Экзамен зачет учебный год 2023 / The independence principle of letters of credit and demand guarantees (1)
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required standard. However, in a few cases the claimant has been able to prove fraud to the |
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required standard.3940For example, in KvaemerJohn Brown Ltd v. Midland Bank Plcw where |
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the beneficiary gave a written statement to the bank confirming that it has given the account |
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party a written notice of the demand as required by the underlying contract when, on the |
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evidence, that was ‘manifestly untrue’ CresswellJ. held that it was ‘clearly arguable’ that the |
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only realistic inference was that the demand was made fraudulently. |
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B. Illegality |
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Where the application for an injunction is based on the illegality exception,41 the account |
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party will face similar issues about a cause of action as in the case of fraud. Even if the contract |
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between the bank and the beneficiary is tainted by illegality, as the account party is not a |
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party to that contract, it is not clear what is the account party’s cause of action against the |
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beneficiary or whether he needs a cause of action. In terms of proof, he must show that it is |
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seriously arguable that on the material available the only inference is that the beneficiary is |
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guilty of illegality.42 |
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C. Unconscionable conduct |
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If this exception is recognized, then the account party should not have difficulty finding a |
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cause of action since the situation is similar to the case of a beneficiary’s fraud which induces |
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the account party to enter into the underlying contract, in the sense that the conduct that |
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is condemned as unconscionable or lacking in good faith is conduct relating to the under |
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lying contract. Indeed, in the case of this exception the bank does not have a cause of |
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action. So, if the exception is recognized, only the account party can rely on it. In relation |
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to proof, it has been said that it must be established by clear evidence’.43 However, it is |
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suggested that it should be the lower standard of a ‘good arguable’ case as in the case of fraud |
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and illegality. |
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D. Demand made in breach of contract |
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Where the basis of the application is that the demand is in breach of a term of the underlying |
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contract the account party should have no difficulty with a cause of action since he is a party |
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to the contract on which he relies. He has a clear cause of action for breach of action. In terms of proof, it appears that under English law it is not enough for the claimant to show that it is seriously arguable that on the material available the demand is or will be in breach of a term in the underlying contract. It appears that he must establish positively that the demand for payment was made in breach of the express terms of the underlying contract.44 It has already been suggested45 that such a standard would be too high for a pre-trial stage and that the appropriate standard should be a ‘seriously arguable’ case.
39e.g. Tukan Timber Ltd v. Barclays Bank Pic [1996] 1 WLR 1152, discussed at para 5.40 above; Themehelp Ltd v. West [1996] QB 84.
40[1998] CLC 446.
41e.g. GroupJosi Re v. Walbrook Insurance Co Ltd 11996] 1 WLR П 52.
42See discussion in para 8.25 above.
43TTI v. Hutchison 3G [2003] 1 All ER (Comm) 914 at [46(3)1 and [37].
44PermasteelisaJapan KKv. Bouyguesstroi [2007] EWHC 3508 (QB).
45See discussion in paras 9.22 to 9.23 above.
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E.Nullity or recklessness
10.24 Since the nullity exception has been rejected by the English courts an injunction will not be granted on the basis of nullity. The position is of course different in other jurisdictions, such as Singapore, where a nullity exception has been recognized.46 If the recklessness exception is recognized by English law then it will be possible to apply for an injunction against the beneficiary on the basis that his conduct in relation to the preparation or presentation of a document, though not fraudulent, or lacking in good faith, was so reckless that he should not be allowed to receive payment under the instrument. However, it is still an open question whether this exception will be recognized by English law.
