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

instrument contains such a clause then the bank is not entitled to refuse payment on the ground of invalidity or unenforceability of the underlying contract36 and the account party should not be able to obtain an injunction to restrain the bank from paying or to restrain the

29 See also Hong Kongand Shanghai Banking Corporation v. Kloeckner & Co AC [ 1990] 2 QB 514, 525.

30[19991 2 Lloyds Rep. 187.

31Ibid., at 202.

32Czarnikow-Rionda Sugar TradingInc v. Standard Bank London Ltd [ 1999] 2 Lloyd’s Rep. 187 at 202.

33E.g. Hamzeh Malas drSons v. British Imex Industries Ltd [1958] 2 QB 127 at 129; Howe Richardson Scale Co Ltd v. Polimex-Cekop and National Westminster Bank Ltd [1978] 1 Lloyd’s Rep. 161 at 165; Edward Owen Engineering Ltd a. Barclays Bank International Lid [ 1978 j 1 QB 159 at 171.

34Unenforceability on the ground of illegality raises wider considerations and is dealt with separately in

Chapter 8 below.

35See discussion of the fraud exception in Chapter 5 below.

36Standard Bank London Ltd v. Canara Bank, 22 May 2002, QB, where it was held that the underlying

contract was not a sham as alleged by the issuer, Moore-Bick J. went on to say that even if it was a sham and therefore invalid, the issuer would still have been liable because the guarantee contained a clause excluding the consequences of invalidity.

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The Independence Principle

beneficiary from demanding payment on the same ground.37 Where the instrument does not contain such a clause the position is not entirely clear. There appears to be no reported decision on the point.3839However, judicial opinion suggests that the bank’s undertaking is not affected by such a dispute. In Bolivinter Oil SA v. Chase Manhattan Bank N A 39 Sir John Donaldson M.R. said that the unique value of a letter of credit or demand guarantee is that the beneficiary can be completely satisfied that whatever disputes may arise between him and the account party ‘in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him’. Thus the bank must honour its undertaking even though there is a dispute as to the validity or enforceability of the underly­ ing contract.40 The result should be the same for credits subject to UCP 600 or demand guarantees subject to URDG 758, since the independence principle stated in these instru­ ments41 is in wide terms, extending to ‘claims or defences’ by the account party resulting from his relationship with the beneficiary. If the bank is bound to pay in spite of a dispute about the validity of the underlying contract, the account party should not be entitled to an injunction to prevent the bank from making payment because of such a dispute.

4.19 The position may be different where the account party’s claim is for restraining relief against the beneficiary, where the claim is made before the beneficiary has demanded payment from the bank and where the bank is not a party to the proceedings. One view is that in such a case the account party should be able to obtain an interim injunction against the benefi­ ciary preventing him from demanding payment under the instrument because the dispute is not merely about the performance or non-performance of an enforceable contract but rather it is one which questions the existence or validity of the underlying contract, which is the foundation of the beneficiary’s rights under the instrument. Moreover, since the dispute is only between the parties to that contract, it does not interfere with the bank’s independent undertaking. This is the approach adopted by the Court ofAppeal in Themehelp Ltd v. West,42 a case where an interim injunction was granted against the beneficiary of a demand guaran­ tee pending resolution of a claim that the underlying contract was induced by fraudulent misrepresentation. Evans L.J., dissenting, said that ‘it is necessary to distinguish between cases where the validity of the underlying contract is called in question and those where, for whatever reason, it is not. I would be prepared to agree that in principle, if there was an argu­ able case that the contract was voidable or otherwise invalid, then further performance of the contract might be restrained pending the court’s resolution of that dispute’.43 Although that was a case where the validity of the contract was disputed on the ground of fraud, Evans L.J.’s statement is expressed in terms which are wide enough to include cases where the validity of the contract is disputed on other grounds.

4 .2 0 A similar view has been expressed in relation to a claim that the contract has been discharged because the account party has accepted a breach by the beneficiary as a repudiation of the

37cf. GulpBank KSC v. Mitsubishi (Heavy Industries) Ltd (No 2) [1994] 2 Lloyds Rep. 145.

38Apart from cases where it is alleged that the underlying contract was induced by fraud or is void on the ground of illegality as discussed in Chapters 5 and 8 respectively.

39[1984] 1 W LR392at393.

