Case No: QBCMF 1999/0673/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Mr Justice Langley
Royal Courts of Justice
Strand, London, WC2A 2LL
Friday 25 February 2000
BANCO SANTANDER S A |
Claimant/Appellant | |
- and - |
||
|
3rd
Defendant/ |
Are defences which would have been available against Bayfern available as
against the assignee Santander?
I do not think that Stoddart v Union Trust Ltd [1912] 1 KB 181
assists Mr Hapgood. That authority has been the subject of criticism (see
Chitty 28th Edition paragraph 20-069) which suggests that it may be
explicable on a procedural point. At best from Mr Hapgood's point of view, all
that can be said of the case is that it recognises that there may be
circumstances where there would have been no defence available as against an
assignor but simply a personal counterclaim, where the court does not allow the
counterclaim to be raised against the assignee. That does not deal with the
situation where there would have been a defence available as against the
assignor. In the present case, if Bayfern had sought payment under the letter
of credit as at 27th November 1998, Santander and Paribas would have
had a complete defence. This, I do not think was disputed by Mr Hapgood, since
it follows from Lord Diplock's formulation of the fraud exception in United
City Merchants v Royal Bank of Canada [1983] 1 AC 168 at 183 in the
following terms:-
"To this general statement of principle as to the contractual obligations of
the confirming bank to the seller, there is one established exception: that is,
where the seller, for the purpose of drawing on the credit, fraudulently
presents to the confirming bank documents that contain, expressly or by
implication, material representations of fact that to his knowledge are untrue.
Although there does not appear among the English authorities any case in which
this exception has been applied, it is well established in the American cases
of which the leading or "landmark" case is Sztejn v J. Henry Schroder
Banking Corporation (1941) 31 N.Y.S. 2d 631. This judgment of the New York
Court of Appeals was referred to with approval by the English Court of Appeal
in Edward Owen Engineering Ltd. V Barclays Bank International Ltd.[1978]
Q.B. 159, though this was actually a case about a performance bond under which
a bank assumes obligations to a buyer analogous to those assumed by a
confirming bank to the seller under a documentary credit. The exception for
fraud on the part of the beneficiary seeking to avail himself of the credit is
a clear application of the maxim ex turpi causa non oritur actio or, if plain
English is to be preferred, "fraud unravels all." The courts will not allow
their process to be used by a dishonest person to carry out a fraud."
The real question is whether the court should boldly, as Mr Hapgood submits,
hold that equity should not allow Paribas or Santander to raise the fraud
defence against an assignee for value without notice. He accepts the normal
rule as expressed in Chitty paragraph 20-068, and Halsbury's
Laws of England 4th Edition Vol 6 paragraphs 23 and 67, that
assignments normally take effect subject to equities. But Mr Hapgood submitted
that the normal rule should not apply where a promise made under a letter of
credit is the subject of an assignment. The submission that the court should
so hold is really founded on what Mr Howard describes as an "in terrorem"
argument which Mr Hapgood deployed with great skill.
The argument can be put rather less elegantly than Mr Hapgood put it, in this
way.
There are two types of letter of credit which contemplate presentation of
documents and an acceptance of an obligation to pay in the future. There is
the "acceptance credit" used for many years which involves the Confirming Bank
accepting a draft in favour of the beneficiary; and there is the newer
instrument the "deferred payment" letter of credit which involves the bank
promising payment at a future date, as in this case. It seems that this latter
kind of letter of credit may have come into use because if drafts were produced
the result was that in many countries stamp duty had to be paid. But drafts did
have this advantage. A negotiable instrument was produced which could be
discounted or sold in the forfait market. To such drafts section 38 of the
Bills of Exchange Act 1882 applies. That section provides as follows:-
"38 Rights of the holder
The rights and powers of the holder of a bill are as follows:
(1) He may sue on the bill in his own name:
(2) Where he is a holder in due course, he holds the bill free from any defect
of title of prior parties, as well as from mere personal defences available to
prior parties among themselves, and may enforce payment against all parties
liable on the bill:
(3) Where his title is defective (a) if he negotiates the bill to a holder in
due course, that holder obtains a good and complete title to the bill, and (b)
if he obtains payment of the bill the person who pays him in due course gets a
valid discharge for the bill."
