England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH
DIVISION (HHJ HALLGARTEN QC SITTING
AS A JUDGE OF THE HIGH COURT)

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 3rd July 2001

LORD JUSTICE MANCE:

Introduction

1. The appellant, Solo Industries Limited ("Solo"), an English company, is the beneficiary under a performance guarantee, or bond, dated 6^th May 1996 issued by the respondent ("Canara"), an Indian bank. Canara has purported to avoid the bond on the ground that its issue was induced by a fraudulent conspiracy and/or misrepresentation to which Solo was party. On 21^st July 2000 HHJ Hallgarten QC refused to give Solo summary judgment against Canara in proceedings on the bond, on the ground that Canara had a real or reasonable prospect of justifying its avoidance. This appeal, with the judge's permission, raises the question whether this was the right legal test, bearing in mind the principle that such bonds are to be treated as equivalent to cash. There are before us also associated applications for permission to appeal, relating to the facts and to an order for security for costs made against Solo.
2. Solo has two directors, a Mr Madhav Patel ("MP") who is its executive managing director and evidently signed the bond, and Mr Simms, a non-executive director, who is an English solicitor and partner in Bower Cotton, who are Solo's solicitors in this action. Solo is insolvent, but not in liquidation. Its shares are effectively owned through a Gibraltar company (Solo Holdings Ltd.) by a Gibraltar trust, created for the benefit of MP and his family. MP is the son of Mr B.M Patel, whose family owns some 20-30% of the shares in the Hamco group of companies. This group includes Hamco Mining and Smelting Limited ("Hamco") and Dravya Industrial Chemicals, both being Indian companies of which Mr B.M. Patel was at the material times chairman and managing director. MP is also 49% shareholder and managing director of Solo Industries Ltd. of Sharjah ("SILS"), and is resident in Sharjah. The remaining 51% shares in SILS are held, as required by local law, by a local resident. The evidence and documents indicate that the day by day affairs of Solo, the English claimant, were conducted in and from Sharjah, by MP with the administrative assistance of a Ms Tasneen Hosain.
3. The bond recites that Solo had, by a purchase contract dated 13^th March 1996 (again evidently signed by MP), agreed to purchase aluminium metal from Hamco, and had paid Hamco a $5 million export advance. According to the terms of the relevant contract document dated 13^th March 1996, the quantities for supply were 300 tonnes a month until repayment of the pre-export advance, with a minimum of 42 monthly shipments and 12,600 tonnes in total. Delivery was to be CIF at prices based on official LME daily quotations. The pre-export advance was to be re-paid on a linear basis by deduction over the first 36 consecutive monthly shipments. Under clause 10, in the event of any failure to deliver the agreed monthly quantities, Solo was entitled to buy in replacement material against Hamco, and Hamco was to indemnify Solo on notice for (a) the amount of the pre-export advance that would have fallen for deduction had Hamco supplied such material, (b) any price difference between the LME based price that Solo would have paid to Hamco and the price of the replacement material and (c) any extra costs involved in the replacement; if Hamco failed to comply with such a notice, the total outstanding amount of the pre-export advance was forthwith repayable with interest. By the bond, Canara undertook "unconditionally and irrevocably …. as a separate and continuing obligation to indemnify" Solo, up to $5.75 million, in respect of any failure by Hamco to meet its obligations under clause 10.
4. The $5 million was paid to Hamco on 10^th May 1996 and was borrowed by Solo from its bankers, Raffeisen Zentralbank Oesterreich A.G. ("RZB"). The benefit of the bond was assigned to RZB as security. In its claim, Solo asserts that between August 1996 and March 1998 Hamco shipped 2556 tonnes under the purchase contract, in respect of which Solo through its bankers paid $2,213,879; that in March 1998 Hamco ceased shipments due to production difficulties; that RZB then claimed and received $1,684,762 from Canara; that by (unaccepted) repudiation in October 1998 Canara purported to cancel the bond (on the basis that it had reasonable grounds to believe that the purported purchase contract between Solo and Hamco was a "sham" transaction and that the bond had been obtained by fraud of which Solo had notice); that in January 1999 Hamco defaulted in relation to a specific demand for a further shipment; that in February 1999 Solo repaid RZB and took a re-assignment of the bond; that in June 1999 a demand for payment was made on Hamco under clause 10; and that by demand dated 2^nd August 1999 Solo demanded the sums due under the bond totalling $2,696,785.40. These proceedings were issued on 10^th August 1999 and the application for summary judgment on 29^th February 2000. Canara resists both the proceedings and the application, primarily on the basis which it stated in late 1998, namely that the purported purchase contract was a sham and that the bond was obtained by a fraudulent conspiracy and misrepresentation as to the genuineness of the underlying transaction, to which both Hamco and Solo were party, and has been validly avoided.
5. Much evidence was served on each side to which it will be necessary to return. HHJ Hallgarten's reasons for refusing summary judgment can be summarised as follows. First, he held that it was sufficient for Canara to show that its defence had a real prospect of success. He concluded that the principle whereby performance bond obligations are treated like promissory notes, bills of exchange or cash ("the cash principle") has no application in situations where the challenge is to the validity of the bond, rather than to the propriety of any demand under it. Secondly, he expressed his conclusions as to the level of proof that Canara had satisfied. He said, with reference to the situation as it would have been, if the cash principle had applied: "I do not regard [Canara's] evidence as clearly establishing fraud, nor do I find that at this stage it is even sufficiently powerful to say that … there should be judgment subject to a stay of execution". Turning then to the ordinary principles that in his view did apply under CPR Part 24, he said: "In my view it is impossible to say on the present materials that the defendants even have a strong case …., but nonetheless I have reached the conclusion that I cannot say other than there is a reasonable prospect of success". Thirdly, he considered that there was in any event "some other reason for trial", on the basis that Solo were in other respects "proven fraudsters" so that Canara ought to be able to look at matters in greater detail.

