Экзамен зачет учебный год 2023 / The independence principle of letters of credit and demand guarantees
.pdfII. M eaning o f Fraud |
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or confirming bank is liable to reimburse the nominated bank even if the beneficiary’s fraud |
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is discovered before reimbursement has actually been made.118 The position is the same |
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where the issuing bank has made payment and is seeking reimbursement from the account |
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party. The account party cannot refuse to reimburse the bank on the ground of fraud on the |
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part of the beneficiary which is discovered after payment by the bank.119 The paying bank |
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is only required to refuse payment where it has clear evidence of fraud at the time of |
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payment.120 The position is the same where a bank has paid under a performance bond. |
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The paying bank’s claim for payment under the instructing party’s counter-guarantee |
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will succeed unless the instructing bank can show clear evidence that the paying bank had |
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knowledge of the beneficiary’s fraud at the time of payment.121 |
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To put it another way, if the account party applies for an injunction to restrain his own bank |
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from reimbursing the paying bank or honouring its undertaking under its counter-guarantee |
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to the paying bank the court will refuse to grant the injunction unless there is clear evidence |
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that the paying bank had knowledge of the fraud at the time of payment.122 The position is |
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not different where it is the paying bank that applies for a summary judgment on its counter |
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indemnity issued by the instructing bank or the account party. In such a case, the paying |
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bank’s claim will succeed unless the defendant (the instructing bank or the account party) |
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can show that it has a real prospect of proving by clear evidence at trial that the beneficiary of |
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the performance bond made a fraudulent demand and the paying bank was aware of the |
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fraud before payment.123 If the case goes to a trial the paying bank’s claim will succeed unless |
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the instructing bank can show that the paying bank had clear knowledge of fraud at the time |
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it made payment to the beneficiary.124 |
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C. Where the bank has not yet made payment |
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Where the bank has not yet made payment it may either refuse to pay on the basis of the |
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information provided by the account party as evidence of fraud by the beneficiary or it may |
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be willing to pay in spite of the information provided. In the former case the bank may have |
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to defend a claim by the beneficiary for summary judgment for breach of contract and in the |
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latter the bank may be faced with a claim by the account party for an injunction restraining the bank from paying. With respect to establishing the bank’s knowledge of fraud the burden on the bank differs according to which claim it is defending. If the bank refuses to pay and the beneficiary applies for summary judgment against the bank for breach of contract the burden is on the bank to prove that it has knowledge of fraud on the part of the beneficiary.
118Art. 14 of UCP 500; Arts 7(c) and 8(c) of UCP 600.
119e.g. Gian Singh & Co Ltd v. Banque de llndochine [1974] 1 WLR 1234.
120Tie bank is not required to investigate any allegations of fraud. If the account party wants to establish
that a demand is fraudulent it must provide clear evidence to the bank: Turkiye Is Bankasi AS v. Bank o f China [1996] 2 Lloyd’s Rep. 611 at 617.
121Banque Saudi Fransi v. Lear Siegler Services Inc [2007] 2 Lloyd’s Rep. 47.
122e.g. Czarnikow-Rionda Sugar Trading Inc v. Standard Bank London Ltd [1999] 2 Lloyd’s Rep. 187, 202. See also, Discount Records Ltdv. Barclays Bank Ltd [1975] 1 WLR 315; Edward Owen EngineeringLtd v. Barclays Bank InternationalLtd[\9TA] 1 QB 159. French courts adopt asimilar approach: Banque Francaise de Commerce Exterieur c. SA Desse, Com. 19 May 1992, D. 1993. Somm. 103; Compagnie des Signaux et d ’Equipement
Electroniques c. Credit Populaire dAlgirie, Paris, 27 November 1990. Somm. 200; SA AST Constructions c. Banque Sanpaolo, Paris 23 November 1990, D. 1991. Somm. 199; Societe Generate c. Compagnie Frangai.se d ’Assurancepour le Commerce Extirieur (COFACE), Com. 25 March 1991, D. 1991. Somm. 202, note Vasseur;
Soc. Arab Bank Ltd c. Soc. Spie Batignolles, Paris, 13 October 1988, D. 1990. Somm. 211.
123Banque Saudi Fransi v. Lear Siegler Services Inc [2006] EWCA Civ 1130.
124Turkiye Is Bankasi AS v. Bank o f China [1996] 2 Lloyd’s Rep. 611.