2.The Balance of Convenience Test
10.25 Where the claimant is unable to show a basis for the injunction it will be refused for that reason.47 However, if he is able to establish a relevant basis to the required standard of proof, the court will go on to consider the question whether it is just or convenient to grant an injunction. This is usually referred to as the balance of convenience test. The test is similar to the US ‘balance of hardships’ test,48 which also seeks to determine whether the balance of convenience favours the grant or refusal of an injunction.49 In determining where the balance of convenience lies, the court considers all the circumstances of the case. As Lord Diplock said in the American Cyanamid case, ‘It will be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relevant weight to be attached to them. These will vary from case to case’.50 In the context of injunctions to prevent the beneficiary from demanding payment under a letter of credit or demand guarantee, in most cases the balance is against granting the injunction. As indicated below, some of the factors favour refusing the injunc tion but others militate in favour of granting the injunction. The extent to which the balance ofconvenience test may apply where the injunction is to restrain the beneficiary from making a demand in breach of the terms of the underlying contract is not entirely clear. This issue is considered separately.
A.Factors against granting an injunction
(i)Damages an adequate remedy
10.26 The availability of an adequate remedy in damages either to the claimant seeking an injunc tion or to the defendant in the event that an injunction is granted against him is a highly
46See discussion in Chapter 6 above.
47Consolidated OilLtd v. American Express Bank Ltd (CA, 21 January 2000).
48Caulfieldv. Boardo fEducation, 583 F 2d 605,610 (2dCir. 1978), as applied inAmerican BellInternational Inc v. Islamic Republic o fIran, 474 E Supp. 420,425-426 (1979); Harris Corporation v. NationalIranian Radio and Television, 691 F.2d 1344, 1357 (1982).
49In some Commonwealth jurisdictions, it has sometimes been said that the balance of convenience test is
not applicable to applications for injunctive reliefrelating to letters of credit and performance bonds. See, e.g. the Singapore Court of Appeal in Bocotra Construction Pte Ltd v. Attorney General (No 2) [1995] 2 SLR 733 (letter of credit). See also in Malaysia, LEC Contractors (M) Sdn Bhdv. Castle Inn Sdn Bhd{2000] 3 MLJ 339, 363 (performance bond). Contra Esso Petroleum Malaysia Inc v. Kago Petroleum Sdn Bbd [1995] 1 MLJ 149, 159; Kheng Bee Construction Sdn Bhcl v. Standard Warehousing Sdn Bhd [2000] MLJU 767 (Mareva injunction).
50 American Cyanamide Co v. Ethicon Ltd [1975] AC 396 at 408.
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relevant factor. The availability of an adequate remedy in damages for the claimant will normally preclude the grant to him of an interim injunction. The question is whether if the injunction is refused the beneficiary will be able to refund the money paid plus ciamages for any loss suffered by the account party if it turns out that the beneficiary was not entitled to payment, fn many cases, the answer will be in the affirmative and therefore the injunction will be refused. This will be the case, for example, where the beneficiary is a large company with substantial assets within the jurisdiction.51 Thus, in State Trading Corporation o fIndia Ltd v. ED & F Man Sugar L td51where the Court of Appeal refused to grant an injunction because the claimant failed to establish fraud, Lord Denning went on to say that even if fraud had been established the court may still have refused to grant an injunction because the beneficiary, avery old-established firm ofsugar dealers in England, was financially sound and would have been able to meet any damages which might have been awarded against them, if the call was wrongful. Similarly, in the Scottish case of Armlea Pic v. The Bank ofScotland53 the Court of Session found that the balance of convenience was against the account party because, inter alia, no suggestion was made that the beneficiary did not have financial assets
to meet any damages which might have been awarded against it if the call was wrongful.54
(H) Expiry date imminent
Another factor which weighs in favour of refusing an injunction is where the expiry of the |
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performance bond or letter of credit is imminent. In Themehelp Ltd v. West,55where an injunc |
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tion was granted, Balcombe L.J. said obiter that if the result of granting an injunction would |
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be ‘that the performance bond could become inoperative by the passage of time, that might |
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be a verygood reason for refusing the reliefsought’.56 More recently, in PermasteelisaJapan UK |
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v. Bougesstroi57 the performance bond was to expire within a few weeks of the date of the deci |
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sion on the application for interim injunction. The injunction was refused because ifa demand |
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for payment was delayed by injunction until an arbitral tribunal was constituted the bond |
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may well have expired before that event. Ramsey J. said that ‘in relation to the balance of |
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convenience, I consider the effectiveness of performance guarantees should take priority’.58 |
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Llowever, the account party could overcome the time limit factor by getting the issuer to |
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agree to an extension of time. In the Themehelp case where the imminent expiry of the |
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performance bond was an issue, the court was able to grant the injunction because the bank |
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was prepared to extend the time. |
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(Hi) Availability o ffreezing injunction |
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It may be that the availability of alternative protection for the account party in the form of a |
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freezing injunction is a factor which could weigh against an injunction restraining the benefi |
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ciary from demanding payment. In Intraco Ltd v. Notts Shipping Corp (The Bhoja TraderJ59 the
51e.g. Brightside M echanicaland ElectricalServices Group Ltd v. Standard Chartered Bank [1989 ] 3 MLI 13, 17-18.