The law

6. The judge's first reason raises a significant point of principle, on which there is no authority clearly binding this court. Mr Paul Downes for Solo submits that the rationale of the court's approach to the enforcement of obligations under instruments such as promissory notes, bills of exchange, letters of credit and performance bonds has equal force and application in relation to issues going to the validity of such instruments. If banks or their customers could avoid payment of obligations apparently arising from such instruments, by challenging the validity of the instruments, the flow of the "life-blood of commerce" could be impeded no less significantly than it would be if challenges to the propriety of demands made under such instruments were permitted. The quoted phrase comes from R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [1978] 1 QB 146, 155G per Kerr J, cited and followed by this court in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 QB. 159. The only recognised exception in the latter context has been in case of fraud, but this too has been limited traditionally by insistence on a high standard of proof of fraud, at least at the interlocutory stage. Mr Downes' essential submission is thus one of policy. The judge's judgment will, he submits, damage confidence in instruments such as the present bond and damage the security of international trade. Mr Downes highlights the position (although it does not arise here, following RZB's re-assignment of the bond to Solo) of a third party purchaser of such an instrument acting in good faith, only to find later that the bank is claiming to set it aside. The court should, in Mr Downes' submission, fashion whatever means may be necessary to ensure that the essence of the cash principle applies in the present context. The key, he suggests, lies in recognising that the authorities establish not just the autonomy of banking instruments and transactions, but a further and more expansive principle of integrity, which should preclude Canara's challenge to the bond that it undoubtedly issued.
7. I turn to the authorities. In Harbottle the court was concerned with injunctions that had been granted ex parte at the instance of a seller against both its bank, which had at its request issued a performance guarantee in favour of its Egyptian buyers, and against the buyers. The bank sought and obtained discharge of the injunction, which was also set aside as inappropriate as against the buyers, even though they did not apply. The case was not one of "established fraud", and Kerr J said:

"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."

8. Kerr J also identified a difficulty relating to the balance of convenience that any applicant for an injunction faces, namely that, if the bank is acting outside its mandate, it will not be entitled to re-imbursement, whereas, if it is acting within it, the basis for relief is lacking. This is a theme developed extensively by Rix J in Czarnikow-Rionda Sugar Trading Inc. v. Standard Bank London Ltd. [1999] 2 Ll.R. 187, to which I shall come.
9. The decision in Edward Owen concerned the like situation of a seller seeking to enjoin its bank from paying under a performance guarantee to a Libyan bank, which had in turn issued a performance guarantee to the Libyan buyer. Lord Denning drew the analogy between a performance guarantee and a letter of credit, and identified, as the one exception to the principle that a bank must pay if the documents are in order and the terms of the credit satisfied, "the case of what is called established or obvious fraud to the knowledge of the bank" (p.169D). It meant that "the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment" (p.169G). Later, he said (p.170H-171A):

"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."

