in accordance with this Article of the UCP.
Mr Howard submits that it is Article 10d which provides for the payment obligation of the Issuing Bank to the Confirming Bank. Mr Hapgood submits (despite the formulation of paragraph 20A(2) of the Re-Amended Points of Claim ) that obligation is to be found in Article 14. So far as material, Article 14, under the heading “Discrepant Documents and Notice”, provides:
a. When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s) or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. To reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated,
ii. To take up the documents.
The remainder of the Article is concerned with the position where the documents presented are discrepant. In this case Santander had the role of both Confirming Bank and Nominated Bank. It is not an easy reading of this Article that it is intended to provide for the right of reimbursement by a Confirming Bank from an Issuing Bank when it has that dual role. That right is in my judgment expressly addressed in Article 10d. Moreover even if both Articles are addressing the same situation, an obligation to “reimburse” a party which has “incurred a deferred payment obligation” would I think as a matter of normal language fall to be discharged only when that latter obligation had itself been discharged by “payment at maturity”. On that basis, as one would expect, the two Articles say the same thing. The consideration for the Confirming or Nominated Banks’ undertaking to pay at maturity is that if and when it does so the Issuing Bank will reimburse it.
Article 14 is, I think, as Mr Howard submitted, directed at establishing that the Issuing Bank cannot complain about the documents presented under the credit once they have been taken up so as to dispute the Confirming and/or Nominated Bank’s right to incur the deferred payment obligation. But that obligation remains to pay at maturity with the right to be reimbursed if you do so.
ESTABLISHED FRAUD
In United City Merchants v Royal Bank of Canada [1983] AC 168, the House of Lords considered the question of fraud which would entitle a banker to refuse to pay under a letter of credit notwithstanding the rule requiring payment when the documents were in order on their face. In the course of his speech, with which the other members of the House agreed, Lord Diplock, at page 183, said:
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.
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. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or “landmark” case is Sztejn v J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631…. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all”. The courts will not allow their process to be used by a dishonest person to carry out a fraud.
In my judgment it must follow on the assumed facts, that had Bayfern in this case sought to enforce the obligation of Santander to pay the letter of credit at maturity Santander would have been entitled and on the present state of law bound to refuse to make that payment or lose its right to reimbursement. The fact that the documents had been taken up before any fraud was notified would not alter the fact that when it was sought to enforce the consequent payment obligation the claimant would be dishonestly seeking to use the process of the courts to carry out a fraud: see also The Society of Lloyds v CIB [1993] 2 LL Rep 579 per Saville J at page 581.
In European Asian Bank A.G. v Punjab and Sind Bank [1983] 1 LL Rep 611 the Court of Appeal considered a claim by the appellant bank against the issuing bank of a deferred payment letter of credit. The Court decided that on the evidence the issuing bank had unequivocally represented to the appellants that they were entitled to act as negotiating bankers under the credit and that they would be paid as negotiating bankers on the maturity date. The appellants had negotiated the credit by paying its discounted value to the Beneficiary. Between that date and the maturity date fraud, or alleged fraud, on the part of the Beneficiary was discovered and the issuing bank denied liability under the credit. The Court held that there was no arguable defence and entered a summary judgment against the issuing bank: see in particular the judgment of the court delivered by Robert Goff LJ (as he then was) at page 621.
A submission on behalf of the issuing bank that the appellants were merely agents for collection for the beneficiary (and so fixed with its fraud) was rejected, but at page 619, Robert Goff LJ added:
Even if it were a fact that, as at August 13 (when the appellants had forwarded the documents to the issuing bank to enquire whether they would accept them) the appellants had been appointed agents for collection by (the Beneficiary) it is beyond question that by August 20 the appellants had negotiated the letter of credit, and there is no suggestion that they acted otherwise than in good faith in so doing. Thereafter, in February 1980, they claimed payment from the respondents; and this was refused. In our judgment it is not open to the respondents, on these facts, to say against the appellants that they were justified in refusing payment on the ground that the documents were fraudulent or even forged. In our judgment the relevant time for considering this question is the time when payment falls due and is claimed and refused. If, at that time, the party claiming payment had negotiated the relevant documents in good faith, the issuing bank cannot excuse his refusal to pay on the ground that at some earlier time the negotiating bank was a mere agent for collection on behalf of the seller and allege against him fraud or forgery (if that indeed be the case) on the part of the beneficiary of the letter of credit.