40On this basis the result in Standard Bank London Ltd v. Canara Bank, 22 May 2002, unreported (QB), should be the same even if the underlying contract was a sham and there was no clause in the instrument excluding the effect of any invalidity of the underlying contract.

41UCP 600, Art. 4.a, URDG 758, Art. 5.a.

42[1996] QB 84.

43Ibid., at 103-104.

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II. The Scope o f the Independence Principle

contract. In Potton Homes Ltd v. Coleman Contractors Ltd,m in the context of a performance bond issued in respect of a contract for the international sale of goods, Eveleigh L.J. said obiter that ‘[a]s between buyer and seller the underlying contract cannot be disregarded so readily. If the seller has lawfully avoided the contract prima facie, it seems to me he should be entitled to restrain the buyer from making use of the performance bond’.45 However, the idea that the assurance of payment, which is the rationale of the independence principle, is not affected by an injunction against the beneficiary has been justly criticized.46 It is submitted that when faced with a claim that the underlying contract is invalid or unenforce­ able the court should hesitate before granting such an injunction whether it is to stop the bank from making payment to the beneficiary or to stop the beneficiary from demanding payment from the bank. In either case the assurance of payment is undermined by the injunction.

(ii) Where the contract has already been declared invalid or unenforceable

Where the underlying contract has already been declared invalid or unenforceable by a court, 4.21 the bank’s obligation under the instrument should not be affected, provided that the benefi­

ciary can still present complying documents. In the case of a letter of credit, it may be possible for the beneficiary to present complying documents in such circumstances since the documents required do not normally relate to the validity or enforceability of the under­ lying contract. However, in practice if the underlying contract has been declared invalid or unenforceable, it is unlikely that the seller will proceed to ship the goods to the buyer and obtain the documents necessary to operate the credit. The situation may be different in the case of a demand guarantee. If the guarantee is one which requires only a simple demand, then the issuing bank should still be liable to pay even though the underlying contract has been declared invalid, since the bank’s liability is independent of the underlying contract. However, if the guarantee is one which requires the beneficiary to present a certificate or statement to the effect that the account party is in breach of contract, it may be difficult to present such a statement after the contract has been declared invalid and unenforceable by a court, since such a statement would imply that there was a valid obligation which the account party has failed to perform. If a beneficiary makes such a statement with knowledge that the contract is invalid and unenforceable, it may amount to fraud. And if the bank has already been informed by the account party that the underlying contract has been declared invalid and unenforceable, the bank may be regarded as having sufficient knowledge of the benefi­ ciary’s fraud. In such a case, the account party may be able to obtain an injunction restraining the beneficiary from demanding or receiving payment under the demand guarantee, not because the underlying contract is invalid but because the demand is fraudulent. Thus, although the independence principle means that in principle the bank is under an obligation to pay even though the underlying contract is invalid or unenforceable, in certain cases established invalidity or unenforceability may make it impossible for the beneficiary to make a complying or non-fraudulent demand for payment.

44(1984) 28 BLR 19.

45Ibid., at 28.

46See discussion in Chapter 10, paras 10.10 to 10.15.

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different where the assignment is of a credit which involves collection by the beneficiary’s bank, since the beneficiary’s bank is likely to have claims against the beneficiary, in respect of which it is entitled to exercise a right of set-off against the assignee’s claim to the proceeds of the instrument.59

53Thus, in EtablissementEsefka InternationalAnstalt v. CentralBank ofNigeria [1979J 1 Lloyd’s Rep. 445 at 448 and 449, on applications by the beneficiary for a freezing injunction and by the bank for security for costs, Lord Denning M.R. suggested that a bank might set-off a claim to recover payments made under a letter of credit in respect of fraudulent shipments against a claim by the beneficiary for payment under the credit in respect of demurrage incurred in respect of other shipments.

54[2001] 2 AUER217.

55Union Bank (UK) Pic v. Patbak [2006] All ER (D) 210 at [45].

56Whether it be a legal or transactional set-off.

Union Bank (UK) Pic v. Patbak [2006] All ER (D) 210 at [45]; Marathon ElectricalManufacturing Carp v. Mashreqbank PSC [1997] 2 BCLC 460.

58[2006] All ER (D) 210.

59Marathon ElectricalManufacturing Corp v. Mashreqbank PSC [1997] 2 BCLC 460.

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60cf. Art. 18 of the UNCITRAL Convention on Independent Guarantees and Standby Letters of Credit.