10. This reasoning might suggest that a bank's duty to pay is conditional upon the honesty of the demand, although, in practice, the bank will be precluded from resisting any demand for payment or any application for summary judgment, if it lacks knowledge or proof of fraud. Subsequent authorities suggest, however, that both the fact, and the bank's knowledge, of fraud are concurrent pre-conditions to a bank having any right to withhold payment.
11. In United City Merchants (Investments) Ltd. v Royal Bank of Canada [1983] AC 168 the House of Lords referred with approval to Edward Owen and treated letters of credit and performance bonds as analogous. In the absence of fraud on the part of the beneficiary presenting documents under a credit, the confirming bank was obliged to pay under the credit against presentation of documents appearing on their face to be in order.
12. In Bolivinter Oil SA v. Chase Manhattan Bank [1984] 1 Ll.R. 251, Sir John Donaldson MR and Griffiths LJ expressed the view that previous authorities did not decide, or have to decide, that the only relevant time at which the state of knowledge of a performance guarantor or issuer of a letter of credit might fall to be considered was when demand for payment was made; and that, if the underlying principle was that "fraud unravels all", then the time when the matter came to court might be relevant. But they did not have to decide the point. They also said:

"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."

13. In United Trading Corp. v. Allied Arab Bank Ltd. [1985] 2 Ll.R. 554 (note) this court considered both the relevant date for establishing knowledge of fraud and the standard of proof required. Ackner LJ said:

"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., [1975] 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?"

14. After examining the evidence (including fresh evidence adduced during the appeal) the court held (p.565) that, although on the available material, there was a seriously arguable case that there was good reason to suspect that the demands were dishonest, the applicants had not established a good arguable case that the only realistic inference was that they were dishonest.
15. In Czarnikow-Rionda Sugar Trading Inc. v. Standard Bank London Ltd. [1999] 2 Ll.R. 187, Rix J was concerned with injunctive relief, sought to be maintained by Rionda against the first defendant bank who at its request had arranged for the issue and confirmation by the second and third defendant banks of letters of credit to finance contracts for purchase by another company ("USR") to which Rionda had become party as "financial intermediary". To try to avoid the impact of Harbottle and Edward Owen, Rionda argued, first, that the real jurisdictional basis of the fraud exception was the law's interest in not allowing fraud to exist, and, secondly, that (applying pre-CPR principles) a good arguable case of fraud should suffice for a pre-trial injunction – without it even being necessary to show any substantive cause of action against the bank. The latter submissions were rejected after detailed examination of the previous authorities. Rix J underlined the principle that:

"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."

16. Rix J analysed the fraud exception in terms of an implied limitation on the bank's mandate, the source of which could be viewed as being the law's prohibition on the use of its process to carry out fraud (cf Lord Diplock in United City Merchants (Investments) Ltd. v. Royal Bank of Canada [1983] 1 AC 168, 184A). He said that:

"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."

17. Rix J. went on to hold, firstly, that the court could not consider granting an injunction in the absence of any contractual basis, and, secondly, that, even assuming the implied limitation on the bank's mandate which he identified and even if Rionda had otherwise sufficiently "established" fraud, no injunction should be granted, because either the banks were entitled by their mandate to pay, or Rionda would have an effective remedy against them for breach of mandate. Further, the fact that Rionda had obtained an interlocutory Mareva or freezing order against the beneficiaries, although it gave no security or priority over competing claims, must also be a highly important consideration, when considering the balance of convenience.
18. In Turkiye Is Bankasi AS v. Bank of China [1998] 1 Ll.R. 250, this court upheld Waller J's decision at trial that the claimant ("TIB") - which had issued a performance guarantee at the instance of the defendant ("BOC") and made payment under it to a Turkish contractor - was entitled to enforce BOC's counter-guarantees, because, applying the test in Edward Owen, there was no true evidence of fraud or anything making fraud obvious or clear to TIB when it made such payment.
19. In Balfour Beatty Civil Engineering v. Technical & General Guarantee Co. Ltd. [2000] CLC 252 this court examined further, under the old rules, the possibility that fraud might be relevantly established between the times of demand and of the court hearing. Waller LJ identified the "absurdity" that would result if a court, having heard the evidence on an application for summary judgment, felt bound to give judgment, because it concluded that, although fraud was now sufficiently established, it had not been sufficiently established and known to the bank at the time when demand was made under the relevant instrument. The key to avoiding this absurdity lay in his view in recognising that the bank would, in this situation, have a cause of action against the beneficiary for fraudulent misrepresentation, on which it could obtain summary judgment which it could then use to extinguish its liability on the instrument. In a case where the fraudulent misrepresentation was so clear as itself to justify summary judgment, no difficulty arose. The parties' established rights to judgment would simply cancel out and preclude any judgment on the claim. As to other cases Waller LJ said this (p.606):

"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."