The essential distinction between that case and this is that in the European Asian Bank case the appellants were or were to be considered to be negotiating bankers. The credit was type a.iv. under Article 9 of the UCP. In this case the credit is type a.ii.
As Robert Goff LJ said at page 621:
After all it was obvious that the appellants as negotiating bankers, would be discounting the letter of credit and so paying out a very large sum of money on the faith of these messages (that is the messages which constituted the representation that the appellants were entitled to act as negotiating bankers under the letter of credit).
Thus the case was one in which it was in effect held that the discounting of the letter of credit was expressly authorised by the issuing bank on terms that it would be liable at the maturity date for the undiscounted sum of the credit. That reflects the meaning of “negotiation” in Article 10b.ii. of the UCP and the express undertaking of the Issuing Bank to reimburse the negotiating bank for doing just that in Article 10d.
If such authorisation is to be found in the present case it has to be found in Article 14 or some custom or practice or implication as paragraphs 20A, 20B and 20C of the Re-Amended Points of Claim recognise. The difficulty facing Santander is however, that the UCP spells out the extent of express authorisation in a deferred payment credit in terms of payment at maturity: Article 9.b.ii. And, as European Asian Bank illustrates, the UCP expressly permits another type of credit, a credit “for negotiation”, which does authorise discounting and require the issuing bank to reimburse the “discounting” bank when it does so.
In this context I should add a word about acceptance credits as Mr Hapgood’s submission was that there was no good reason why the effect of established fraud should differ in the case of acceptance credits and deferred payment credits. An acceptance credit, however, expressly involves authority from the Issuing Bank to the Confirming Bank to accept drafts and pay them at maturity: Article 9.b.iii. a. The Issuing Bank’s obligation is to reimburse the Confirming Bank for undertaking those obligations. If the Beneficiary discounts the accepted draft to a bona fide third party the third party will be a holder in due course entitled regardless of subsequently discovered fraud to payment on the draft by virtue of the provisions of the Bills of Exchange Act 1882. If the Confirming Bank discounts its own acceptance it will become a holder of the draft and if it holds it at maturity the draft will in law then be discharged: section 61 of the Act. In either case therefore the express obligation of reimbursement of the Issuing Bank is effective. The authorised acceptance of the draft itself carries with it that consequence.
ASSIGNMENT AND PRACTICE
Finally, in the context of fraud by the Beneficiary, it is necessary because of the way the submissions have developed and because of the references to assignment in the documentation to which I have referred, to consider the effects of the assignment from Bayfern to Santander in this case and the evidence relating to the practice of discounting deferred payment credits.
The Beneficiary of a confirmed deferred payment letter of credit has the promise of both the Issuing Bank and the Confirming Bank to pay on the maturity date : UCP Article 9.b.ii.
If the Confirming Bank agrees to discount the proceeds of the letter of credit it is in effect agreeing to “buy” its own future promise to pay at a current price. Whether it does so and if so on what terms is, as all the witnesses agree, entirely a matter for its own decision in agreement with the Beneficiary and will be done (as it was done here) without any reference or notice to the Issuing Bank. For example, it could be done with or without recourse to the Beneficiary (in this case it was with recourse). On the evidence, it could also be done with or without taking an assignment and with or without any attempt to assess the credit or character of the Beneficiary to whom the discounted price was to be paid. Mr Turnbull said it was not his practice to ask for an assignment on discounting “his own” confirmation. But he acknowledged some banks would insist on an assignment, which he said was unnecessary as there was nothing to assign once the discounted payment had been made.
Santander did insist on an assignment as their own Manual required. Mr MacNamara described it as “belt and braces”. Mr Savage said taking an assignment was the normal practice. Although both experts agreed that market practice would not take account of the credit risk of the beneficiary they also agreed that banks would often assess the integrity of the beneficiary. In this case Santander in fact obtained a bank reference on Bayfern from the Royal Bank of Scotland. It is obvious that any bank contemplating discounting is in a position at least to seek to know who it is dealing with.
