Экзамен зачет учебный год 2023 / The independence principle of letters of credit and demand guarantees (1)

‘requires that the fraudulent aspect of the document be material to the purchaser of that document or that the fraudulent act be significant to the participants in the underlying

63Rafianjan Pistachio Producers Co-operative v. Bank Leumi Pic (UK) [1992] 1 Lloyd’s Rep. 513, 542.

64Ibid., at 186.

65Malek and Quest, Jack; Documentary Credits (4th edn, Tottel Publishing, 2009) [9.17].

66e.g. Tukan Timber Ltd v. Barclays Bank Pic [1987] 1 Lloyd’s Rep. 171.

67See discussion at paras 5.39 to 5.43 below.

68e.g. Esal Commodities Ltd v. OCL [1985] 2 Lloyd’s Rep. 546, 550; IE Contractors Ltd v. Lloyd’s Bank Pic

[1990] 2 Lloyd’s Rep. 496, 500.

69 Para 1.

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The Fraud Exception

transaction’. The example is given of a contract to deliver 1,000 barrels of salad oil. The seller delivers 998 but knowingly submits an invoice showing 1,000 barrels. If the shortage of two barrels is an insubstantial and immaterial breach of the underlying contract then the benefi­ ciary’s act, though possibly fraudulent, is not materially so and the fraud exception will not apply.

2.Beneficiary’s Knowledge or Lack of Honest Belief

5.28The state of mind that is required in order to establish fraud was laid down by Lord Herschell in Derry v. Peek70 when he explained that:

fraud is proved when it is shown that a false representation has been made (i) knowingly, (ii) without beliefin its truth, or (iii) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real beliefin the truth ofwhat he states. To prevent afalse statement from being fraudulent, there must, I think, always be an honest belie! in its truth.71

5.29In the context of the fraud exception the state of mind required appears to cover all the cat­ egories listed by Lord Herschell, that is to say, cases where the beneficiary had knowledge that the representation was false or where he did not have an honest belief in its truth. So, if a beneficiary makes a demand for payment which contains a material false representation, he will be guilty of fraud if he had knowledge that the representation was false or if he did not have an honest belief that the representation was true.

A. Beneficiary’s Knowledge

(i)General

5.30A demand guarantee is usually issued to secure the account party’s performance of the under­ lying contract. In some cases a letter of credit is also issued to serve this purpose. In such a case, if the account party has fully performed the contract and the beneficiary is aware of it then the beneficiary is aware that he is not entitled to payment under the guarantee. Therefore, if, with knowledge that he is not entitled to payment, the beneficiary makes a demand under the guarantee or letter of credit the demand will be fraudulent.72 A slightly different situation is one where the letter of credit or guarantee is issued where there is an agreement or understanding between the parties that the beneficiary will not demand pay­ ment under it unless specified conditions are met. In such a case, although the guarantee itself may be unconditional, if the beneficiary demands payment when he knows that the agreed conditions have not been satisfied, the demand is fraudulent73 because the demand is made in the knowledge that the beneficiary is not entitled to payment. However, such a demand is not fraudulent where the beneficiary believes (rightly or wrongly) that the

70(1889) 14App.Cas.337

71Ibid., at 376.

72See, e.g. CDNResearch&Dev. Ltd v. Bank o f Nova Scotia (1980) 18 CPC 62 (On. HC). There, a guarantee was issued to secure the delivery by the account parry of fire fighting vehicles to Iran. The vehicles were delivered to the beneficiaries in Iran yet the beneficiary demanded payment under the guarantee. Galligan J. held that there was a strong prima facie case of fraud, since the beneficiaries knew that delivery had been made and they were not entitled to payment under the guarantee.

73e.g. Rosen v. Pullen (1981) 126 DLR (3d) 62 (demand under a letter of credit).

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informed the account party that the statement in the document was false and the account party raised no protest and was prepared to accept it. In one Australian case, 'The Inflatable Toy Company Pty Ltd v. State Bank o fNew South Wales)1shipping documents had been issued for a quantity of inflatable toys. However, 366 cartons were not shipped when they were discovered to be defective. For some reason the shipping documents were not changed to

74 Bolivinter Oil S'/J v. Chase Manhattan Bank [1984] 1 Lloyd s Rep. 251.

75[1983] 1 AC 168.