20. Waller LJ summarised his views in relation to such other cases as follows: if the evidence of fraud was "powerful", but not sufficient to justify summary judgment, the bank could in his view seek either a stay of execution in respect of its liability on the instrument or a deferral of any judgment on the instrument until after trial of its counterclaim; if, on the other hand, the evidence was less than powerful, the bank would simply be left to pursue a claim or counterclaim against the beneficiary for reimbursement or its remedy against its customer.
21. Another way of reaching the same conclusion in cases where there is, by although not before the time of the hearing, established fraud, (and probably also in cases where there is, by the same time, "powerful" evidence of fraud) may be by applying Lord Diplock's underlying principle that the court should not lend its process to assist fraud and that "fraud unravels all". No question arises in this context of the grant of injunctive relief or of any requirement for that purpose to have a cause of action. It would affront good sense, and probably general principles relating to illegality, if courts were obliged to give judgment in favour of a beneficiary now shown to be acting fraudulently.
22. In Safa Ltd. v. Banque du Caire [2000] Ll.R. 600 Safa were assignees of two letters of credit opened in the sums of $5.55 million and $3.7 million by the bank in favour of Paul Group International Insurance Brokers/T.L. Dallas Ltd. ("PGI"), a Lloyd's broker. The context was proposed loans of $30 and $40 million by the bank to Aboul Fotouh Establishment ("AFE"). The credits were available for draw-down against presentation of a financial insurance guarantee to be issued in favour of the bank by Merrion Reinsurance Company Ltd., covering repayment of the loans. Payments under the credits were intended to cover the premium on the financial insurance guarantee. PGI was on the face of it acting as broker for the bank in arranging such insurance. But the bank never in fact agreed to make the loans and concluded that Merrion was not financially sound. A demand was made by PGI, which the bank argued was fraudulent. It also argued that it had only entered into the credits on the basis of representations made by PGI as to the creditworthiness of Merrion. The decision to uphold Timothy Walker J's refusal of summary judgment was primarily based on the peculiar inter-relationship of the banking and underlying commercial transactions. In that context, it would be unjust if the bank could not defend the claim on the credits when it had a real prospect of establishing that the demand had been fraudulent. Waller LJ cited in this connection (a) the principles governing bills of exchange, according to which set off is not admissible, other than between immediate parties in cases of partial failure of consideration when the amount involved is both ascertained and liquidated, (b) the principles indicated in Balfour Beatty with reference to Edward Owen.
23. In the latter context, Waller LJ referred to submissions of Mr Slade on the passage, quoted above, from his own judgment in Balfour Beatty:

"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."

24. Waller LJ then cited Hong Kong and Shanghai Banking Corp. v. Kloeckner & Co. AG [1989] 2 Ll.R. 323, where Hirst J. expressed the view that there was "no principle equivalent to that laid down in Edward Owen that debars a bank setting off against a beneficiary under a bill of exchange a claim by the bank against the beneficiary". The bank's claims in that case arose from commitments undertaken by Kloeckner to the bank in respect of the same dry cargo contracts as those in relation to which the bank had given to Kloeckner stand-by credits. Hirst J pointed out that it would only be in the rarest cases that there would be an antecedent banking connection between bank and beneficiary that could give rise to such cross-claims.
25. Waller LJ's final citation was of Clovertogs Ltd. v. Jean Scenes Ltd. (CA transcript, Mar. 5, 1982). He dealt with this case as follows:

"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."

26. In my view, the reasoning in Clovertogs was equivocal. Only Cumming-Bruce LJ put the matter squarely on the basis that a triable issue of misrepresentation inducing the cheques justified leave to defend. Eveleigh LJ said simply that:

"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."

27. In Safa Waller LJ summarised the position as follows:

"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."

28. I would agree that special considerations arise in circumstances such as those in Safa itself, where the beneficiary and bank are both intimately involved in a wider underlying transaction. That gives force to both Waller LJ's points 2 and 3. But point 4 is on its face an independent point embracing two different situations: the first, where a bank has a claim with a real prospect that the demand was fraudulent, even if it had no clear evidence of fraud at the time of demand; and the second, where it has a claim with a real prospect that there was a misrepresentation by the beneficiary directed at persuading the bank to enter into the letter of credit. To the extent that the bank's defence in Safa involved reliance upon, inter alia, PGI's alleged representations about Merrion, the validity of the defence might have been decided by reference to point 4. But it is not clear to me that it was. The bank's participation in the underlying transaction appears to have been treated as significant. After concluding that there was material to justify the allegation of misrepresentation, Waller LJ said (at p.610):

"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."