52State Trading Corporation o fIndia Ltd v. ED & F Man (Sugar) Ltd [1981] Com LR 235.
53[2004] ScotCS 132.
54See also, Prime D eal (HK) Enterprises Ltd v. HongKongand Shanghai Banking Corp Ltd [2006] 3 HKC 74, balance of convenience was against the granting of an injunction as damages were an adequate remedy.
55[1996] QB 84, CA.
56Ibid., at 106.
57[2007] EWHC 3508 (QB).
58Ibid., at [57].
59 [1981] Lloyd’s Rep. 256.
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defendants sold their vessel, TheBhoja Trader, to the claimants who provided a performance bond for part of the price. The vessel was delivered but was arrested shortly afterwards. The claimants were forced to pay money to secure its release and suffered losses due to cargo cancellations. The claimants obtained an injunction exparte restraining the defendants from demanding payment under the performance bond. However, the injunction was discharged on the ground that there was no evidence of fraud. But a freezing injunction was granted in its place. In the Court of Appeal it was established that the proceeds were payable abroad rather than in London and for that reason the court discharged the injunction. However, the Court of Appeal was comfortable with the restrictive approach to an injunction preventing the beneficiary from calling on the bond because the freezing injunction was available as an alternative protection to be used in an appropriate case. Thus, after noting that in the absence of fraud an injunction would not be granted to restrain the beneficiary from calling for pay ment under a letter of credit or performance bond, the court said thatc [t] he learned Judge went on to say that this did not prevent the Court, in an appropriate case, from imposing a
Mareva injunction upon the fruits of the letter of credit or guarantee. Again we agree’.60
10.30 The weight of this factor depends on the circumstances of each case. In a case where the account party is financially solid but where the prospect of a full recovery from the benefi ciary is uncertain, availability of a freezing injunction may not carry much weight. In
Themehelp Ltd v. West,6162the account party was a solvent concern with the financial ability to honour its undertaking in damages. By contrast both defendants were out of the jurisdic tion and there was a risk that they may not obey any freezing order. Moreover, there was no evidence that they had sufficient assets remaining within the jurisdiction to satisfy any judgment. In those circumstances the Court ofAppeal, by a majority, granted an injunction restraining the beneficiary from demanding payment under the performance bond and rejected a contention that the account party’s injunctive reliefshould be limited to a freezing injunction restraining the beneficiary from disposing of the proceeds of the guarantee. The court said that there was an appreciable risk that if the claimant was wholly successful at trial the judgment could not be wholly satisfied.
(iv) Availability o ffinal accounting
10.31 Another factor that has contributed in shaping the restrictive attitude of the English courts towards injunctions restraining the beneficiary from demanding or receiving payment under demand guarantees in particular is the fact that the account party, who is exposed to the risk of abusive demands for payment, is protected by the availability of ultimate protection in the form of final accounting. In other words, payment to the beneficiary under the instrument does not mean that the account party is precluded from recovering the sum if it turns out that all or some of it was not due. If the demand was for an amount that was excessive, the account party may be entitled to recover the excess. In Cargill International SA v. Bangladesh Sugar & Food Industries Corporation62 Morison J. held that the account party was entitled to recover any surplus from the beneficiary. In reaching that conclusion he explained that, implicit in the restrictive attitude of the courts towards injunction, was the idea 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 their rights and obligations
60Ibid., at 258.