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The Fraud Exception
But if the bank is willing to pay and the account party applies for an injunction to stop the bank from paying the burden is on the account party to prove fraud on the part of the benefi ciary and the bank’s knowledge of the fraud.
(i) Summaryjudgment
5.54 In a claim by the beneficiary against the bank it is not sufficient for the bank to plead that it has received information which the account party alleges amounts to a sufficient case of fraud and that the material provided is sufficient to amount to notice of clear fraud on the part of the beneficiary but that the bank itselfdoes not allege fraud by the beneficiary.12516The bank must plead fraud on the part of the beneficiary and prove it to the required standard. At what time must the bank have knowledge (and therefore evidence) of the fraud?
5.55Is it at the time of payment or at the time of the hearing? This has been a thorny issue. In
Balfour Beatty Civil Engineering v. Technical & General Guarantee Co L td 126 the appeal was from a summary judgment on a performance bond. The bank’s defence was that when the beneficiary called on the bond he had no honest belief that there had been a default under the underlying agreement. The question arose whether the requirement that there must be clear evidence of fraud should be satisfied at the time of payment or whether it is enough that the evidence is available at the time of the hearing. Waller L.J., with whom Swinton-Thomas L.J. and Jonathan Parker J. agreed, recognized the force of a submission that if at the hearing stage the bank can produce clear evidence of fraud it would be absurd to think that the bank can have judgment entered against it because evidence of the fraud was not available to the bank at the time of payment. However, he took the view that the Edward Owen case127 is authority for the proposition that the bank is only entitled to refuse to pay ‘where it has clear evidence of fraud’. He said that the liability of the bank cannot alter depending on the context. In other words, the bank must have clear evidence of fraud at the time of refusal to pay. That view does not remove the absurdity identified by Waller L.J.
5.56However, he found an answer to the problem in the idea of a counter-claim by the bank against the beneficiary. The foundation of the idea is that the bank has a claim in damages for deceit against a beneficiary who makes a fraudulent representation to the bank in order to obtain money under the bond.128 When such a beneficiary applies for summary judgment against the bank, the bank may counter-claim and ifjudgment were obtained in both appli cations the one will cancel out the other. In some cases there may be a stay of execution of the beneficiary’s judgment pending the outcome of the bank’s counter-claim. So, to avoid circu ity of action, the bank’s evidence of fraud may be heard at the hearing of the beneficiary’s application for summary judgment. In this way, if there is clear evidence of fraud, judgment will not be entered against the bank. Waller L.J.’s approach is, with respect, open to some objections. First, it avoids the absurdity only where the bank has a counter-claim against the beneficiary and leaves the question open where the bank does not have a counter-claim because the fraud is not one which could form the basis of an action for damages for deceit.129
125Society o fLloyd’s v. Canadian ImperialBank ofCommerce [199312 Lloyds Rep. 579.
126(1999) 6 8 Con LR 180.
127Edward Owen (Engineering) Ltd v. Barclays Bank International Ltd [ 1978 ] QB 159, 169.
128e.g. Komercni Banka AS v. Stone and Rolls Ltd 1.2002] EWHC 2263 (Comm), 12003] 1 Lloyd’s Rep. 383 (fraud on the part of a beneficiary of a letter of credit).
129e.g. Where there is no evidence that the bank relied on the fraud or where there is an equitable defence such as acquiescence.