The experts are also agreed that it is (and was) common market practice in London to discount deferred payment letters of credit where the beneficiary requested it. Whether the beneficiary did request it would of course depend on all sorts of individual factors.
Counsel are not agreed on either the utility or effect of an assignment. Mr Hapgood’s first submission, indeed, is that the assignment was worthless because there was nothing to assign. He submits that the payment made by Santander to Bayfern on June 17 was “plainly intended by both parties to extinguish all Bayfern’s rights under the Credit, both against Santander and against Paribas.” He points to the report of Re Charge Card Services Ltd [1987] Ch 150 at page 175C/D where it is recorded that counsel conceded that a debt cannot be assigned in whole or in part to the debtor since such an assignment operates wholly or partially as a release. That he submits remains unaffected by the decision in Re BCCI SA (No 8) [1997] 4 All ER 568 at pages 575 to 578. Mr Hapgood also submits that in any event an assignee is not affected by the subsequent emergence of fraud on the principle that the claim of an assignee is not defeated by an unknown fraud which induced the debtor to enter into the relevant contract. The authority cited for this principle is the decision of the Court of Appeal in Stoddart v Union Trust Ltd [1912] 1 KB 181.
One context in which this question could arise directly is the forfaiting market. In simple terms a forfaiter may buy, also at a discounted price, the obligations of the issuing bank and confirming bank (if any) under a deferred payment letter of credit. In other words the forfaiter is an independent party to the Credit itself, albeit frequently a bank, and trades in trade paper by the purchase of the obligations it represents. The experts agree that there is a well established forfaiting market which deals in deferred payment undertakings both in London and elsewhere. They also agree that the documentation in such a case provides for the forfaiter to obtain an assignment from the beneficiary of its own rights under the credit and that the forfaiter will give notice that it has done so to the banks whose obligations it has bought. In such a case the basis in law on which the forfaiter is entitled to the proceeds of the credit must be the assignment as it is not a party to the credit.
Mr Howard, on the other hand, submits that an assignment does involve assigning valuable rights, the rights to a future payment from both the Issuing and Confirming Banks. In other words, that even in a case where the Confirming Bank is discounting or buying its own future obligation the position is the same as for a forfaiter. He also submits, on well known principles (see Chitty on Contracts, Vol. 1, paras 19-039 to 042) that an assignee takes subject to equities against the assignor, and thus that in both cases if the assignor had no right to payment, for example because the documents were forged, then the Confirming Bank and forfaiter cannot recover as they are in no better position than the assignor.
These counter submissions became of more importance in the course of the parties’ closing submissions because despite the fact that no claim was pleaded by Santander as assignee and therefore no reference to the effect of the assignment was expressly included in the issues ordered for preliminary trial both counsel agreed that the court should address the issue and, as it had been raised in the course of argument and Mr Hapgood indicated that if Santander was not succesful on any of its claims as formulated, it would pursue a claim as assignee, I agreed to do so.
At this stage I would simply record the following:
(1) It is agreed that the forfaiter’s legal rights are dependant on the efficacy of the assignment to it of the rights of the beneficiary.
(2) Mr Hapgood submits and it is his primary case that the discounting Confirming Bank’s rights are to be found in Article 14a of the UCP and only if he is wrong about that does he now seek to find them in the assignment.
(3) There is therefore in Santander’s own primary case a material difference in the legal basis for a claim by a forfaiter and a claim by a Confirming Bank which has discounted its own obligation.
(4) On any view the rights of a bona fide assignee of an obligation owed to an assignor who has been guilty of fraud in the context of that obligation are as a matter of law of some nicety. Yet, on the evidence of Mr Turnbull, it seems the forfait market has not appreciated this or, if it has, has chosen to run the risk.
(5) It is not easy to see why a Confirming Bank which discounts its own confirmation should be in any better or different position than the forfaiter, especially so where (as here) the discounting agreement with the Beneficiary is in effect on the same basis as a forfaiter would use.