61[1996] QB 84 at 103.
62[1996] 2 Lloyds Rep. 524.
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will be finally determined at some future date’.63 In other words, the court can afford to take |
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a restrictive approach towards applications for injunctions because there is an alternative |
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line of protection for the account party at some future stage in the form of final accounting |
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between the parties.64 |
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B. Factors in favour of an injunction |
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An injunction is likely to be granted where there is a substantial risk that the beneficiary will |
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not be in a position to pay damages if eventually ordered to do so by the court in order to |
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compensate the account party for loss suffered as a result of payment being made to the ben |
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eficiary who was not entitled to it. Such a risk is likely to present itselfwhere the beneficiary |
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is resident abroad or is a company with its place of business abroad and has no (or insuffi |
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cient) assets within the jurisdiction to pay on his or its undertaking as to damages.65 |
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Where there is a real risk that payment under the instrument will cause the account party |
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damage that is not reparable by an award of damages, this is likely to be an important factor in favour of granting the injunction. This may be the case where if the injunction is refused the only alternative left for the account party would be to commence proceedings against the beneficiary in a foreign country where it is clear that, for political or other reasons, the account party will not get justice.66 A case of irreparable damage may also be shown where the beneficiary is in administrative receivership and there is a real risk that it will go into insolvent liquidation.67 In such a case, the account party may suffer irreparable damage because if it subsequently turns out that he has a claim against the beneficiary, the account party will only be an unsecured creditor. And if the circumstances are such that there will be nil dividend to unsecured creditors then the account party’s claim will be absolutely worthless. Some Australian courts have gone further to consider risk of damage to the good will of the account party’s business and its reputation as possible irreparable damage and therefore a factor in favour of granting the injunction.68 And, perhaps even more controver sially, loss of ability to bid for contracts has been considered as damage which may be irrepa rable. In PRA ElectricalPty Ltd v. Perseverance Exploration Pty Ltd,69 where an injunction was granted restraining the beneficiary from receiving payment under a performance guarantee, Smith J. accepted evidence that payment under the guarantee would affect the capacity of the account party to tender for and negotiate contracts, several of which were in the process
63 Ibid., at 528.
64 e.g. Brigbtside Mechanical and ElectricalServices Group Ltd v. Standard Chartered Bank [1989] 3 M L J 13 at 18, where the court refused an injunction to stop the beneficiary from receiving payment under a perform ance bond because the balance o f convenience was in favour o f the beneficiary. One reason given for that con clusion was that the money paid under the bond was recoverable by the account party to the extent that it was not required by the beneficiary to carry out maintenance work.
65 e.g. Jhemehelp Ltd v. West [1996] Q B 84, discussed in para 10.30. See also SunderlandAssociation Football Club Ltd v. Uruguay Montevideo FC [2001] 2 A ll E R (Comm) 828, 834, where an injunction was refused because there was no evidence o f fraud, but Blofeld J. held that if the claimant had succeeded on the fraud point, the balance o f convenience would have favoured granting the injunction because the defendants had no assets in England to satisfy any judgment.
66This view was adopted in some cases in the United States concerning demands by beneficiaries in Iran following a relationship breakdown between Iran and the USA. See, e.g. hek Corporation v. FirstNationalBank o fBoston, 730 F 2d 19 (1984); RockwelllnternationalSystems Inc v. Citibank! 19 F 2d 583 (2nd Cir. 1983).
67e.g. Boral Formworks & Scaffolding Pty Ltd v. Action Makers Ltd[2003] N S W S C 557.
68e.g. Barclay Mowlem Construction Ltd v. Simon Engineering (Australia) Pty Ltd (1991) 23 N S W L R 451; PRA ElectricalPty Ltd v. PerseveranceExploration Pty Ltd [20071V S C 74.
69[2007] V S C 74.
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of negotiation. He also accepted the proposition that if loss was suffered through failure to obtain tenders, the assessment of the damages would be a ‘difficult and unsatisfactory pro cess’.70 However, it is arguable that in such a case the real reason for the account party’s inability to bid for contracts is its own financial situation. The fact that payment under a demand guarantee will reduce the working capital of the account party should not be regarded as irreparable damage.