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II. M eaning o f Fraud |
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There is no reason why the availability of clear evidence of fraud should only defeat the ben |
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eficiary’s claim in those limited circumstances.130 Secondly, since Waller L.J.’s approach is |
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predicated on the availability of a counter-claim by the bank, it increases the number of |
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issues to be decided by the court at the hearing for summary judgment. For example, a lot of |
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time may be taken up with legal arguments whether, on the facts, the ingredients necessary for |
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an action for fraudulent misrepresentation are satisfied. Disputes of this kind will only com |
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plicate and lengthen what should be a fairly straightforward and relatively short procedure. |
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Another way of removing the absurdity that would result from insisting that the bank must |
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have clear evidence at the time of payment was suggested by Mance L.J. in Solo Industries и |
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Canara Bank,131 In that case the defendant bank had refused to honour a call on a perfor |
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mance bond, claiming to have avoided the bond on the ground that the issue of the bond |
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was induced by a fraudulent misrepresentation to which the beneficiary was a party. The |
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beneficiary applied for summary judgment against the bank and the question was whether |
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the bank had a real prospect ofjustifying its avoidance of the bond.132 Mance L.J., who deliv |
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ered the judgment of the Court of Appeal, referred to the judgment of Waller L.J. in the |
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Balfour Beatty case but said that another way of reaching the same conclusion is by applying |
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the underlying principle that the court should not lend its process to assist fraud.133 On the |
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basis of this principle the beneficiary’s entitlement to payment is defeated by fraud even if the |
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evidence of fraud becomes available to the bank only at the time of the hearing. It matters |
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not that the bank did not have the evidence at the time of payment. |
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It is submitted that Mance L.J.’s approach is preferable. It has the merit that it allows the |
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bank to use clear evidence of fraud in all cases where such evidence is available rather than |
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only in cases where the bank has a counter-claim against the beneficiary. |
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(H) Injunction against bank
Where the bank is willing to pay under the instrument and the account party seeks an injunction to stop the bank from making payment, it is for the account party to establish fraud on the part of the beneficiary and, in addition, clear knowledge by the bank of the fraud.134 The evidence must be clear both as to the fact of fraud and as to the bank’s knowl edge.135 It is not enough that the information provided to the bank is such as to raise suspi cion of fraud or to suggest that further investigation is necessary13617or to raise some doubt about the validity of the demand. In GKN Contractors Ltd v. Lloyds Bank Pic,137 for example, the bond was for the benefit of an Iraqi state agency. The bond was not assignable or transfer able. However, subsequently a new state enterprise succeeded to the original beneficiaries.
130See Mahonia Ltdv.JPMorgan Chase Bank [2003] 2 Lloyds Rep. 911 at [45], where ColmanJ. expressed the view that it is unnecessary to confine the banks position to one founded on a counter-claim for damages for fraudulent misrepresentation.
131[2001] EWCA Civ 1041; [2001] 2 All ER (Comm) 217.
132Pursuant to CPR 24.2(a) (ii).
133[2001] 2 All ER (Comm) 217 at [21].
134Edward Owen EngineeringLtd v. BarclaysBank InternationalLtd[\9B7\ 1 QB 159. The bank’s knowledge is also a requirement under French law: Societe Tunisienne de Banque c. Ste Spie Batignolles, Paris, 24 April 1992, D. 1993. Somm. 1 0 2 .
135Bolivinter Oil SA v. Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep. 251 at 257, per Sir John Donaldson M.R.; United Trading Corporation SA v. Allied Arab Bank [1985] 2 Lloyd’s Rep. 554 at 561, per
Acker L..J.
136Consolidated OilLtd v. American Express Bank Ltd [2002] CLC 488.
137[1985] 30 BLR 48.
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The Fraud Exception
Later an Iraqi Ministerial Order was made transferring this new enterprise to the State Establishment ofAgriculture Design and Construction (SEADC). When SEADC called on the guarantee the account party applied for an injunction against the banks alleging fraud since SEADC was not the beneficiary. However, the court refused to grant an injunction because it was not established that the bank had clear knowledge of the alleged fraud since there was considerable confusion on the question of the effect of the Iraqi Ministerial Order. A bank that receives from the account party information that raises doubt as to the validity of a demand but does not amount to clear evidence of fraud is under no duty to conduct its own investigations to determine whether there is fraud.1381904As Clarke L.J. said in Consolidated OilLtd v. American Express Bank Ltd,™ such a duty would deal a serious blow to the ordinary processes of international banking and international commerce.
5.59The position is the same in respect of payment under a letter of credit. In Czarnikow-Rionda Sugar Trading Inc v. Standard Bank London Ltd,™ the court refused an application to restrain a bank from paying under letters of credit which it had issued. Rix J. said that the beneficia ry’s fraud will intervene with the bank’s obligation to pay only where the bank had knowl edge of the fraud.