Thus holders in due course can sue on the drafts even if fraud is discovered
prior to the maturity date of the draft. Furthermore, if a Confirming Bank who
has accepted a bill becomes the holder and holds the bill at maturity, the bill
is discharged by virtue of section 61 of the Bills of Exchange Act. Although
the matter was not explored in argument, I understood it to be common ground
between Mr Howard and Mr Hapgood that since that discharge is by law automatic,
the fraud would not provide an answer, and that thus the Confirming Bank is in
as good a position as a holder in due course, even if it purchases drafts
accepted by it.
So the argument runs, with the deferred payment letters of credit there has
grown up a practice of discounting the promise in the forfait market. It will
curtail the beneficial use of the deferred payment letter of credit if
something equivalent to section 38 is not put in place to protect innocent
assignees. Reference in this regard was made to an article in Insight (1999
Volume 5, No.4 pages 14-15 -Tab 19 in the authorities bundle). This article
followed Langley J's decision in this case, and suggested that it was now
"difficult to see the future for the deferred payment L/C at least in this
jurisdiction."
We were told that in another jurisdiction, France, in a case to which Santander
were a party, a blow similar to that apparently dealt by Langley J had been
dealt to "deferred payment" letters of credit (see the decision of Paris Court
of Appeal dated 28th May 1985 at tab 21 in the authorities bundle)
so the reference to "this jurisdiction" alone may be a little harsh, and indeed
Mr Howard submitted that since their use apparently continued following the
Court of Appeal in Paris' decision, the prediction may be somewhat
exaggerated.
But whether exaggerated or not, I have to say that I have felt some anxiety
about this point. I can see how it can be said with force that a promise by a
bank under a letter of credit made once documents have been accepted should be
capable of being acted on by other bankers without inquiries as to the bona
fides of the beneficiary. The difficulty is that Santander tried to establish
a market custom to the effect that this was how such promises were treated in
the market, but failed.
In bringing this new type of instrument into operation, it seems it has not
been thought necessary to make express provision in the UCP to cover the
situation, or to make express provision in the letters of credit themselves.
So far as the UCP is concerned that seems to be true even following the
decision of Langley J in this case as we were informed by Mr Howard, who
produced a Banking Commission Statement on the Future of UCP 500 revision
produced by the International Chamber of Commerce. How far all this material
was admissible must be in considerable doubt, but it was all produced without
protest, and is helpful in seeking an overall view.
I have ultimately concluded that if parties agree for whatever reason that they
will not provide a negotiable instrument, and do not provide by terms of the
trade or even by the express terms of the instrument itself the protection for
assignees that a negotiable instrument would provide, they must live with the
consequences.
I thus do not think it is open to the court simply to make an exception to what
would otherwise be the clear rule that a defence which would have been
available as against the assignor should be available against the assignee.
If I am right so far, that (as Mr Howard submitted) is in fact the end of this
appeal. Santander's claim is as assignee, and they are defeated by the defence
that would have been available as against Bayfern.
However, in case I be wrong in my conclusion so far, and because the matter was
fully argued, I turn to the terms of the UCP.
Terms of the UCP
These terms would apply if Santander had paid Bayfern on 17th June
1998 the $19,667,238.84 in discharge of the obligations of Paribas and
Santander under the letter of credit. The letter of credit was subject to the
UCP and the relevant Articles seem to me to be as follows.
"Article 2
Meaning of Credit
For the purposes of these Articles, the expressions "Documentary Credit(s)" and
"Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)", mean any
arrangement, however named or described, whereby a bank (the "Issuing Bank")
acting at the request and on the instructions of a customer (the "Applicant")
or on its own behalf,
i. . . .
or
ii, authorises another bank to effect such payment, or to accept and
pay such bills of exchange (Draft(s)),
or
iii. . . .
against stipulated document(s), provided that the terms and conditions of the
Credit are complied with.