C.Injunction to restrain a demand made in breach o f contract
(i)No balance o fconvenience
10.34Where the injunction is to restrain the beneficiary from demanding payment under the instrument on the ground that such a demand is or will be in breach of an agreement between the beneficiary and the claimant, it is not clear whether in English law the balance of conve nience test is applicable. The general rule, as stated by Lord Cairns, L.C. in Doherty v. Allman,1' appears to be that, in the case of a negative stipulation in a contract, the court will simply grant an injunction to restrain a breach; the court has no discretion to exercise and therefore the balance of convenience test does not apply. Lord Cairns said that:
[i]f parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court o f Equity has to do is to say, by way o f inj unction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction o f the process of the Court to that which already is the contract between the parties. It is not then a question o f the balance o f convenience or inconvenience, or o f the amount o f damage or o f injury.72
10.35This statement of Lord Cairns has been criticized as not being in accordance with equitable principles.7374In Insurance Company v. Lloyd’s Syndicate74 it was explained and qualified by Colman ]. who said that Lord Cairns was not withdrawing injunctions in support of express negative covenants from the category of discretionary remedies. Rather Lord Cairns was merely emphasizing the point that the court would not be deterred from making such an order simply because there is no proof of loss or damage to the applicant. In other words, proof of loss is not a requirement for the remedy. Colman J. concluded that although, in general, absence of loss to the claimant is not a bar to relief there may be exceptional cases where the granting of an injunction would be so prejudicial to a defendant and cause him such hardship that it would be unconscionable for the claimant to be given injunctive relief if he could not prove damage. He held that in such a case an injunction will be refused and the claimant will be awarded nominal damages.
10.36In Sirius International Insumnce Corp (Publ) v. FAI General Insurance Co Ltd,75 where the Court ofAppeal stated that the court can grant an injunction to restrain the beneficiary from demanding payment under a letter of credit where the demand would be in breach of an agreement between the beneficiary and the applicant, the court referred to the statement of Lord Cairns as modified by Colman J. This suggests that in the case of an application for an injunction to prevent a demand in breach of contract the court will normally grant the
70Ibid., at [14].
71(1878) 3App.Cas. 709.
72Ibid., at 720.
73See, e.g., I. C. F. Spry, Equitable Rem edies (6th edn, 2001) 586-587.
74[1995] 1 Lloyd’s Rep. 272 at 276-277.
75[2003] 1A ll E R (Comm) 865, discussed in paras 9.11 to 9.12 above.
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injunction if breach of a negative stipulation is shown, even if there is no proof of loss or damage to the applicant. The court will not engage in a balance of convenience exercise. The injunction will only be refused in exceptional cases: (a) where there is no proof of loss, and
(b) to restrain the beneficiary from demanding payment would be so prejudicial to him and cause him such hardship that it would be unconscionable for the claimant to be given restraining relief even though he could not prove damage. If this is correct then the direction in which English law appears to be heading may be contrasted with the approach adopted by the courts in Australia.