29. Schiemann LJ in his judgment also emphasised that the court was not concerned with a normal transaction, adding that the facts cried out for examination.
30. In relation to the first aspect of Waller LJ's point 4, Mr Downes referred us to the earlier passage in Waller LJ's judgment, where Waller LJ thought that there was little difference between "powerful evidence" and the "real prospect" of success referred to in various contexts in the new CPR, and said that he "would accept that where the bank can raise a set-off as defence the question whether it has a 'real prospect of success' is the appropriate test". Mr Downes submitted that this showed that the high test of "established fraud" indicated in Harbottle and Edward Owen continues to apply, in relation to any allegation of either a fraudulent demand or misrepresentation. I find it difficult to match this submission with Waller LJ's words.
31. However, if Waller LJ was accepting that any lower test than "established fraud" will justify permission to defend a summary judgment application on the basis of an allegedly fraudulent demand, there are also problems - as Mr Hunter accepted. A "real prospect" of establishing fraud is a comparatively low hurdle. The White Book Service (August 2001) note 24.2.3 identifies it with "some prospect of success"; it continues: "That prospect must be real, i.e. the court will disregard prospects that are false, fanciful or imaginary", and adds that it does not involve showing probability of success at trial. I would not consider that this low test can be justified on the basis that Safa concerned the relationship between bank and beneficiary, rather than between customer and bank or between the parties to the underlying commercial relationship. If instruments such as letters of credit and performance bonds are to be treated as cash, they must be paid as cash by banks to beneficiaries. The courts in Harbottle and Edward Owen emphasised this, and, in my view, set a higher standard than "a real prospect of success" in relation to all these situations. Short of "established fraud", a bank will not normally be allowed to raise any defence or set-off based on alleged impropriety affecting the demand.
32. It may be suggested that the re-formulation of the test in United Trading lowers the standard. The court expressed the test at the interlocutory stage, as being (under the old rules) whether "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 demands on the performance bonds". In that re-formulation, the first four words would now have to be replaced by the words "there is a real prospect". I have some reservations about the re-formulation, and note what Rix J said in Czarnikow-Rionda at p.202, point (4). The courts in Harbottle and Edward Owen were concerned with the interlocutory stage. The test that they stated was undiluted by any reference to "arguable case". The defence that they and later authorities identify, of established 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. If and so far as that defence is limited to the time when demand was or payment should have been made, but the court will still refuse judgment if by the time of judgment fraud is established, again there would seem to be little room for considering whether there is an "arguable case" or "real prospect" of establishing fraud. On any view, as Rix J observed, the court should be careful not to allow too extensive a dilution of the presumption in favour of the fulfilment of independent banking commitments. The introduction of the balancing concept of "the only realistic inference" and the actual conclusion on the facts in United Trading suggest that the court there also had this consideration in mind.
33. The second aspect of Waller LJ's point 4 requires separate treatment. The challenge here is to the validity of the instrument itself. Such limited authority as there is supports Waller LJ's formulation in point 4, and is therefore against Solo. It consists, first, of Sir John Donaldson MR's dictum in Bolivinter. He indicated that the first task of any judge faced with an application for interim injunctive relief was to "ask whether there was any challenge to the validity of the instrument" and "if there is not or if the challenge is not substantial, prima facie no injunction should be granted". He clearly did not have in mind a test or burden equivalent to that under the fraud exception, when he referred to the need for any challenge to be "substantial". He meant, in modern terms, that it must have a "real prospect". The underlying assumption that there could then be injunctive relief may itself be questionable, in the light of the difficulty identified in Harbottle and developed by Rix J in Czarnikow-Rionda. But it remains true that the court in Bolivinter recognised the present situation as distinct and as falling outside the principles in Harbottle and Edward Owen. Secondly, there is the decision, equivocal though it is, in Clovertogs Ltd. v. Jean Scenes Ltd. (CA transcript, Mar. 5, 1982). Thirdly, there are Waller LJ's own dicta in Safa, indicating that in principle a misrepresentation inducing the opening of a credit may give rise to a defence or other compelling reason for trial.
34. Mr Hunter submits that the principles established by Harbottle and Edward Owen recognise banking instruments as autonomous and established fraud as an exception to autonomy. He points out that this is how the position is summarised in Jack on Documentary Credits (3^rd ed.) para. 9.3. He submits that these principles have nothing to do with any questions that may, rarely, arise regarding the validity of any such instrument. Mr Downes submits that we should recognise a separate and wider principle, which, as I have said, he describes as one of "integrity". This, he submits, explains the general rule that one party to a commercial transaction cannot restrain another as beneficiary from claiming under such an instrument. However, it seems to me that the principle of autonomy is capable of embracing and explaining this rule. The banking relationship being autonomous, one commercial party cannot interfere with the other's separate relationship with a banker.
35. The integrity of commercial transactions is mentioned in the authorities simply as the reason for the principle of autonomy. Banking commitments are to be honoured free from interference, according to their terms and on a documentary basis. Banks are not to be involved in underlying commercial disputes. Beneficiaries are to be paid, regardless of such disputes. Mr Downes pointed out that the effect is that issuing banks and their customers accept the risks inherent in the terms of the instruments that they issue, including the risk that a beneficiary may make a demand that is unjustified or fraudulent, but has to be met because it cannot be clearly established to be so. Banks also accept the risk that they may have to make a payment, that they cannot later recover from their customer if their customer defaults and becomes insolvent. The cash principle means that (short of established fraud) any claim that a bank may acquire against a beneficiary making a fraudulent demand must be pursued separately and subsequent to payment, and cannot normally be used as a defence or set off to avoid payment. All that is clear. But such risks all arise out of and on the basis of the instruments issued. They assume the "integrity" of the instrument that the bank has issued.