Article 9
Liability of issuing and Confirming Banks
(a) An irrevocable Credit constitutes a definite undertaking of the
Issuing Bank, provided that the stipulated documents are presented to the
Nominated Bank or to the Issuing Bank and that the terms and conditions of the
Credit are complied with.
i. . . .
ii. if the Credit provides for deferred payment - to pay on the maturity
date(s) determinable in accordance with the stipulations of the Credit.
iii. If the Credit provides for acceptance:
a. By the Issuing Bank - to accept Draft(s) drawn by the Beneficiary
on the Issuing Bank and pay them at maturity,
or
b. By another drawee bank - to accept and pay at maturity Draft(s)
drawn by the Beneficiary on the Issuing Bank in the event the drawee bank
stipulated in the Credit does not accept Draft(s) drawn on it, or to pay
Draft(s) accepted but not paid by such drawee bank at maturity.
iv. if the Credit provides for negotiation - to pay without recourse to
drawers and/or bona fide holders. Draft(s) drawn by the Beneficiary and/or
document(s) presented under the Credit. A credit should not be issued
available by Draft(s) on the Applicant. If the .Credit nevertheless calls for
Draft(s) on the Applicant, banks will consider such Draft(s) as an additional
document(s).
b. A confirmation of an irrevocable Credit by another bank (the
"Confirming Bank") upon the authorisation or request of the Issuing Bank,
constitutes a definite undertaking of the Confirming Bank, in addition to that
of the Issuing Bank, provided that the stipulated documents are presented to
the Confirming Bank or to any other Nominated Bank and that the terms and
conditions of the Credit are complied with.
[The sub-articles mirror a i, ii, iii and iv].
Article 10
Types of Credit
a All Credits must clearly indicate whether they are available by sight
payment, by deferred payment, by acceptance or by negotiation.
b. i. Unless the Credit stipulates that it is available only with
the Issuing Bank, all Credits must nominate the bank (the "Nominated Bank")
which is authorised to pay, to incur a deferred payment undertaking, to accept
Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a
Nominated Bank.
Presentation of documents must be made to the Issuing Bank or the Confirming
Bank, if any, or any other Nominated Bank.
. . .
d By nominating another bank, or by allowing for negotiation by any
bank, or by authorising or requesting another bank to add its confirmation, the
Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the
case may be, against documents which appear on their face to be in compliance
with the terms and conditions of the Credit and undertakes to reimburse such
bank in accordance with the provisions of these Articles.
Article 13
Standard for Examination of Documents
a Banks must examine all documents stipulated in the Credit with
reasonable care, to ascertain whether or not they appear, on their face to be
in compliance with the terms and conditions of the Credit. Compliance of the
stipulated documents on their face with the terms and conditions of the Credit,
shall be determined by international standard banking practice as reflected in
these Articles. Documents which appear on their face to be inconsistent with
one another will be considered as not appearing on their face to be in
compliance with the terms and conditions of the Credit.
. . . .
Article 14
Discrepant Documents and Notice
a When the Issuing Bank authorises another bank to pay, incur a deferred
payment undertaking, accept Draft(s), or negotiate against documents which
appear on their face to be in compliance with the terms and conditions of the
Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. To reimburse the Nominated Bank which was paid, incurred a deferred
payment undertaking, accepted Draft(s), or negotiated,
ii to take up the documents."
It is Mr Hapgood's case
(1) that a claim for reimbursement could not be made prior to 27th
November 1998; and (2) that the claim would be for the full $20,315,796.30.
That, as it seems to me, already has this rather odd feature. It is not in
fact reimbursement for the sum paid out which is being claimed, and nor as one
would tend to think it should be if reimbursement flows from payment, is
reimbursement available at the moment when the payment has been made.
On the other hand Mr Howard accepts that if there had been no fraud, the fact
is that Paribas would have paid on 27th November 1998 the
$20,315,796.30. The basis for that concession is set out in the judge's
judgment in the following terms:-
"In my judgment Mr Howard is right in his submissions that:
(i) where the Confirming Bank discounts its own obligation, at maturity either
it is to be deemed to make payment at that date or it is entitled to claim as
assignee of the claims of the Beneficiary.
(ii) where a forfaiter discounts the Credit it is entitled to claim as
assignee."