(6) It is a matter of commercial indifference for the issuing bank whether the Beneficiary is able to or chooses to “discount” its rights under a confirmed deferred payment letter of credit with the confirming bank or a forfaiter. It will also be ignorant whether one or the other has in fact occurred. Thus, if the consequences in law are different, that will be so for no apparent commercial reason and without the knowledge of the Issuing Bank.
(7) There can be no doubt that in a case where no fraud is involved both the discounting Confirming Bank and the forfaiter must have an enforceable right to be “reimbursed” by the Issuing Bank.
(8) It was comforting to hear from both experts that the incidence of fraud in these situations is very rare indeed. Thus the extent of the problem, whilst when it arises no doubt capable of involving very large sums, is such that one might expect it to ameliorate Mr Turnbull’s expressed concerns about the effect on the market should Santander not be entitled to recover from Paribas. Moreover, as I have already said, the use of Credits for negotiation is an option and at the least it is agreed that the forfait market has and has always had, a “problem” in such cases but it has continued to grow and develop nonetheless. If as Mr Turnbull’s evidence suggests that was because forfaiters believed they were immune from fraud once they had “bought” the obligations under a deferred payment letter of credit then the belief was wrong.
(9) I accept that it is difficult for a Confirming or any bank to protect itself against fraud and that the UCP looks to the Applicant for the credit to do that. But the law is only that payment is to be refused in cases of established fraud known to the Bank before the due date for payment. That is not harsh. This case concerns the consequences when for its own reasons and without reference to the Issuing Bank or Applicant the Confirming Bank chooses to commit itself to making a payment before it is bound to do so.
THE SUBMISSIONS
Apart from the competing submissions on the Assignment Issue, which I have set out and consider below, the essential submissions on the core questions can I think be fairly summarised as follows.
Mr Hapgood submits that:
(1) Santander is entitled to be reimbursed by Paribas under Article 14a of the UCP regardless of the assumed fact that by November 27, 1998 it knew of established fraud by Bayfern. That is his primary case.
(2) In the alternative it is entitled to be reimbursed as assignee notwithstanding the assumed fraud.
(3) In the further alternative, as set out in paragraphs 20B and 20C of the Re-Amended Points of Claim Santander had “implied, usual or customary” authority to discount and there was an obligation on Paribas to reimburse Santander for having done so as a matter of market practice.
Mr Howard submits that:
(1) the obligation of an Issuing Bank to reimburse a Confirming Bank is to be found in Article 10d of the UCP and not Article 14a and in any event the Articles have the same effect which is that the right to reimbursement arises only at the maturity date.
(2) In the case where a Confirming Bank discounts its obligation and there is no fraud, its right to reimbursement arises at the maturity date as a matter of analysis on the basis that :
(i) its obligation to pay the Beneficiary is deemed in law to be fulfilled or to be discharged at that date as it will then owe the liability to itself; or, as a secondary case,
(ii) as assignee of the obligation of the Issuing Bank to pay the Beneficiary at that date, such an assignment being either express (as in this case) or arising by implication from an agreement to discount. But in either case knowledge of fraud prior to the maturity date entitles the Confirming Bank to refuse payment and disentitles it from reimbursement by the Issuing Bank.
(3) There is no evidence of any relevant market practice to justify Santander’s claims in paragraphs 20B and 20C.
CONCLUSIONS
ARTICLE 14a I have already expressed my view of this Article when considering the provisions of the UCP. In short, in my judgment Mr Howard is right and Mr Hapgood wrong in their submissions about it. The basic authority given by the Issuing Bank to the Confirming Bank in a deferred payment letter of credit is to pay at maturity. The consequent obligation to reimburse is to reimburse on payment being made at maturity. If at that time there is established fraud, there is no obligation on the Confirming Bank to pay nor on the Issuing Bank to reimburse. I cannot construe either Article 10d or 14a as entitling Santander to “reimbursement” for having incurred a deferred payment undertaking as opposed to paying it at maturity, as Mr Hapgood submits I should. That seems to me both to fail to recognise the existence and rationale of the established fraud exception and to be inconsistent with the normal meaning of the word reimbursement. Nor can I accept that the payment of the discounted sum discharged the obligations of Santander and Paribas under the Credit for the reasons stated below. I should make clear that it is no part of Mr Howard’s case or my reasoning that “discounting” of the payment obligation under a deferred payment letter of credit is a “breach of mandate” or that for some other reason (in the absence of established fraud) the Issuing Bank’s reimbursement obligation cannot be invoked. In my judgment Mr Howard is right in his submissions that:
(i) where the Confirming Bank discounts its own obligation, at maturity either it is to be deemed to make payment at that date or it is entitled to claim as assignee of the claims of the Beneficiary.