61Lechmere v. Hawkins (1798) 2 Esp. 626; Taylor v. Okey (1806) 13 Ves Jun. 180.

62[1974 1 QB 1.

63[1990] 2 QB 514.

64The terms in the acknowledgement of assignment in Marathon Electrical Manufacturing Corp v.

Mashreqbank PSC [ 1997] 2 BCLC 460.

65Union Bank (UK) Pic v. Pathak [2006] All ER (D) 210 at [49H 50J.

66cf. UNCITRAL Convention of Independent Guarantees and Stand-By Letters of Credit, Art. 18.

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The Independence Principle

III.T H E ROLE OF DOCUMENTS

1.Bank’s Liability Depends on Documents not Facts

A.Bank not concerned with facts

4.32 An important rule which reinforces the principle of independence is that when determining whether it is liable to pay under a letter of credit or demand guarantee, a bank is only con­ cerned with documents, not facts.67 It is not concerned with matters outside the documents presented and the terms of the instrument. If the documents presented comply with the terms of the instrument, the bank must pay. If it refuses to pay on the ground of matters outside the documents and the terms of the instrument, it may be sued by the beneficiary in an action for damages for breach of contract.68 The bank is not entitled to concern itselfeven with the facts behind the documents presented. Letters of credit and demand guarantees are generally conditioned upon the presentation of documents ‘rather than upon the actual existence of facts which those documents assert’.6970Since a bank is not concerned with the underlying facts, a court that has to determine whether or not a document presented to a bank is in conformity with the credit is not permitted to speculate about the underlying facts. In Westpac Banking Corp v. South Carolina NationalBank70 the Privy Council held that the court was wrong to have gone beyond the terms of a bill of lading itselfand to draw infer­ ences of fact as to what went on when the bill was issued. Lord Goff said that ‘it is well settled that a bank which issues a letter of credit is concerned with the form of the documents pre­ sented to it, and not with the underlying facts. It forms no part of the bank’s function, when considering whether to pay against the documents presented to it, to speculate about the underlying facts. For that reason, the Court of Appeal erred in approaching the problem by seeking to draw the inferences of fact to which their Lordships have referred’.71

4.33 The rule that a bank is not concerned with the facts behind documents is also expressed in Article 5 of UCP 600 and Article 6 of URDG 758 where it is stated that banks ‘deal with documents and not with goods, services or performances to which the documents may relate’.

4 .3 4 Just as the bank is not concerned with the facts behind documents, it is also not concerned with the purpose for which the account party has asked for the presentation of a particular document under the credit.7273If a credit requires a particular document and a document fitting that description is tendered the bank is entitled to accept it. In Commercial Banking Co o fSydney Ltd v. jalsardn Lord Diplock explained that ‘[t]he banker is not concerned as to whether the documents for which the buyer has stipulated serve any useful commercial pur­ pose or as to why the customer called for tender of a document of a particular description’.74

67Banque de Undochine v.JHRayner (Mincing Lane) Ltd [1983] QB 711, 719.

68e.g. Urquhart, Lindsay & Co Ltd v. Eastern Bank Ltd [1922] 1 KB 318.

69IE Contractors Ltd v. Lloyd's Bank Pic [1990] 2 Lloyd’s Rep. 496, 499.

70[1986] 1 Lloyd’s Rep. 311.

71Ibid., at 315.

72MidlandBank Ltdv, Seymour[1955] 2 Lloyds Rep. 147 at 151.2; SeaconsarFar EastLtd v. Bank Markazi JombouriIslamiIran [1993] 1 Lloyds Rep. 236 at 239.

73[1973] AC 279.

74Ibid., at 286C.

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75IE Contractors Ltd v. Lloyd’s Bank Pic [1990] 2 Lloyd’s Rep. 496,499.

76Gian Singh & Co. Ltd. v. Banque de I’Indochine [1974] 2 Lloyd’s Rep. 1,11; Siporex Lrade SA v. Banque

Indosuez [1986] 2 Lloyd’s Rep. 146.

77[1974] 1 WLR 1234 at 1238-1239.

78[2009] EWHC 2303 (Comm) at [531-

79IE ContractorsLtd v. Lloyd’s Bank Pic [1990] 2 Lloyd’s Rep. 496, 499.

80Art. l4.aof UCP 600.