76Ibid., at 183.

77[1994] 34 NSWLR243.

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The Fraud Exception

reflect the correct quantity shipped. The seller contacted the buyer and explained why the documents would be different to what was actually shipped and explained that the remain­ der would be sent by air after the defects had been cured. The buyer was initially prepared to accept this. The seller presented the documents to the bank. The buyer at first indicated that it was content with what was happening but later changed its attitude and applied for an injunction to prevent the seller from receiving payment under the letter of credit. Young J. refused to grant an injunction on the basis that this was not a case of clear fraud. The court took the view that it did not necessarily follow from the fact that the seller knew that the documents presented were untrue that he was guilty of actual fraud. The court stated that since the seller had explained to the buyer why the documents would be different from what was shipped and made promises that the missing quantity would be sent by air after the defects have been cured and the buyer was prepared to accept it, at least initially, the buyer could not afterwards complain of fraud. So, although knowledge by the beneficiary of a material false representation in a document before presentation entitles a bank to refuse to pay, an account party who is informed of the false statement and accepts it may not be allowed subsequently to prevent payment on the basis of the beneficiary’s fraud.

5.34If a beneficiary makes a material false representation with knowledge that it is false the fraud exception applies.7879The relevant time for the beneficiary’s knowledge of the falsity is the time of presentation. If the beneficiary becomes aware that a document is false after presentation his claim to payment will not be defeated. Knowledge at the time of trial is certainly too late. As Staughton L.J. said in Group Josi Re и Walbrook Insurance Co Ltdls>‘it is nothing to the point that at the time of trial the beneficiary 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’.80

(ii)Fraud o fbeneficiary’s agent

5.35The English courts have not yet pronounced on the question whether in the context of the fraud exception the beneficiary is to be liable for the fraud of his agent81 or whether the agent’s knowledge is to be imputed to the beneficiary.82 However, where the beneficiary’s agent passes on a misrepresentation to the beneficiary who then presents it in good faith to the bank it is likely that the beneficiary will not be liable for the fraud of the agent if the beneficiary is himself an intended victim of the agent’s fraud.83

(Hi) Thirdpartyfraud

5.36The fraud exception is confined to fraud by the beneficiary. It does not extend to fraud by a third party of which the beneficiary has no knowledge. Therefore, where the beneficiary presents a document which has been issued by a third party (such as a bill of lading or an expert’s certificate) and the document contains a material statement that is untrue, the ben­ eficiary is not guilty of fraud if he was not aware that the statement was untrue at the time

78United City Merchants v. Royal Bank o f Canada [1983] 1 AC 168 at 183; GKN Contractors Ltd v. Lloyd’s Bank Pic (1985) 30 BLR 48 at 63.

79[1996] 1WLR 1152 at 1161.

80See also Montrod Ltd v. Grundkotter Fleischvertriebs GmbH [2001] EWCA Civ 1954; [2002] 1 WLR 1975; [2002] 1 All ER (Comm) 257 at [42].

81e.g. In re HampshireLand\\%96\ 2 Ch 743.

82e.g. Lloyds v. Grace Smith [1912] AC 716.

83cf. Kwei Tek Chao v. British Traders and Shippers Ltd [1954] 2 QB 459.

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84[1983] 1 AC 168.

85[1982] QB 208 at 239.

86The position is the same where the beneficiary/seller has been deceived by his own supplier who has

shipped the wrong goods directly to the account party/buyer. Although the supplier’s conduct may be fraudu­ lent the beneficiary, who has also been deceived, is not a party to the fraud: cf. Korea Industry Co Ltd v. Andoll Ltd[ 1990] 2 Lloyds Rep. 183 (Sing. CA).

87e.g. Singapore: Mess Pierson NVv. Bay Pacific (S) Pte Ltd [2000] 4 SLR 393, no fraud where presenter was not aware that the bill oflading presented was antedated and that a health certificate was a forgery.