Both sides, as it seems to me, thus approach the question of reimbursement on
the basis that the mandate of Santander is to pay $20,315,796.30 on
27th November 1998, and in the one case as per Mr Hapgood, Santander
must be treated as having done that by an early payment on 17th June
1998 whether or not there would have been a liability to pay on 27th
November 1998, and as per Mr Howard, for Paribas, Santander is either deemed to
be an assignee (with the result as per the first section of this judgment), or
possibly can be treated as having paid on 27th November 1998
provided there would have been a liability to pay as at that date.
There was some debate before the judge and before us as to whether the
obligation to reimburse the Confirming Bank arose under Article 10 d, or
whether because of the words at the conclusion of that Article "undertakes to
reimburse such bank in accordance with the provisions of these Articles", that
took one to Article 14, and in particular Article 14 a i. I am not sure that
it makes any great difference to the strength or weakness of the arguments
which Article applies. As it seems to me Article 14 a i does not set out fully
the conditions which must be fulfilled in order for the obligation to reimburse
to arise. Whether one is considering a "deferred payment undertaking",
"accepted drafts" or "negotiation", reimbursement would only arise on
payment although the word payment does not appear in Article 14 a i.
Reimburse means repay a person who has expended money, and it is simply
meaningless to suggest that there can be an obligation to reimburse a "deferred
payment undertaking".
Ultimately the question to be asked is what precisely the Issuing Bank has
requested the Confirming Bank to do, and what the Issuing Bank has promised to
do if the Confirming Bank does what is requested of it. The answer, as it
seems to me, is that the Issuing Bank has requested the Confirming Bank to give
its own undertaking to pay on 27 th November 1998, in addition to
that of the Issuing Bank, and has promised to reimburse the Confirming Bank
when it pays on that deferred payment undertaking i.e. pays $20,315,796.30 on
27th November 1998. There is no request from Paribas that Santander
should discount or give any value for the documents prior to 27th
November 1998, and albeit it may not be a breach of mandate for Santander to do
so, it is up to Santander whether it does so or not.
Mr Hapgood submits, (as the judge also found), that since it was not a breach
of mandate for Santander to discount it follows that Santander are entitled to
be reimbursed as agents under the UPC and consistently with the principles in
Bowstead 16th Edition, Article 64, which is in the following terms:-
"Subject to the provisions of Article 65, every agent has a right against his
principal to be reimbursed all expenses and to be indemnified against all
losses and liabilities incurred by him in the execution of his authority: and
where the agent is sued for money due to his principal, he has a right to set
off the amount of any such expenses, losses or liabilities unless the money due
to the principal is held on trust."
In my view Mr Hapgood cannot argue simply from the fact that to do something is
not a breach of mandate to the position that what was done was authorised by
the principal so as to produce a right of reimbursement. An agent may be
entitled to go off and do something on his own account without being in breach
of his mandate from the principal, but it does not follow that when he does do
something on his own account, because he is not in breach of the mandate, the
principal must indemnify him in relation to that which he has done. In my view
the position is that Santander had no authority to negotiate from Paribas to
discount, and did not seek it. It was something they were entitled to do on
their own account. If they had not chosen to discount and had waited until 27
th November, they would have had a defence, and it is in those
circumstances not open to them to claim reimbursement from Paribas.
If a Confirming Bank in the position of Santander wishes to be free to give
value for documents when it accepts the documents, it can do so either by
insisting on the use of an acceptance credit or by insisting on obtaining
authority to negotiate and confirmation of reimbursement if it does.
European Asian Bank v Punjab & Sind Bank (No 2) [1983] 1 WLR 642
seems to me to demonstrate how, if Santander had informed Paribas that it had
discounted, and had received confirmation from Paribas that Paribas would still
reimburse on 27th November 1998, Paribas would not be able to raise
the fraud exception because they would be estopped from disputing Santander's
authority to discount.
Conclusion
For reasons which differ very little from those of the judge, I would dismiss
this appeal.
LORD JUSTICE MUMMERY: I agree.
LORD JUSTICE MORRITT: I also agree.