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The Independence Principle

investigations to determine whether the statements in the documents are factually correct or not. For example, if a demand guarantee requires the beneficiary to state that the account party is in breach of the underlying contract then if the beneficiary presents a document with the required statement, the bank is not required to conduct investigations to determine whether in fact the account party is in breach. Article 19.e of URDG states that the issuer ‘need not re-calculate a beneficiary’s calculations under a formula stated or reflected in the guarantee’. The position is similar under UCP. In Credit Industriel et Commercial v, China Merchants Bankw a bank that had issued a letter of credit, subject to UCP 500, covering a shipment of timber from Gabon to China rejected the documents on the ground, inter alia, that the commercial invoice and the packing list were mutually inconsistent. This view was the result of a calculation made by the bank itself, by reference to the packing list, that the percentage of, for example, Cl logs in the entire Okoume log parcel was 38.64 per cent whereas the commercial invoice stated a percentage of 40 per cent. David Steel J. rejected the bank’s objection because the bank was not required to embark on the calculations relied upon. After referring to Articles 13(a) and 21 of UCP 500, he said that the obligation of the bank to examine documents tendered was ‘a passive one, in the sense of using reasonable care to assess the absence of any apparent inconsistency on the face of the documents as opposed to an active obligation to establish the existence of complete consistency on the basis of material contained on the face of the document’.812

2. Documents Must Comply

4 .3 9 The principle that the bank’s liability is conditioned on documents not facts is the pillar on which the independence principle stands. It gives the beneficiary the assurance of payment even where there is a dispute between him and the account party in connection with the performance of the underlying contract. This puts the beneficiary in a very advantageous position vis-a-vis the account party who may thereby be exposed to abuse by an unscrupu­ lous beneficiary. As a counter-balance, in order to afford the account party some protection, it is required that documents presented must comply with the requirements of the letter of credit or demand guarantee.83 The requirement of compliance means that the issuing bank is only entitled to reimbursement from the account party if it acts within its mandate by accepting documents that are compliant. The beneficiary, in turn, is only entitled to pay­ ment under the instrument if he presents documents that comply with the requirement of the credit. This ensures that the account party gets protection from the documents that he has stipulated for, such as a certificate of inspection or a surveyor’s certificate, and that, in the case of letters of credit, the buyer receives documents (such as a bill of lading or insurance policy) that are commercially valuable.

4 .4 0 In the case of letters of credit, it is well established that documents presented must be in strict compliance with the requirements of the credit. But in the case of demand guarantees, there has been some uncertainty as to the degree of strictness required. It is submitted that there is now a large degree of convergence between the requirement of compliance under letters of

81[2002] 2 A11ER (Comm) 427.

82Ibid., at [25].

83Ihe degree ofprotection enjoyed by the account partywill depend on the nature of the document required and the issuer of the document (whether the beneficiary, a third party or the account party). See the discussion in paras 5.100 to 5.127.

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III. The Role o f Documents

credit and the requirement under demand guarantees. In the case of letters of credit, whereas originally application of the requirement of compliance was strict there appears to have been some relaxation of the degree of strictness required. By contrast, in the case of demand guar­ antees, whereas at first there was a suggestion that the requirement of compliance should be less strict, subsequent decisions show that the courts insist on strict compliance. It may be helpful, for purposes of exposition, to consider the requirement of documentary compliance under letters of credit before examining the position under demand guarantees.

A.Letters of credit

(i)Strict compliance

It is well established that documents presented under a letter of credit must comply strictly 4.41 with the requirements of the credit. In Equitable Trust Co o fNew York v. Dawson Partners Ltd,M where a credit required a certificate of quality to be issued by experts’ the House of Lords held that the requirement was not satisfied by a certificate signed by one expert. Viscount Summer stated, in an often quoted passage, that:

[ijt 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 o f 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 o f the details o f 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.

goods as ‘machine-shelled groundnut kernels’. There was evidence of a trade usage that the two terms referred to the same goods. But the Court of Appeal held that the usage was irrelevant. The bank was obliged to pay only against documents relating to coromandel groundnuts as stated in the credit. The bank was not required to have knowledge of customs and customary terms of the various trades for whose dealings it may issue letters of credit.

84(1926) 27 Lloyds Rep. 49.

85e.g.English, Scottish andAustralian Bank Ltd v. Bank ofSouthAfrica (1922) 13L1LR.21 at24; GianSingh

dr Co Ltdv. Banque de I’lndochine [1974] 2 Lloyd’s Rep. 1 at 12.