(H) TheAustralian approach
In cases concerning an application for an injunction to restrain a demand for payment on the |
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ground that the demand would be in breach of a negative stipulation in the underlying con |
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tract, the Australian courts have applied the balance of convenience test without hesitation.76 |
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The statement of Lord Cairns does not appear to have been raised in the Australian cases as |
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a reason for not applying the balance of convenience test in this context. The balance of |
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convenience would favour the granting of the injunction where the demand would result in |
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irreparable harm to the account party. This may be the case where the call is on an otherwise |
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unimpeachable company whose reputation would be irreparably damaged by having a |
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call on its performance bond.77 But the balance of convenience would favour refusal of an |
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injunction where the applicant cannot prove loss or damage. Thus, in one case78 an injunc |
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tion was refused in part because the balance ofconvenience weighed in favour of allowing the |
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beneficiary to call on the bonds. The reason was that there was no evidence of damage to the |
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applicant, who was in administration, or to its creditors, if the beneficiary called on the |
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bond. The beneficiary was in a stable financial position so that there was no doubt that if it |
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later turned out that the call was wrongful it would be in a financial position to refund the |
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money. Moreover, given that the applicant was in administration, there was uncertainty as to |
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the beneficiary’s position in respect of a possible reconstruction or scheme put forward by an |
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administrator. |
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The availability of the balance of convenience test in Australia serves as a safety valve against |
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frequent injunctions restraining calls on demand guarantees or letters of credit which could |
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affect the value of these instruments as the equivalent of cash. It may be suggested that, in |
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order to avoid frequent injunctions on this ground, the English courts should emulate the |
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practice of the courts in Australia and apply the balance of convenience test in this context. |
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IV. IN JUN CTIO N TO STOP PAYMENT
An application foran injunction to prevent the beneficiary from demanding payment should 10.39 be made before the beneficiary makes a demand for payment.79 If the beneficiary has already
76 e.g. ReedConstruction ServicesPtyLtd v. KhengSeng(Australia)Pty£fc/(1999) 15 B C L 158; Australian Winch andHaulage Co Ltdv. Walter Construction Group Ltd [2002] F C A 1181. See also, in Malaysia, Daewoo Engineering & Construction Co Ltdv. 'Ihe Titular Roman CatholicArchbishop ofKuala Lumpur [2004] 7 M L J 136.
77e.g. Pearson Bridge (NSW) L’tyLtdv. State RailAuthority ofNSW[\9S2\ 1 Aust Const L R 81.
78Australian Winch and Haulage Co Pty L.tdv. Walter Construction Group L.td [2002] F C A 1181.
79e.g. Themehelp Ltd v. West [1996] Q B 84, CA; 777 v. Hutchison 3G [2003] 1 A ll ER (Comm) 914.
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made a demand, it is too late for an injunction to stop him from doing so.80 In such a case, the account party will have to apply for an injunction against the bank to prevent it from making payment to the beneficiary under the instrument.81 The application could be made against the bank alone or the beneficiary could bejoined asa second defendant to be restrained from receiving any payment from the bank pursuant to the demand that the beneficiary has already made.82 In some of the earlier cases it was common to join the bank as a defendant in the application for an injunction against the beneficiary.83 However, we are concerned here only with injunctions to restrain the bank from making payment to the beneficiary. To succeed, the account party must satisfy the court in relation to two matters. The first is that there is a serious issue to be tried between the account party and the bank (a cause of action). The second is that the balance of convenience favours the granting of the injunction.
1.Causes ofAction
10.40 It may be helpful to consider the issue ofwhether a cause of action is necessary for an injunc tion against the bank before discussing separately the possible causes of action against the account party’s bank and the paying bank instructed by the account party’s bank.
A.Is a cause of action necessary?
10.41 An interim injunction is normally granted only to prevent the alleged breach of a legal duty owed by the defendant to the claimant or by way of ancillary relief required by a party to proceedings who asserts a substantive cause of action against the other party.8485It should therefore be necessary for an account party seeking an injunction to restrain a bank from making payment under a letter of credit or demand guarantee to show a cause of action against the bank. This should be the case even where the account party alleges that the benefi ciary’s demand is fraudulent. However, some doubt was cast about the need for a cause of action in such a case by Phillips J. in Deutsche Ruckersicherung AG v. Walbrook Insurance Co Ltd.95 In that case, which was concerned with an injunction against the beneficiary rather than the bank, Phillips J. suggested that a cause of action was not necessary where the injunction was against the bank. However, in Czamikow-Rionda Sugar Trading Inc v. Standard Bank London Ltd,86 a case concerned with an application for an injunction against the issuing bank of a letter of credit, Rix J. took the view that a cause of action was required. He rejected a submission that the fraud exception is an exception to the requirement of a cause of action since it reflects the law’s general concern to prevent a person (the beneficiary) from benefiting from his own wrong. It is submitted that Rix J. s view is to be preferred since it is in line with the general rules relating to the granting of interim injunctions. It is therefore
80 In United Trading Corp SA v. AlliedArab Bank [1985] 2 Lloyd’s Rep. 554, 557, where the beneficiary had already made the call but had not yet received payment, the account party accepted that at that stage it could not obtain an injunction against the beneficiary. See also, in Malaysia, Lotterworld Engineering & Construction Sdn Bhdv. Castle Inn Sdn Bhd[ 1998] 7 M LJ 105, following Esso Petroleum Malaysia Inc v. Kago Petroluem Sdn Bbd [1995] 1 M L J 149.