881993 SLT 190.

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The Fraud Exception

the court refused to grant an injunction to stop the issuing bank from making payment to the correspondent bank that had already paid the beneficiary under a letter of credit. The injunction was refused because the fraud was that of a third party, the engineers, who issued the certificate and the beneficiary was not aware of it.8990

B.Honest belief

5.39Even if the beneficiary did not have knowledge that a representation was false he may still be guilty of fraud if he did not have an honest belief that it was true. However, if he had an honest belief then he cannot be guilty of fraud, especially where the fraud is that of a third party, or even, it would appear, that of his agent, provided that the agent’s false statement was intended to deceive the beneficiary himself.

5.40Where a presenter makes a false representation without actual knowledge that it is false but with no honest belief in its truth this could amount to fraud for purposes of the fraud exception. In Tukan Timber Ltdv. Barclays Bank Plcsathe claimants were importers of timber from Brazil and the trade had been financed by Unitrade SA which later became Unibanco Trading SA. Payment was made by letters of credit opened at the claimants’ bank with Unitrade as the beneficiary. The documents required included a beneficiaries’ receipt countersigned by, inter alia, Mr Franklin. After Unitrade became Unibanco the existing red clause letters of credit were cancelled and a new one substituted. Under the new credit, the signature of Mr Franklin was changed to ‘Jonathan Franklin’, a director ol the claimant company. Subsequently the bank was presented with a demand for payment supported by a purported receipt signed by ‘J. M. Franklin’. The bank declined to honour the demand because the signature was in its old form and the name at the top of the receipt was Unitrade not Unibanco. Later the bank received a second demand signed ‘J. M. Franklin’. Mr Franklin testified that the signatures on the two documents were forged. The beneficiary presented the second document on instructions from their subsidiary in San Paulo in Brazil, where the claimants and Mr Franklin were based. So, the beneficiary did not have knowledge of the alleged forgery. However, it was held that the forgery in the second document was so crude and manifest that the beneficiary could not have had an honest belief that the document was valid. At the top of the receipt was the heading ‘Unitrade S.A.’ but that had been lightly deleted in the second document and in its place was inserted ‘new company name, Unibanco Trading S.A.’ Also, the document had the very same date as the date in the first rejected document. Hirst J. concluded that it was ‘manifestly a crude and plainly dishonest attempt to get round the difficulties encountered with the first receipt. I am therefore prepared to hold that the only realistic inference is that Unibanco S.A. could not have honestly believed that this document purportedly emanating from its subsidiary, Unibanco Trading S.A., was valid’.91 Although the forgery might have been the act of a third party, since it was so crude and therefore manifest, the beneficiary could not honestly have believed that it was a valid document.

5.41The position is the same in relation to documents presented under a performance bond. A demand for payment must be honest.92 For example, a demand made on the basis that the

89Ibid., at 193.

90[1987] 1Lloyd’s Rep. 171.

91Ibid., at 176.

92 e.g. Esal Commodities Ltd v. OCL [1985] 2 Lloyd’s Rep. 546, 550; IE Contractors Ltd v. Lloyd’s Bank Pic

[1990] 2 Lloyd’s Rep. 496, 500.

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mance bond demands payment in circumstances where the breach of contract on which he relies was caused by his own breach of the underlying contract, for example, by failing to open avalid letter ofcredit. In Edward Owen Engineering Co Ltd v. Barclays Bank International Ltd99 the underlying contract was for the sale of goods by English suppliers to Libyan buyers. The contract was subject to a condition precedent that the sellers would arrange for a perfor­ mance guarantee to be given to the buyers. Accordingly, the sellers arranged for Barclays Bank International to provide the guarantee which was issued by a local bank in Libya. Barclays Bank provided a counter-guarantee to the Libyan bank payable on first demand and without any conditions or proof. Payment of the contract price under the sale contract was to be by a confirmed letter of credit to be arranged by the buyer. The sellers claimed that the letter ofcredit opened by the buyer was not a confirmed credit and that because of this breach

93cf. Kvaerner Singapore Pte Ltd v. UDL Shipbuilding (Singapore) Pte Ltd [1999] 3 SLR 350.

94Lome Stewart Pic v. Hermes KreditversicherungsAG [2001] All ER (D) 286 at [36].