5.60Since, in his application for an injunction to restrain the bank from paying because of the beneficiary’s fraud, the account party needs to establish that the bank had knowledge of the fraud, the question has arisen as to the time of the bank’s knowledge. The decision in Edward Owen Engineering is sometimes understood as requiring knowledge at the time of payment. However, in Bolivinter OilSA v. Chase Manhattan Bank141 Sir John Donaldson M.R., who delivered the judgment ofthe Court ofAppeal, stated obiter that in Edward Owen Engineering the court did not have to decide and did not decide ‘that the only relevant time at which the state of knowledge o f the guarantor, or issuer of the letter of credit, fell to be considered was that when the demand for payment was first made’.142 However, since there was no issue as
to the time of knowledge in the Bolivinter case because what the banks knew at the time of payment was the same at the end of the hearing, the Court of Appeal left open the question as to the time a bank must have knowledge of fraud. It has been suggested that in proceedings for an injunction against a bank, the bank should be taken to know what is contained in the witness statements or affidavits so that if they show fraud the bank is taken to have knowl edge of the fraud for purposes of the grant of an injunction.143 In other words, the time of the bank’s knowledge should not be confined to the time of payment but should extend to the time of the hearing or trial. There is force in this view. First, it is not clear why the banks knowledge of fraud should be relevant only at the time when payment should have been made. Such a requirement appears to be redundant in this context since by the time of the inter partes hearing the bank will normally be aware of the evidence relied on to support the allegation of fraud so that if on the material available fraud is clearly established then necessarily the bank will be aware of the fraud.
138Consolidated OilLtd v. American Express Bank Ltd [2002] CLC 488
139[2002] CLC 488.
140[1999] Lloyd’s Rep. 187 at 202, coi 1.
141[1984] 1 Lloyd’s Rep. 251.
142Ibid., at 256.
143Deutsche RuckversicherungAG v. Walbrook Insurance Co Ltd [1995] 1WLR 1017 at 1030, per Phillips J.
This view was followed by Bat J. in the Australian case of Olex Focas Pty Ltd v. Skodaexport Co Ltd [19981 3 VR 380.
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III. Standard o f P roof |
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Secondly, the policy considerations are similar to those arising in the context of a summary |
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judgement application against a bank that is refusing to pay and the same approach should |
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be adopted as to the time of the bank’s knowledge. It would affront good sense if the court |
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were to find that the beneficiary’s demand was fraudulent and that the bank now knows |
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of the fraud but then refuse to restrain the bank from making payment to the beneficiary. |
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As Sir John Donaldson M.R. said in the Bolivinter Oil case, ‘if, as Lord Diplock said, the |
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principle is that “fraud unravels all” and if the issue is whether payment should now be made, |
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it is nothing to the point that at an earlier stage the fraud was unknown to the payer and so |
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could not begin its unravelling, if fraud is now known to him and has now unravelled his |
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obligations’.144 |
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Indeed it is not clear that the requirement of knowledge by the bank serves any useful pur- |
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pose in the context of an application for an injunction. It certainly has no relevance where |
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the injunction is against the beneficiary alone. In the case of an injunction against the bank, |
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if, as suggested above, the bank can be restrained from making payment by knowledge of |
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facts established at the hearing of the application for interim injunction then it might be |
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asked whether knowledge of the bank should remain as a requirement for injunctive relief |
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against the bank. Little wonder that in some jurisdictions, such as Canada, knowledge of the |
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bank is not a requirement in the case of an application for interim injunction to stop the |
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bank from paying or to stop the beneficiary from demanding payment.145 |
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III. STANDARD OF PROOF
A party who alleges fraud is only required to prove it to the standard of balance of 5.63 probability.146 However, in practice more cogent evidence will be required to prove
fraud than other allegations.147 And where a party has been acquitted of fraud by a trial judge the decision in his favour will not be displaced on appeal except on the clearest grounds.148 In the context of the fraud exception, the precise standard of proof required depends on the nature of the particular proceedings involved. For example, what has to be shown where a party seeks to prove fraud at a trial is different from the standard required in an application by the account party for an interim injunction or where a bank that has refused to pay seeks to resist a beneficiary’s application for summary judgment.
144[1984] 1 Lloyd’s Rep. 251 at 256.
145e.g. in Canada, set Bank o fNova Scotia v. Angelica WhitewearLtd [1987] 1 SCR 59; in the United States,
see Article 5-109 of the UCC.
146Homalv. Newberger Products Ltd [1957] 1 QB 247.
147cf. Ibid., at 258, per Denning L.J. ‘The more serious the allegation the higher the degree of probability that is required.’ See also RH (Minors) (SexualAbuse: Standard o fProof) [1996] AC 563, as interpreted in Re В
(Minor) [2008] UKHL 35.