81e.g. Consolidated OilLimited v. American Express Bank Limited [2002] C L C 488.
82e.g. KvaernerJohn Brown Ltd v. Midland Bank Pic [1998] C L C 446.
83e.g. Elian andRabbath v. Matsas [1966] 2 Lloyds Rep. 495, CA .
84Siskina (Ownerso fcargo lately laden on board) v. Dittos Campania Naviera SA (The Siskina) [1979] A C 210,
256. cf. Fourie v. lc Roux [2007] U K H L 1; [2007] 1 W L R 320 (freezing/Mareva injunction) and Masri v. Consolidated Contractors International Co SAL [2009] Q B 503 (anti-suit injunction).
85[1995] 1W L R 1017.
86[1999] 2 Lloyd’s Rep. 187 at 203.
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necessary for an account party seeking an injunction to restrain his bank from making payment to show a cause of action against the bank.
B. |
Cause o f action against account party’s bank |
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Fraud |
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Since there will normally be a contract between the account party and his bank, in the |
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case where the account party’s bank is the issuing bank, the account party will be able to |
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claim that the bank will be committing a breach of its contract with the account party if it |
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makes payment to the beneficiary when it has clear evidence that the beneficiary’s demand is |
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fraudulent. The fact that it is for the bank alone to decide whether or not a demand is valid |
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might appear to expose the account party to the risk that the bank might decide to pay in |
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circumstances where the demand is fraudulent and it will be the account party who will |
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ultimately bear the loss since it will have to reimburse the bank. However, the question |
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whether the account party will have to reimburse his bank if it pays upon a demand that is |
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fraudulent depends on the terms of the contract between the account party and his bank. |
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It may be that the contract imposes on the bank a duty not to pay the beneficiary where the |
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bank is aware that the beneficiary’s demand for payment is fraudulent. And it may be that |
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under the contract the bank is not entitled to reimbursement if it pays with clear knowledge |
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that the demand is fraudulent. However, in most cases there will be no express term to this |
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effect in the contract between the account party and his bank. |
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In the absence of an express term of the land suggested in the preceding paragraph, it has |
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been suggested that a term to the same effect is to be implied into the contract between the |
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account party and his bank. If there is such an implied term then it will be a breach of con tract for the bank to pay when it has knowledge that the beneficiary’s demand is fraudulent. The authorities indicate that the account party has a cause of action against his bank for breach of contract if it pays the beneficiary with clear knowledge that the beneficiary’s demand for payment is fraudulent. And it has now been recognized that this cause of action is based on an implied term. In R.D. Harbottle (Mercantile) v. National Westminster Bank Ltd,ю where the application was for an injunction to stop the bank from paying because of the alleged fraud of the beneficiary, Kerr J. adopted an analysis based on the existence of a cause of action for breach of contract against the bank. After stating that the plaintiffs were seeking to prevent the bank from paying and debiting their account, he continued:
It must then follow that if the bank pays and debits the plaintiff’s account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank’s con tract with the plaintiff or in breach of it. If it is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach o f contract, which the plaintiffs’ writs do not even allege and as to which they claim no declaratory relief, then the plaintiffs would have good claims for damages against the bank.
Kerr J .’s contract analysis has been approved in a long line of cases.878 In Turkan Timber Ltd v. 10.44 Barclays Bank Ltd89 Hurst J. said that if the account party’s bank were to pay the beneficiary
87 [1978] Q B 146.