(ii) where a forfaiter discounts the Credit it is entitled to claim as assignee.
Assignment. (a) Despite the attraction of Mr Hapgood’s submission that an assignment to the debtor of his own obligation to pay extinguishes the debt and discharges it, I am not persuaded. First, the “debt” in question was owed by two parties (Paribas and Santander ) not just Santander and was payable only in the future (unlike the existing debts in the Re Charge Card Services case). Second, the expressed consideration for the payment of the discounted sum was the irrevocable and unconditional assignment to Santander of Bayfern’s rights under the Credit. Third, the agreement to discount and assign cannot be read as Mr Hapgood submits it is to be read as an agreement to discharge or, on payment of the discounted sum, as an actual discharge of the obligations of either Bank under the Credit. Indeed the agreement is inconsistent with such an outcome. The expressed purpose was to keep the Credit intact. Fourth, I do not see anything objectionable in one (Santander) of two parties (Santander and Paribas) liable for a future payment agreeing with the creditor (Bayfern) to acquire the creditor’s rights against the other (Paribas) on terms that his own obligation to make a payment in the future to the creditor is to be preserved so as to be treated as discharged at that future date and thus available then to trigger the obligation on the other debtor to reimburse him. That seems to me to have been the intention of both Santander and Bayfern expressed in the agreement and I do not see why the court should not give effect to it.
(b) The second question in relation to assignment which now arises is whether a claim by Santander as assignee of Bayfern would be sustainable on the assumed facts that Bayfern was guilty of fraud in submitting the documents under the Credit but that fraud was unknown to Santander at the time of assignment but known at the maturity date.
In my judgment the answer to this question is “No”. It is no surprise that Santander have not pleaded a claim on this basis. Stoddart’s case has been the subject of some criticism and can be distinguished : see Chitty para 19-040. On the assumed facts, Bayfern had no rights under the Credit and so nothing to assign to Santander. Unless (which is in reality the first question) Santander has an independent right to recover from Paribas, I do not think qua assignee Santander could obtain more than Bayfern had to give at the time of the assignment.
Custom and Practice. Mr Turnbull’s views are of course entitled to respect and in reaching the conclusions I have I have had them in mind. Essentially, however, I think they come to no more than a reflection of expectations on the part of Banks (or at least discounting banks with London operations) that it is safe to discount Credits and that they are not concerned with the bona fides of the Beneficiary. I cannot spell out from that any relevant custom or practice or the basis for the implication of any relevant contractual term. If I am right in my construction of the UCP it provides for the obligations undertaken in this case and there is nothing in Mr Turnbull’s evidence which can alter that. It also establishes what it was that Santander was authorised to do (“pay at maturity”) and no wider authorisation is justified on the evidence nor any of the ways in which Santander have sought to express the claim in paragraphs 20B or 20C of the Re-Amended Points of Claim. On the evidence there is no common practice even as regards the documentation where a Confirming Bank discounts its own confirmation and the incidence of fraud has been so slight that no practice in that context could exist. Nor, as I have said, in the related case of the forfait market, would it seem that whatever the expectation it reflects the reality.
It follows that on all the issues before the court in my judgment Paribas are right and Santander wrong.
THE ANSWERS TO THE ISSUES
I will hear the parties on the form of Order to be made in the light of this judgment and the fact that both have sought to refine the specific questions which were referred to the court. My essential conclusion is that on the assumption that Bayfern was guilty of fraud in the manner alleged and that was known to Santander before November 27, 1998 the risk of that fraud falls on Santander and not Paribas.