86[1954] 2 Lloyd’s Rep. 526.

87See also Soproma SpA v. Marine andAnimalBy-Products Corpn [1966] 1 Lloyd’s Rep. 367.

38 [1943] KB 37.

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The Independence Principle

If there is a discrepancy the bank must reject the document. It is not for the bank to deter­ mine whether the discrepancy is material or not.

(it) Roomfor bank’sjudgment?

4 .4 4 It is accepted that strict compliance does not require that documents presented must use the precise wording of the credit in all circumstances.89 The question of compliance is to be considered ‘intelligently rather than mechanically’.90 For example, if a credit requires a cer­ tificate confirming that goods are from ‘Holland’ a certificate confirming that the goods are from the Netherlands is unlikely to be regarded as discrepant since it is well known that the two names refer to the same place. The position is less clear where the requirement of the credit is stated in one language and the document presented contains the required informa­ tion but in another language. In Equitable Trust Co. o fNew York v. Dawson Partners Ltd,91 for example, the credit called for a document signed by the ‘Chamber of Commerce’ of Batavia and the document presented was signed by the ‘Handelsvereeniging te Batavia’. In fact the two bodies were the same. The credit referred to it in English and the document referred to it in the Dutch style. As the evidence was that the two were known to be the same, it was held that deviation from the wording of the credit was not a discrepancy.92 This decision may be supported on the ground that it was obvious that the two bodies were the same. It is submit­ ted that where it is not obvious, in particular where the deviation from the language of the credit requires the bank to make inquiries or conduct investigations in order to discover that the terminology in the document refers to the same thing or place as that required by the credit, the departure from the language of the credit should be regarded as a discrepancy.

4.45 Even where there is a discrepancy, it has been suggested that there should be some room for trivial discrepancies that are not material.93 As to what amounts to a trivial discrepancy, it has been said that it is not helpful to provide a definition.94 However, it is generally accepted that obvious typographical errors which are not material may be regarded as trivial. An example is an obvious typographical error which causes no confusion, as where a documents states a telex number as 931310 instead of 9 8 1 3 1 0 * The ISBP also states in paragraph 25 that a misspelling or typing error that does not affect the meaning of a word or sentence in which it occurs does not make a document discrepant. The examples given include a description of merchandise as ‘mashine’ instead o f ‘machine’, ‘fountan pen’ instead o f ‘fountain pen’. In some cases a misspelling of the name of a party may be an obvious typographical error. This may be the case, for example, of Smithh instead o f ‘Smith’.96 But it may not be case, for

” , Krecliebank Antwerp v. Midhind Bank Pic [1999] Lloyds Rep. 219 at 223; Banque de llndochine v JH Rayner (Mincing Lane) Ltd [1982] 2 Lloyd’s Rep. 476 at 482.

90Forth Bank SA/NVv. Indian Overseas Bank [2009] F.WHC 2303 (Comm) at [33]

91[1927] 27 LI LR. 49.

92Ilie House of Lords reversed the decision on another ground.

93Banque de I'Indochine v. JH Rayner (Mincing Lane) Ltd [1982] 2 Lloyds Rep. 476 at 482; Bank o fNova Scotia v. Angelica-WhitewearLtd [1987] 1 SCR 59 at 67.

SeaconsarFar East Ltd v. Bank MarkaziJombouri Islami Iran [1993] 1 Lloyd s Rep. 236 at 240.

95 ,AS examPle Siven LM L J ■in Seaconsar Far East Ltd v. Bank MarkaziJombouri Islami Iran [1993] 1 Lloyd s Rep. 236 at 240. See also HingHip fling Fat Co Ltd v. Daiwa Bank Ltd [l 991 ] 2 HKLR 35 (Hong Kong),

document referring to account party as ‘Cheergoal Industrial Limited’ instead of'Cheergoal Industries Limited’ held to be trivial. Contrast, United Bank Ltd v. Banque Nationalde Paris [1992] 2 SLR 64 (Singapore), a document which referred to the account party as ‘Pan Associated Pte Ltd’ instead of‘PanAssociated Ltd’. It was held

C Сг b ,was entltlectto ГФ « the document as the discrepancy was not an obvious typographical error. Example given in Beyerne v. Irving Trust Co. 762 F 2d 4 (US Ct of Apps (2d Civ.) (1985)), where the

misspelling or the name Solan as Soran was held to be a material discrepancy.

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