36. It does not follow that banks accept the risk that the instrument itself has been induced by conspiracy between, or misrepresentation by, their customers and the beneficiaries. The mere appearance of a valid instrument cannot commit a bank. Take the case of a forgery. The bank must be able to advance a defence with a real prospect of success that an instrument relied upon is a forgery by the beneficiary. The contrary proposition could, I think, prove as great a threat – if not greater - to the "integrity" of commerce as - or than - any that Solo can muster in support of its case. Solo's argument has thus to be that, once a bank has issued an instrument, it is bound to pay under it, although it is in truth voidable, and the bank has claimed to avoid it, unless the bank can establish at the interlocutory stage that the avoidance was clearly justified. I cannot see any principled basis for this conclusion. It has nothing to do with autonomy. It cannot flow from the terms of the instrument, or the fact that banks are concerned with documentary compliance. It seeks to impose on banks the risk of being misled into entering into the instrument, when the only risks that the bank may fairly be taken to have accepted are the risks undertaken under the instrument, assuming it to be valid. It does not reflect the limits of a defence or right of set off (like the fraud exception). It deprives the bank of a defence that it has under ordinary contractual principles, and of its right to trial of that defence, which if tried and proved would mean that the bank should not have been held liable in the first instance.
37. The problems inherent in Solo's case can be illustrated: if, on an application for summary judgment, the court were to apply the principle for which Solo contends and to give judgment upon a demand because the invalidity of the bond was not sufficiently "established" at that stage, the bank or other issuer of the instrument could still continue with proceedings to establish that it had in fact validly avoided the instrument. Such proceedings would be decided according to the ordinary civil standard of proof, bearing in mind of course the seriousness of any allegation of fraud. Assuming that the bank succeeded, it would be necessary to consider the effect on the prior, final judgment on the demand. That judgment would, presumably, have to be set aside in some way, perhaps as having itself been obtained by fraud. Mr Downes suggested that this was an essentially procedural problem that could be overcome by, for example, formulating any judgment so that it was not final, but for an interim payment. But there is difficulty about that too, since the relevant rule only permits an interim payment, where the court is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial sum (CPR 25.7).
38. The analogy of a bill of exchange has informed the courts' thinking in relation to banking instruments such as bonds. That too does not assist Solo's case. Defects in title - including fraud inducing the bill provided the obligee repudiates the bill on discovering the fraud - may be raised as against immediate parties, or remote parties who are not holders in due course: see ss. 29(2) and 38 of the Bills of Exchange Act 18 and Byles on Bills of Exchange (26^th ed.) 228-231. Mr Downes highlights the position of third party purchasers of instruments such as the present bond acting in good faith. We do not need to express any concluded views about the position of such purchasers. However, if they are vulnerable, it is because of the general principle that assignees take subject to equities, to which s. 38 creates an exception in relation to bills of exchange. The present case is not concerned with any assignee purchasing in ignorance of any defect in title. But, if the common law analogy between bills of exchange and banking instruments, such as performance bonds, breaks down at this point, it is because there is no enactment in relation to performance bonds paralleling s. 38 in relation to bills of exchange. That is no reason for creating a wider principle rendering even immediate parties immune from objections to the validity of such instruments.
39. Mr Downes also points to the common situation of a chain of banks, and suggests that there could then be little prospect of the issuing bank being able to avoid, in the way that Canara submits that it can; any misrepresentation or fraud would have been directed against the first bank in the chain, not the bank that issued the instrument. I would not accept the premise. Where, as here, a fraudulent conspiracy or misrepresentation is alleged, involving the pretence of a genuine commercial transaction, it would not seem difficult to treat the pretence as directed to all bankers who become involved. Each no doubt acts on that basis. Further the law constructs a contract between the issuing bank and the beneficiary. The law may in appropriate circumstances be capable of recognizing or constructing an implicit representation as to the genuineness of the underlying commercial transaction as far as the beneficiary is aware.
40. The pragmatic arguments that Mr Downes advanced are to my mind also not made good. The fact that the present issue only now requires decision itself suggests either that banks rarely attempt to avoid instruments such as credits and performance bonds or that beneficiaries have recognised that the cash principle cannot enable summary judgment to be obtained where banks have a real prospect of justifying such an avoidance. Common sense suggests that the former probably applies. The present facts are obviously extreme. The law has developed the cash principle and the limited fraud exception in response to perceived commercial need. I do not see the same need for the further development now suggested, which could not in any event take place consistently with general contractual principles.
41. For these reasons, I see no sound conceptual or practical basis for the suggested wider principle according to which it is submitted that Canara should now be ordered to pay Solo, although Canara has, on the judge's findings, shown a reasonable or real prospect that the relevant bond was procured by, and has been validly avoided by Canara on account of, fraudulent conspiracy and fraudulent misrepresentation by Hamco in conjunction with Solo. I would therefore dismiss the appeal on the point of law on which the judge gave permission to appeal.