95e.g. Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159, 170. See also

Fletcher Construction Australia Ltd v. VamsdorfPty Ltd [1998] 3 VR 812,823.

96[1981] Com LR235.

97Cf. United Technologies Corp v. Citibank, 469 F. Supp. 473 (1979).

98Discount Records Ltd v. Barclays Bank Ltd [1975] 1 WLR 315, where the seller delivered packages largely

containing rubbish instead of the goods contracted for, it was held that the account party could not rely on the fraud exception to prevent payment by the bank, cf., in the USA, American Bell lnternational Inc v. Islamic Republic o fIran, 474 F. Supp. 420 (1979); New Orleans Brass v. Whitney Nat. Bank, 818 So. 2d 1057 (La. App. 4 Cir. 2 0 0 2 ) (alleged breaches of the underlying contract did not constitute fraud so as to justify an injunction against the beneficiary).

99 [1978] 1 QB 159.

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The Fraud Exception

of contract by the buyers the sellers were entitled to and had repudiated the contract of sale. The buyers demanded payment under the performance bond issued by the Libyan bank, who in turn demanded payment under their counter-guarantee given by Barclays. The sellers sought an injunction to restrain Barclays from paying under the counter-guarantee. The Court ofAppeal refused to grant the injunction and held that the bank must pay. It was held that even if the sellers were right in their claim that the buyers had failed to comply with their contractual obligations to open a confirmed credit and that as a result the sellers were entitled to and had terminated the contract of sale, those factors did not amount to evidence of fraud on the part of the buyers.100 Lord Denning M.R. stated that ‘[s]o long as the [beneficiaries] make an honest demand, the banks are bound to pay’.101

5.44Where a material representation has been made to the bank which, to the knowledge of the beneficiary, is false, it is not clear whether in order to establish fraud it is necessary to show in addition that the beneficiary, in making a demand for payment, intended to deceive the bank. It would appear that where the beneficiary is aware of a material false representation in any document to be presented to the bank and he nevertheless decides to present the docu­ ment for payment then it can be inferred that he intends to deceive the bank.102 Where the document has been produced by the beneficiary himself and he is aware that the representa­ tion is falsefit is difficult to escape the conclusion that in presenting the document he intends to deceive the bank. The position should be similar where the false representation is con­ tained in a document issued by a third party but presented by the beneficiary with knowledge of the false representation.

5.45Tire same should be the case where the false representation was made by the account party in the application for the letter of credit or performance bond. If the beneficiary was aware that the bank had issued the letter of credit or the performance bond as a result of a false representation by the applicant, for example about the terms of the underlying contract, then the beneficiary intends to deceive the bank if he presents documents for payment in relation to the purported contract.103

3.Bank’s Reliance

5.46One of the elements of a claim for damages in deceit is reliance by the claimant on the defen­ dant’s false representation.104 However, in the context of the fraud exception, a distinction should be made between cases where the bank is refusing to pay or where the account party seeks an injunction to prevent the beneficiary from demanding payment or to prevent the bank from making payment and cases where the bank has already paid the beneficiary and seeks to recover the payment through an action for damages in deceit. In the former, the English courts do not require actual reliance; potential reliance is sufficient. In the latter, however, actual reliance is required.

100Ibid., at 173 and 175.

101Ibid., at 170.

102 Iiafianjan Pistachio Producers Co-operative v. Bank Leumi Pic (UK) [1992] 1 Lloyd’s Rep. 513,541.

103Comp. Solo Industries UK Ltdv. CanaraBank [2001] 2 A11ER (Comm) 217.

104Derry v. Peek ( Ш 9 ) 14 App. Cas. 337; TheKritiPalm [2007] 1 All ER (Comm) 667.

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must show actual reliance in order to succeed in its claim.108 The bank will normally be able to show that it relied on the apparent conformity of the documents and that it would not have accepted the documents (and therefore would not have paid) if it had known that the documents were false. If the beneficiary presents to the bank a document which to his knowl­ edge contains a false statement that is material, the court will readily find that he intended the bank to rely on it and once the bank acts on it in the manner desired by the beneficiary the court will presume that the bank was actually induced by the false statement.109 There is a rebuttable presumption that the intended recipient of a fraudulent misrepresentation was induced by it.110 This presumption makes it unnecessary to call the decision-maker in order to prove the inducement.11112In Komercni Banka AS v. Stone and Rolls'u the beneficiary had presented to the bank documents which appeared to be in conformity with the requirements of a letter of credit but the documents were, to the knowledge of the beneficiary, false. The bank accepted the documents because of their apparent conformity and paid the beneficiary under the credit. In the bank’s action against the beneficiary for damages in deceit it was held that by accepting the documents the bank had relied on the defendant’s fraud.

