COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH
DIVISION (HHJ HALLGARTEN QC SITTING
AS A JUDGE OF THE HIGH COURT)
Strand, London, WC2A 2LL
Tuesday 3rd July 2001
B e f o r e :
LORD JUSTICE MANCE
SIR MARTIN NOURSE
SOLO INDUSTRIES UK LTD
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| SOLO INDUSTRIES UK LTD
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Ian Hunter QC & Nigel Eaton (instructed by Messrs Lawrence Jones Solicitors for the Respondent)
Crown Copyright ©
LORD JUSTICE MANCE:
"Except perhaps in clear cases of fraud on which the banks had notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration …. The courts are not concerned with their difficulties to enforce such claims; those are the risks which the merchants take. In the present case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged."
"So …. these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay; and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay."
"Judges who are asked, often at short notice and ex parte, to issue an injunction restraining payment by a bank under an irrevocable letter of credit or performance bond or guarantee should ask whether there is any challenge to the validity of the letter, bond or guarantee itself. If there is not or if the challenge is not substantial, prima facie no injunction should be granted and the bank should be left free to honour its contractual obligation, although restrictions may well be imposed upon the freedom of the beneficiary to deal with the money after he has received it. The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests upon the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged."
"The relevant date for establishing knowledge of fraud
It seems to us clear that, where payment has in fact been made, the bank's knowledge that the demand made by the beneficiary was fraudulent must exist prior to the actual payment to the beneficiary and that its knowledge at that date must be proved. Accordingly, if all a plaintiff can establish is such knowledge after payment, then he has failed to establish his cause of action. The bank would not have been in breach of any duty in making the payment without the requisite knowledge.
Standard of proof
The respondent banks accept for the purposes of this appeal that the fraud exception exists. They point out, however, that it has never been successfully invoked in practice because of the heavy burden of proof. They contend that this is because proof of facts which, in the absence of explanation, would ordinarily establish fraud is not sufficient unless every possibility of an innocent explanation is excluded. They submit that the Courts will accordingly speculate whether an innocent explanation is possible, and will usually not infer fraud from mere silence in the face of the accusation.
In our judgment the respondents are overstating the standard of proof. The evidence of fraud must be clear, both as to the fact of fraud and as to the bank's knowledge. The mere assertion or allegation of fraud would not be sufficient (see [Bolivinter] at p.257). We would expect the Court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the buyer. In general, for the evidence of fraud to be clear, we would also expect the buyer to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. If the Court considers on the material before it that the only realistic inference to draw is that of fraud, then the seller would have made out a sufficient case of fraud. Whilst accepting that letters of credit and performance bonds are part of the essential machinery of international commerce (and to delay payment under such documents strikes not only at the proper working of international commerce but also at the reputation and standing of the international banking community), the strength of this proposition can be over-emphasized. As Mr Justice Neill observed in the judgment under appeal, it cannot be in the interests of international commerce or of the banking community as a whole that this important machinery that is provided for traders should be misused for the purposes of fraud. …. Moreover, we would find it 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 restrictive 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.
The learned Judge concluded that the test to be applied by the Courts is the standard of the hypothetical reasonable banker in possession of all the relevant facts. Unless he can say "this is plainly fraudulent; there cannot be any other explanation", the Courts cannot intervene. We respectfully disagree. The corroborated evidence of a plaintiff and the unexplained failure of a beneficiary to respond to the attack, although given a fair and proper opportunity, may well make the only realistic inference that of fraud, although the possibility that he may ultimately come forward with an explanation cannot be ruled out. The claim before us is a claim for an interlocutory judgment. The first question is therefore - following principles laid down in American Cyanamid Co. v Ethicon Ltd.,  AC 396 - Have the plaintiffs established that it is seriously arguable that, on the material available, the only realistic inference is that Agromark could not honestly have believed in the validity of its demands on the performance bonds?"
"The interest in the integrity of the banking contracts under which banks make themselves liable on their letters of credit or their guarantees is so great that not even fraud can be allowed to intervene unless the fraud comes to the notice of the bank (a) in time, i.e. in any event before the beneficiary is paid, and (b) in such a way that it can be said that the bank had knowledge of the fraud."
"If the source of the power to injunct were purely the law's interest in preventing the beneficiary from benefiting from his own fraud, I do not see why there should be the added requirement that the fraud be patent to the bank."
"A bond is treated as the equivalent of a bill of exchange or a letter of credit, so that it follows that normally a set-off or counterclaim will not be enough to prevent judgment being given. That does not prevent the defendant continuing to pursue the counterclaim, and may in some rare cases lead to a stay of execution while the counterclaim is being fought out."
"Mr Slade was anxious about the use of the words "set-off and counterclaim" in [the passage quoted above]. He would I think suggest that a claim by a bank that it is being sued on what it alleges is a fraudulent demand is something that the bank can raise by way of defence or set-off and not simply by counterclaim. He would thus submit that an arguable case that a fraudulent demand has been made with a real prospect of success would entitle the bank to resist an application for summary judgment. I accept that. I also think that the difference between "the powerful evidence" that the Court had in mind when considering the O.14 position and the "real prospect of success", the language of the new rules, is not very different, and I would accept that where the bank can raise a set-off as a defence the question whether it has a "real prospect of success" is the appropriate test."
"The claim was on a cheque. The Court of Appeal gave conditional leave to defend on the basis that there was a triable issue as to whether the cheques had been delivered on the basis of a misrepresentation. In the notes in the 1999 Annual Practice to which Mr Slade very properly drew our attention, it is said that the case is of dubious authority being out of line with other cases on bills of exchange. Since the misrepresentation seemed to relate as much to the underlying transaction as to the issuing of the bill, it seems to me the note is right. However, if there was a misrepresentation by a beneficiary made directly to induce the opening of a letter of credit in that beneficiary's favour, and there was a real prospect of such being established at the trial, it would seem to me that a Court would be entitled not to give summary judgment."