148 Niru Battery Manufacturing Co v. Milestone Trading Ltd [2004] 1 Lloyd’s Rep. 344 at 361.2, citing
AKerbielm v. De Mare [1956] AC 789 at 806 and Glasier v. Rolls (1889) 42 Ch D 436.
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The Fraud Exception
1.At Trial
5.64Considering the seriousness of an allegation of fraud, for the fraud exception to succeed at trial there must be particularly cogent evidence’.149150In United Trading Corporation SA v.
AlliedArab Bank150 Ackner L.J. said that the court would require:
strong corroborative evidence o f the allegation, usually in the form o f contemporary docu ments, particularly those emanating from the [beneficiary]. In general, for the evidence of fraud to be clear, we would also expect the [beneficiary] to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circum stances where one could properly be expected. If the C ourt considers that on the material before it the only realistic inference to draw is that o f fraud, then the [account party] would have made out a sufficient case of fraud.
5.65Where the issuing bank has made payment and the account party is raising fraud as a defence against the bank’s claim for reimbursement151 the account party must adduce clear evidence both that the beneficiary’s demand was fraudulent and that before payment the bank had knowledge which made the fraud clear or obvious to the bank.152 In this respect knowledge by the bank of fraud in respect of an earlier presentation is not evidence that the bank had knowledge of fraud in a subsequent presentation.153 Where the account party relies on the fraud exception in order to obtain a permanent injunction to stop the bank from making payment the evidence must be clear, both as to the fact of fraud by the beneficiary and as to the bank’s knowledge of it.154
2.Interim Injunction
A.The general test
5.66The general test for the standard ofproofrequired in an application for an interim injunction was laid down by the House of Lords in American Cyanamid Co v. Ethicon Ltd.'55The test, so far as the standard of proof is concerned, is whether there is ‘a serious question’ to be tried. Prior to the American Cyanamid test the question was whether the claimant had made out a ‘prima facie case’ that he will succeed at trial.156 That test often involved a ‘trial in miniature’ at the interlocutory stage. The American Cyanamid test introduced a lower threshold test to establish whether there is a serious issue to be tried; that is to say the court only needs to be satisfied that the claim is not frivolous or vexatious.
149Enka InsaatVe SanayiAS v. Banco. Popolare Dell’AltoAdige SPA [2009] EWHC2410 (Comm) at [25]. cf. Fletcher Construction Australia Pty Ltd v. VamsdorfPty L.td [1998] 3 VR 812, 830.
150[1985] 2 Lloyd’s Rep. 554 at 561.
151e.g. Bank of'Nova Scotia и Angelica-Whitewear Lfef [1987] DLR4'1 161.
152Banqite Saudi Fransi v. Lear Sieglar Services Inc [20071 2 Lloyd’s Rep. 47 at [3].
153cf. Bank o fNova Scotia v. Angelica-Whitewear Ltd [1987] DLR 4lh 161, where the Supreme Court of Canada held that the bank’s knowledge of fraud with respect to the earlier presentation covered by invoice SS/3 had no bearing on the question whether it had knowledge of the alleged fraud with respect to a subsequent presentation with respect to invoice 0014.
154Bolivinter OilSA v. ChaseManhattan BankNA [1984] 1 Lloyds Rep. 251,257. But see discussion above at paras 5.59 to 5.63.
155[1975] AC 396.
156e.g. Fellowes&Son v. Fisher [1976] QB 122.