105[1992] 1 Lloyd’s Rep. 513.

106Ibid., at 542.

107Ibid.

108The representation need not have been the sole cause of the claimant acting as he did; it is sufficient that it was a cause of the claimant acting as he did; Edgington v. Fitzmaurice (1885) 29 Ch. 459, 483.

109UxinterimpexJSC v. StandardBank Pic [2007] EWHC 1151 at [108] and [109].

110Dadourian Group International v. Simms [2006] EWHC 2973 (Ch) at [543].

111 Smith v. Chadwick [1884] 9 AC 187 at 196. 112 [2003] 1 Lloyd’s Rep. 383.

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The Fraud Exception

4. Banks Knowledge

A. The requirement

5.49 It is often said that for the account party to obtain an injunction on the ground of fraud there must be evidence of fraud and evidence that the bank had knowledge of the fraud. However, a distinction should be drawn between cases where an injunction is sought against the ben­ eficiary at a time when a demand has not yet been made under the instrument and the bank is not a party to the proceedings and cases where the application is for an injunction against the bank to restrain it from making payment under the instrument. In the former class of case, knowledge by the bank of the beneficiary’s fraud is not a requirement.1,3 But in the latter, knowledge by the bank is a requirement. For a party to rely on the fraud exception against a bank it is not enough to establish fraud on the part of the beneficiary. It must in addition be shown that the bank was clearly aware of the fraud.1143 Against a bank the fraud exception applies only where ‘there is a clear Iraud of which the bank has notice’.115 The reason for this requirement is because the bank’s mandate to pay under the instrument is subject to an implied limitation that it should not pay where it has knowledge that the ben­ eficiary’s demand is fraudulent.116 So, to put is another way, the bank will be in breach of its mandate only where it makes payment with knowledge that the demand is fraudulent.

5.50 The bank ought not to pay under a letter of credit or performance bond if it knows that the demand if fraudulent.117 Where the bank has knowledge of fraud on the part of the benefi­ ciary it is both entitled and bound to refuse payment. In considering the requirement of knowledge on the part of the bank it may be helpful to distinguish between the case where the bank has already paid (and the instructing bank or, if there is no instructing bank, the account party is refusing to reimburse the paying bank on the basis of the beneficiary’s fraud) and the case where the bank has not yet made payment (so that if it refuses to pay it may have to face an action for summary judgment by the beneficiary and if it is willing to pay the account party may apply for an injunction to stop the bank from making payment). Whereas in the former, the requirement of knowledge is not controversial, in the latter it may be open to question in applications for injunctive relief.

B. Where the bank has already paid the beneficiary

5.51 Where the bank has already paid the beneficiary and the account party is complaining that the bank ought not to have done so, the requirement that the bank must have clear knowl­ edge of the fraud is an important protection for the bank. Since the bank is not under a duty to conduct investigations to determine whether there is fraud on the part of the benefi­ ciary it would not be right for the bank not to be reimbursed because of the beneficiary’s fraud of which the bank had no knowledge. Therefore, where a nominated bank has paid under a letter of credit in accordance with its instructions on or after the date payment is due under the credit and without knowledge of fraud by the beneficiary, the issuing bank

113Themehdp Ltd v. West [1996] QB 84.

114GKN Contractors Ltd v. Lloyd’s Bank Pic (1985) 30 BLR 48.

115Edward Owen Engineering v. Barclays Bank International [1978\ QB 159 at 171 per Lord Denning M.R., at 172 per Browne L.J., and 175 per Geoffrey Lane L.J.

116See discussion at para 5.06 above.

117Edward Owen Engineering v. Barclays Bank International [ i 078] QB 159, 169.

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