"It seems to me that the effect of misrepresentation upon a bill of exchange is a matter on which it is not easy to discover the law. That being so, I would have thought that indeed there can be an arguable point of law on that matter, but its force would clearly depend upon very nice findings of fact.
As this case has still to be heard, it clearly would not be right to indicate just what findings of fact I have in mind; it is sufficient to say that in my view there is in consequence an arguable case, and for that reason I agree with the order proposed by my Lord"
May LJ said:
"I also agree.
I would merely add that I am quite satisfied that the argument that has been addressed to us was by no means so fully put to the learned judge in the court below."
"Gathering the threads from the above authorities and adapting them to the circumstances of this case, my view is as follows:
1. The principle that letters of credit must be treated as cash is an important one, and must be maintained.
2. It is however unusual for a bank which has opened a letter of credit to be involved in the related transaction to the extent this bank was.
3. When a bank is involved in the related transaction it may be unjust for that bank to be forced to pay on a summary judgment where it has a real prospect of succeeding by reference to a claim on the underlying transaction, and particularly if that claim is a liquidated claim, the Court should not give summary judgment either because a set-off has a reasonable prospect of success or because there is a compelling reason to have a trial of the letter of credit issue.
4. If a bank can establish a claim with a real prospect of success, either that the demand was fraudulent even if it had no clear evidence of fraud at the time of demand, or that there was a misrepresentation by the beneficiary directed at persuading the bank to enter into the letter of credit, it may also be unjust to enter summary judgment against the bank either because the bank has a reasonable prospect of succeeding in a defence of set-off or because there is a compelling reason for a trial of the letter of credit issue."
"Again in the context of the inter-relationship between the bank and PGI, it would be unjust for the bank not to be able to raise its claim by way of set-off."
(1) The alleged purchase contract
"This [oxidised material which had been manufactured in September/October 1996] was shown to Mr M. Patel when he visited our factory. On physically seeing the condition of the material he advised us to despatch the material with changed date of manufacture."
"the documents supplied to him regarding sales to his company are true and correct and he has supplied to me this morning documents relevant to the onward sale."
Mr Simms continues:
"He has informed me that the aluminium was traded to the LME in Rotterdam by Ecumet and the brokers to the LME in Rotterdam have confirmed that the aluminium was placed into warrant with them. Mr Wafer informed me that he had checked the numbers and the chemical makeup of the ingots and that there is no doubt that they are the same items as are referred to in the documentation exhibited to my first witness statement. It is therefore the Claimant's submission that there can be no doubt that the deliveries were real and that they were supplied to Ecumet who placed them into warrant on the London Metal Exchange in Rotterdam. Copies of the relevant documentation are attached hereto as exhibit 10".
"Mr Wafer informs me that on many occasions Ecumet acted more as agents than principals on the sale of aluminium emanating from Hamco. He advises me and verily believes that his company arranged for the aluminium which is the subject matter of this action to be put on LME warrant in Rotterdam and Mr Wafer has supplied me with documentation to this effect and I have exhibited this to the third witness statement made by me in this action."
"Substantially the whole of the business of Solo UK in the relevant years was the purchase of aluminium alloy ingots under the Hamco Agreement and the purchase of tin ingots from Dravya under the Standard Bank facility."
"Unfortunately, due to some of the files of the Claimant going astray between various firms of advisers before my firm was instructed in this matter I have been able to identify 50 shipments whereas there were in fact 56 and these are detailed in Annex to my First Witness Statement herein."
"I should wish at the outset to make entirely clear what my position is. I am a non-executive director of the Claimant company. I have no executive responsibilities and have no first hand knowledge of the company's operations or dealings save what I have gleaned from the various papers which are virtually all before the Court of which [sic] I am more than happy to make available.
Whatever else is clear, the Claimant is presently insolvent; and that insolvency has been caused by the Defendants' refusal to pay out on a performance bond. I am therefore duty bound to do all I possibly can to assist the Claimant in succeeding against the Bank for the survival of the Claimant and the repayment of its creditors.
I repeat what I have previously said:
(a) I am unaware of any evidence that the underlying transactions with which the Court were concerned were fraudulent. I have taken the shipping documents at face value and can see nothing suspicious about them on their face.
"5. …. Clearly, since I had not found documents relating to six of the 56 shipments there are clearly gaps in the documentation and there must exist further documents which I have not been able to trace. ….
6. I believe that the correspondence in Annex 13 evidences that where the goods were exported by Hamco to Singapore that they were …. sold locally, put on LME warrant and, in some cases, sent to Dubai for treatment for oxidation. In respect of those shipments made direct to Dubai, I am informed by Tasneen Hosain and verily believe that the shipping documents on receipt and on onward transmission were dealt with by [SILS] in Sharjah and it is for that reason that such documentation is not in the London office. The books and records of the Sharjah company are not available to me. Nonetheless, my third witness statement makes it clear that Ecumet UK Limited, a company wholly independent of the Claimant, did receive and place on LME warrant in Rotterdam a significant part of the cargoes."
(2) The wider picture
(a)The tin purchase contract
"The criminal courts have been very careful not to admit such evidence unless its probative value is so strong that it should be received in the interests of justice; and its admission will not operate unfairly to the accused. In civil cases the courts have followed a similar line but have not been so chary of admitting it. In civil cases the courts will admit evidence of similar facts if it is logically probative, that is, if it is logically relevant in determining the mater which is in issue: provided that it is not oppressive or unfair to the other side; and also that the other side has fair notice of it and is able to deal with it."
(2) The fraud in India
(3) The fraud in Sharjah