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III. Standard o f P roof |
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However, in applications for interim injunctions to stop payments under letters of credit and |
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demand guarantees the courts at first adopted a higher standard without explaining whether |
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that was a deliberate derogation to the general standard laid down in the American Cyanamid |
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case and if so, what were the reasons for the exception. However, more recent authorities |
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have reformulated the test in letter of credit and performance bond cases by reference to the |
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American Cyanamid case, although in practice the threshold test remains a high one. We can |
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look at the early authorities before considering the later cases which adopt a test based on the |
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American Cyanamid guideline. The approach in some other jurisdictions will then be looked |
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at briefly. |
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B. The early test of established fraud |
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It was at one time the view that the standard ofproofrequired in an application for an interim |
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injunction to restrain payment under a letter of credit or performance bond was the high |
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threshold o f‘established fraud’. In RD Harbottle v. NationalWestminster Bank)57for example, |
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the allegation was that the beneficiary’s demand for payment under three performance bonds |
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was fraudulent. Kerr J. discharged interim injunctions that the account party had obtained |
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against his bank, the foreign issuing bank and the foreign beneficiary. One of the reasons for |
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doing so was that the evidence did not amount to established fraud. Kerr J. said that the evi |
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dence did not show ‘a case ofan established fraud at all’. It was ‘a long way from fraud, let alone |
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established fraud’.715819In Edward Owen Engineering v. Barclays Bank International Ltd159 the |
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Court ofAppeal approved the decision ofKerrJ . in the Harbottle case. In the Edward Owen case |
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a sellerwas seeking to enjoin its bank from paying a Libyan bank that had issued a performance |
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bond for the benefit of the buyer in Libya. The allegation was that the buyer’s demand for |
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payment under the bond was fraudulent and the Libyan and English banks were aware of it. |
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The Court of Appeal refused to allow an interim injunction on the ground that there was no |
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established fraud. After stating that a bank that gives a performance bond must honour its |
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obligation according to the terms of the bond, Lord Denning M.R. said that the only excep |
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tion iswhen there is ‘the case ofwhat is called established or obvious fraud’.160 Browne L.J. also |
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accepted that there was a fraud exception. But he explained that it was ‘not enough to allege |
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fraud; itmustbe“established”,and in suchcircumstances Ishouldsayveryclearlyestablished’,161 |
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In United City Merchants (Investments) Ltd v. RoyalBank o fCanada)62a case concerned with |
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a letter of credit and which was not an interlocutory dispute, the House of Lords referred |
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with approval to the decision of the Court of Appeal in the Edward Owen case. |
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The courts in those cases did not seem concerned that the high standard of proof required by |
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the test of ‘established fraud’ was out of line with the lower threshold test stated in the |
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American Cyanamid case. |
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C. The current test: seriously arguable case |
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However, in United Trading Corporation SA v. AlliedArab Bank Zfe/163Ackner L.J. reformu- |
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lated the test applicable in the case of letters of credit and demand guarantees to align it more |
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157[1978] 1 QB 146; [1977] 2 All ER 862.
158Ibid., at 155.
159[1978] QB 159; [1978] 1 All ER976.
160Ibid., at 169.
161[1978] 1 AUER 976 at 984.
162[1983] AC 168.
163[1985] 2 Lloyd’s Rep. 554, 561.
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The Fraud Exception
closely with the American Cyanamid guidelines. In the United Trading case it was thought that the test of established fraud put the standard of proof too high. Ackner L.J. warned that it would be ‘an unsatisfactory position if, having established an important exception to what had previously been thought an absolute rule, the Courts in practice were to adopt so restric tive an approach to the evidence required as to prevent themselves from intervening. Were this to be the case, impressive and high-sounding phrases such as “fraud unravels all” would become meaningless’.164 He said that since the application was for interim injunctions the American Cyanamid principles should be the guiding principles. Based on those principles he stated that the test was whether the claimant has established that it is ‘seriously arguable’ that, on the material available, the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demand for payment. It was explained that the corroborated evidence ol a claimant and the unexplained failure of a beneficiary to respond to the allegation of fraud, although given a fair and proper opportunity, may make the only realistic inference that of fraud.165 This standard, of a ‘seriously arguable’ case that the only realistic inference is fraud, is lower than that o f‘established’ fraud.
5.71But, in Solo Industries v. Сапат Bank,166 where the Court of Appeal was concerned with an allegation that the bank had been induced to issue a performance bond by fraudulent mis representation of which the beneficiary was a party, Mance L.J. expressed some reservations about the reformulation of the test in United Trading and the lower standard involved in the reformulated test. He preferred the higher standard set in the Harbottle and Edward Owen cases. He said that the defence which those two cases and later authorities identify, ‘of estab lished fraud known to the bank’, is by its nature one which, ‘if it is good at all, must be capable of being established with clarity at the interlocutory stage’.167
5.72It is submitted that the United Trading test should be preferred. One reason for this is because it is expressed to be within theAmerican Cyanamid principles so that the test at the interlocu tory stage is different from the test at trial. A problem with the Harbottle and Edward Owen test is that the standard required at the interlocutory stage was the same as that required at trial. The second reason is that it takes account of the special factors in the context of letters of credit and demand guarantees, that is to say, the independence principle and the life blood
of commerce factor in that the standard required is not as low as that required by the ordinary American Cyanamid test of a serious issue to be tried.168 Thus, although the United Trading standard of a good arguable case is lower than the Edward Owen standard of established fraud the United Trading standard is still higher than the ordinary American Cyanamid standard of a serious issue to be tried. Under the United Trading test it is not enough for the claimant to show a seriously arguable case that there is a good reason to suspect that the demand is fraudulent. In the United Trading cast itself the claimants succeeded in showing a seriously
164 |
Ibid. |
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This could be the case even though the possibility that the beneficiary may ultimately come forward with |
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an explanation could not be ruled out: United Trading Co v. AlliedArab Bank Г19851 2 Lloyd’s Reo |
554 561 |
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166 |
[2001] 2 AU ER (Comm) 217. |
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167Ibid., at 229.