88 e.g. Edw ard O w en Engineering L td v. Barclays B ank International L td [1978] 1 Q B 159 at 169; G K N Contractors P ic v. Lloyd's B ank L td (1985) 30 B LR 48 at 64.
89 [1987] 1 Lloyd’s Rep. 171 at 177.
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Injunctions
when it had knowledge that the beneficiary’s presentation under a letter of credit was fraudulent, the account party would have ‘a cast-iron claim ... for breach of contract’ against the bank.90
10.45In Czarnikow-Rionda v. Standard Bank9' RixJ. accepted the contract analysis. He said: ‘I do not see how payment in the face of fraud can be a mere matter of discretion by a bank: it must be either within its mandate or not, and either a matter of obligation or not.’ He went on to
explain the cause of action on the basis of an implied term. He said that the fact that the rationale of the fraud exception is the law’s prohibition on the use of its process to carry out fraud, as Lord Diplock explained in the UCM v. Royal Bank o f Canada,92 may be viewed as an authoritative expression of the source in law of the implied limitation on a bank’s mandate. Rix J. s analysis of the cause of action as based on an implied contractual term was endorsed by Potter L.J. in M ontrodLtd v. Grundkotter Fleischvertriebs.93 Thus, through the device of an implied term into the account party’s contract with his bank, the account party can rely on the fraud exception as the basis for an injunction to restrain his own bank from making payment to the beneficiary or to a paying bank that has paid the beneficiary with knowledge that the beneficiary’s demand was fraudulent.
10.46Even where the account party can show a good arguable case that there was fraud by the beneficiary, where the fraud is one that induced the account party to enter into the underly ing transaction, it may be necessary for the claimant to show, in addition, a sufficiently good case that the account party was entitled to rescind the contract so as to make it a fraud on the part of the beneficiary to demand payment at the time that it did. Where rescission of the underlying contract is no longer available then the court is likely to refuse to grant an injunc tion against the bank.94 Where the beneficiary has already received payment from the paying bank and the application for an injunction was to restrain the account party’s bank from reimbursing the paying bank, the courts have refused to grant the injunction if the underly ing contract had not been rescinded.9596In Czarnikow-Rionda v. Standard Bank London Ltd?6 for example, the paying bank had paid the beneficiary before the maturity date of the letters of credit and the claimant sought an injunction to restrain the instructing bank from paying on the ground that the claimant was induced to enter into the underlying transactions as a result of the beneficiary’s fraud. RixJ. said that even if he assumed that there was clear fraud it remained Very unclear’ whether the claimant would have been entitled to rely on such fraud to rescind the underlying contracts into which it had entered. The reason was because
90 See also Turkiye Is Bankasi As v. Bank o f China [1996] 2 Lloyds Rep. 611, in a claim by a paying bank against an instructing bank, under the latter’s counter-guarantee, the defence of fraud raised by the instructing bank failed. In Czarnikow-Rionda v. Standard Bank [1999J 2 Lloyd’s Rep. 187, R ixJ. said that the analysis of the fraud defence in the Turkiye case ‘would appear to have been that it was an implied term o f the counter guarantee either that the [paying bank’s] bond would not be paid where [the paying bank] had clear proofo f the beneficiary’s fraud or that [the instructing bank’s] counter-guarantee would not operate in such a case’.
91[1999] 2 Lloyd’s Rep. 187 at 203.
92[1983] 1A C 168 at 183. See para 5.04 above.
93[2002] 1 W L R 1975; [2002] 1 A ll E R (Comm) 257 at [41].
94Ihe majority decision o f the Court o fAppeal in Themehelp Ltd v. West[1996] Q B 84, where an injunction was granted against the beneficiary, is often criticized because the underlying contract had not been rescinded on the ground of the alleged fraud. In any event, in that case the majority stressed the fact that the injunction was against the beneficiary. 'Ihe position should be different where the application is for an injunction to stop the bank from paying.
95Deutsche RuckersicherungAG v. Walbrook Insurance Co Ltd [1995] 1 W L R 1017.
96[1999] 2 Lloyd’s Rep. 187 at 205.
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