168In Dongjin Metal Co Ltd v.RaymetLtd, 13 July 1993, Lloyd L.J. said that T do not think it makes much difference whether one says that the letter ofcredit cases are special cases within the American Cyanamid guide
lines, because of the special factors which apply in such cases ... or whether one says that such cases fall outside the guidelines altogether. I prefer the former view.’ Cited by Staughton L.J. in GroupJosiRe v. Walbrook Insurance [1996] 1 Lloyd’s Rep. 345, 361.
III. Standard o f P roof |
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arguable case chat there was good reason to suspect fraud. However, they failed to establish a |
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seriously arguable case that the only realistic inference was fraud is the test. |
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'[lie United Trading standard of ‘a seriously arguable’ case that on the material available |
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the only realistic inference is fraud that is now applied by the English courts. It was adopted |
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by Staughton L.J. in GroupJosi Re v. Walbrook Insurance,169 a case concerned with an interim |
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injunction to restrain a demand for payment under a letter of credit on the ground of |
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illegality. It was also applied by the Court of Appeal in Themehelp Ltd v. West,169170 where an |
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interim injunction was granted to restrain a beneficiary from demanding payment under |
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a performance bond as the claimant had succeeded in discharging the onus of showing an |
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arguable case that on the material available fraud was the only realistic inference. The United |
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Trading standard has also been applied in other cases.171 The United Trading test of a good |
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arguable case is a high one and not every application for an interim injunction will surmount |
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that hurdle. However, that standard is lower than that required by the Edward Owen test of |
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established fraud. |
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D. The practice in some other jurisdictions |
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It is often said that in deciding whether to grant interim injunctions courts in some common |
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lawjurisdictions apply a less stringent standard of proof than the English courts.172 This view |
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was correct when the English courts applied the Edward Owen test of clearly established |
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fraud. It is no longer correct following the English courts’ rejection of that test in favour of |
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the lower standard of a ‘seriously arguable’ case introduced in the United Trading case as |
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discussed in the preceding paragraph. In Australia the courts have adopted the United Trading |
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standard of a ‘seriously arguable’ case.173 In the USA, under Article 5 -109(b) (4) of the UCC |
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an injunction may be granted only if the court finds that on the basis of the material submit |
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ted to the court, the applicant ‘is more likely than not to succeed in its claim of fraud. |
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This is hardly a less stringent standard that the English standard of a good arguable case. |
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Indeed the Official Commentary of the UCC states174 that the ‘standard for injunctive relief |
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is high’. |
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In Canada, although earlier cases adopted the Edward Owen standard o f‘clearly established’ |
5.75 |
fraud,175 this has been abandoned in favour of a less onerous test of a ‘strong prima facie’ |
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case.176 However, the test o f ‘strong prima facie’ case, although less stringent than that of |
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‘clearly established’ fraud is no less onerous than the current English test o f‘a good arguable |
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case’. It should be noted that the test of a ‘strong prima facie’ case in Canada requires |
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169[1996] 1 Lloyd’s Rep. 345, 360.
170[1996] QB 84.
171e.g. Consolidated Oil Ltd v. American Express Bank Ltd [2002] CLC 488; KvaernerJohn Brown Ltd v.
Midland Bank pic [1998] CLC 446 (injunction granted).
172 e.g. P. Ellinger & D. Neo, The Law and Practice o f Documentary Letters o f Credit (Hart Publishing,
Oxford, 2010) 158.
173e.g. Fletcher Construction Australia Ltd v. VarnsdorfPty Ltd [ 1998] 3 VR 812, 823 and Alex Focas Pty Ltd
v.Skodaexport Co Ltd [1998] 3 VR 380, both cases citing United Trading Corporation SA v. AlliedArab Bank Ltd
[1985] 2 Lloyd’s Rep. 554, 561.
174Para 4. The Official Commentary goes on to note that in some decisions prior to the revised version of the UCC some courts had granted injunctions on insufficient proof by the applicant.
175e.g. Lumcorp Ltd v. Canadian Imperial Bank o f Commerce [1977] CS 993 and Aspen Planners Ltd v.
Commerce Masonry & Forming Ltd (1979) 100 DLR (3d) 546.
176 See Bank o fNova Scotia v. AngelicaWhitewear Ltd [1987] 1 SCR 59, CDN Research & Development Ltd v. Bank o fNova Scotia (1980) 18 CPC 62.
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The Fraud Exception
the applicant seeking an injunction to interfere with payment under a letter of credit or performance bond to make a stronger case than he will normally be required to make.177 In Singapore, although the Edward Owen test of clear fraud has been followed in some cases,17819 that standard has now been rejected in the case of performance bonds in favour of the Canadian standard of a ‘strong prima facie’ case. In CharteredElectronics Industries Pte Ltd v. Development Bank o fSingapore™ the Singapore High Court took the view that ‘there is no reason why the less onerous test of a ‘strong prima facie case’ should not suffice’.180 One reason for adopting this standard of proof is to make it easier for the account party to be able to obtain relief in cases of abuse by the beneficiary. In the CharteredElectronics case the court noted that a performance bond can be an oppressive instrument if abused and that such abuse is given encouragement if the standard of proof is so high that it is extremely difficult for a claimant ever to reach the required threshold for the court to grant relief. A lower stan dard of proof will give the claimant a fighting chance of satisfying the requirement and enabling the court to grant relief.
3.Summary Judgment
5.76Where the beneficiary of a letter of credit or performance bond applies for summary judg ment against the paying bank and the bank seeks to defend the application on the ground of the fraud exception, the standard of proof required for the defence should be that contained in CPR Pt 24. However, it is not entirely clear whether the test in CPR Pt 24 is to be applied normally or whether it is to be adjusted to take account of the special circumstances arising from the independence principle of letters of credit and demand guarantees.181 It may be helpful to consider the general test in CPR Pt 24 before examining the extent to which it is adjusted in the context o f claims under letters of credit and demand guarantees.
A. General standard under CPR Pt 24
5.77Under CPR 24.2(a) (ii) the court may give summary judgment against a defendant on the whole of a claim or on a particular issue if the defendant has ‘no real prospect’ of successfully defending the claim or issue and there is no other compelling reason why the case should be disposed of at trial. This test of ‘real prospect’ in CPR Pt 24 is not a very high standard. What the defendant needs to show is ‘some “prospect”, i.e. some chance of success’.182 He is not required to show that his case will probably succeed at trial. As Lord Hobhouse of Woodborough said in Three Rivers D C v. Bank o fEngland (No Д),183 'The criterion which the judge has to apply under CPR Pt 24 is not one of probability; it is absence of reality.’
177The normal test is simply whether there is a substantial issue. See CDN Research & Development Ltd v. Bank o fNova Scotia, 21 June 1982, Ontario Superior Court ofJustice, esp. at [28]. In this case the court refused to grant an injunction to stop payment under a letter of credit because (at [29]) the evidence showed nothing more than a possibility of fraud’.
178Korea Industry Co Ltd v. Andoll Ltd [1990] 2 Lloyd’s Rep. 183 at 188 (letter of credit) and Bocatra Constructions v. A-G (No 2) [19951 SLR 733 (performance bond).
179Chartered Electronics Industries Pte Ltd v. DevelopmentBank o fSingapore [1999] 4 SLR 655 at [40].
180Approved by the Singapore Court of Appeal in Dauphin Offshore Engineering & Trading L'te Ltd v. The Private Office of HRH Sheikh Sultan Bin Khalifa Bin ZayedAl Nahyan [2000] 1 SLR 657 at [57].
181Enka InsaatVe SanayiAS v. Banca Popolaire DelTAltoAdige SPA [2009] EWHC 2410 (Comm) at [20].
182The White Book Service (Sweet & Maxwell, 2009) [24.2.3].
183[2001] 2 A11ER 513.
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