The facts

42. We heard full argument on Solo's application to appeal on the facts. Solo challenges the judge's conclusion that Canara has even a reasonable or real prospect of establishing the conspiracy or fraudulent misrepresentation that it alleges at trial. During submissions, points have been made on the facts in both directions, although there is no cross-appeal before us. While I consider permission to appeal on the facts to be appropriate in the light of the submissions that have been addressed, the more that the known facts have been considered, the more convinced I have been that the judge was right to refuse summary judgment.
43. The matter can be approached by looking, first, at the evidence relating directly to the alleged purchase contract, and, secondly, at the wider picture on which Canara also seeks to rely.

(1) The alleged purchase contract

44. Hamco originally informed Canara that it was to contract with SILS, but is said to have contracted with Solo, because of SILS's inability and Solo's ability to obtain finance for the pre-export advance. Hamco's letter to Canara dated 24^th November 1995 records that it was "because of the quality of our products that [SILS] are placing with us an order for the supply of 12600 metric tonnes of aluminium alloy ingots."
45. Solo alleges that under the contract 56 shipments were made between September 1996 and October 1998, totalling some 2786 tonnes (rather than the quantity of over 7000 tonnes contemplated by the contractual terms over such a period). The schedule produced shows extreme variations, and only two months in which any tonnage approximating to the contractual 300 tonnes is said to have been shipped. No shipment at all was made in December 1996, May 1997 and between November 1997 and March 1998. This last gap is said to have been in accordance with a written request, which has been produced, from Solo. The only shipments made thereafter totalled some 204 tonnes in the months April to June 1998.
46. The tonnages comprised in the 56 alleged shipments are consistent with Hamco's manufacturing records, in the sense that they are or may be either less than relevant quantities recorded as manufactured or, as regards the period from March to October 1997, they coincide precisely with such quantities. Canara submits that this is in contrast with Hamco's representation to it in November 1995 that 71% of its manufacturing capacity was already utilised on other business and "Hence, the co. would be able to fulfil the export obligation under the proposed contract". Mr Downes replies that Hamco's accounts (taken at face value) show that Hamco was also buying in for resale as well as manufacturing. But Hamco's representations (including that made on 24^th November 1995 about the "quality of our products") indicated that the contract was to be fulfilled out of Hamco's manufacturing capacity. The 71% related to the year 1994-95. However, if the 56 shipments were of Hamco's manufacture, any other business utilising Hamco's capacity must have declined to the point of disappearing.
47. More puzzling is the fact, noted by the judge, that some 14 of the 56 shipments were completely undocumented, that 22 of the remainder were without any document beyond a bill of lading and that 6 of the bills of lading that are available suggest shipments on vessels that were not in the suggested loading ports on the relevant dates. On the other hand, since payments were made by or through RZB to Canara in respect of all 56 shipments, apparently genuine shipping documents must at some stage have existed. All the bills of lading were issued on the forms of Middle East X-Press Lines Inc ("MEXP"), a company owned by Mr Verma (Mr B.M. Patel's son-in-law) which did not itself own or operate any vessels (and whose bills are, one could add, no reliable indicator of shipment – see below). The discrepancy in ship locations could, however, be explicable in terms of ante-dating, although by a matter of weeks, rather than days in at least two of the six cases. Further, in respect of one of such cases, there is apparently persuasive contemporary correspondence referring to its shipment to, and arrangements for its reshipment from, Singapore. In relation to those shipments documented by more than bills of lading, Solo also points to marks of independent authentication of shipments, such as Indian agents and customs stamps.
48. That some shipments, at least, were being made to Singapore is indicated, persuasively, by early correspondence between Ms Hosain and Singapore agents. However, the correspondence, far from evidencing shipments of quality, indicates a chaotic position, whereby Hamco's containerised product arrived improperly stuffed (so that it had broken loose), improperly packaged (without shrink wrapping), heavily oxidised, without assay certificates and quite unsuitable for sale on LME warrant. Further, there is, rather remarkably, a direct statement by Mr Khwaja of Hamco, in a fax dated 5^th November 1996, showing that the shipment of goods in oxidised condition was no mere default by Hamco, but came about with MP's full consent and in conjunction with associated deceit:

"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."

49. Ms Hosain, who appears to have been doing her best to deal with the situation, gave Hamco instructions on 2^nd November 1996 not to make any more shipments to Singapore. All 17 containers that went to Singapore were, it appears, reshipped to Dubai. What became of them there is unclear.
50. The real questions arise, as the judge observed, when one turns to Solo's receipt and realisation of the aluminium said to have been shipped under this large long-term contract. Solo relies in essence on the evidence of shipments to Singapore, for the ostensible purpose of sale on LME warrant, and on documents produced relating to a company called Ecumet (U.K.) Ltd. ("Ecumet") of 6 Paddockhall Road, Haywards Heath, West Sussex. Together the Singapore shipments and the Ecumet documents cover no more than 723 tonnes. The Singapore tonnage is unaccounted for. The Ecumet documents consist of four bills of lading, and invoices and certificates of origin issued in SILS's, not Solo's, name accompanied by certain Hamco packing lists and certificates of analysis, giving container numbers and heat or melt numbers and dates. All the bills of lading cover shipments from Dubai. The first, dated 14^th November 1996 but altered to 3^rd March 1997, is for shipment of 119. 935 tonnes C & F Rotterdam, the second dated 18^th March 1997 covers a further 120 tonnes C & F Felixstowe, and the third and fourth dated 5^th and 14^th May 1997 cover shipments of 61 tonnes and 20 tonnes C & F Singapore, making a total of some 320 tonnes. Mr Simms, who has made the only witness statements relied on by Solo in these proceedings, records in his third statement that he has contacted Ecumet's managing director, Mr Wafer, who has confirmed that Ecumet "conducted business over many years with Solo Sharjah and had satisfactory dealings with Solo until the collapse of the company" and that:

"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".

51. The "relevant documentation" attached as exhibit 10 consists of no more than contractual documentation and an invoice covering the sale to Metallgesellschaft Ltd. for $1514 per tonne of the 119.935 tonnes shipped C & F to Rotterdam, and an unexplained commission statement for $75.25 due to Metallgesellschaft Ltd. stated to be for sale to and repurchase from Ecumet of 80 tonnes of aluminium alloy. In his fourth statement, Mr Simms says:

"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."

52. It is clear that Mr Simms' assertions regarding what the documentation shows cannot be taken at face value. Only four shipments of only 320 tonnes of Hamco material to Ecumet have been in any way identified. None of them is expressly connected with Solo, as distinct from SILS, but SILS may have been acting for Solo. Only one of them went to Rotterdam. There is no evidence of reshipment of the second shipment, which was to Felixstowe, and the other two went to Singapore, despite Solo's earlier unhappy experience there. All four shipments are invoiced to Ecumet at $1300 per tonne. This is in contrast with a steady increase in the LME based markets prices ostensibly applicable under the contract between Hamco and Solo. These increased considerably over the months: as stated contemporaneously by Ms Hosain, they were $1193 in November 1996, $1325 in December 1996 and January 1997 and $1469 in February 1997. The price applicable to any particular month remained applicable to material which Hamco ought to have shipped in that month, but only shipped later. But that does not explain the pricing to Ecumet in respect of four apparently ad hoc shipments C & F from Dubai to various parts of the world. One may speculate that the pricing to Ecumet at $1300 may have been pro forma, if Ecumet was acting in all these cases as agent. However, on that basis, the only realisation for which any documentary evidence at all has been produced concerns the sale of 119.935 tonnes on LME warrant to Metallgesellschaft Ltd. in Rotterdam.
53. The judge regarded it as "striking" that Solo could not, save by pointing to the evidence regarding Singapore and Ecumet, say what happened to the goods. I, for my part, think that the judge, far from paying this aspect too much attention, could justifiably have expressed himself in more forceful terms. If it was genuine, the Hamco contract was, on any view, a very large and high-value commitment, central to Solo's future and profitability. In his second witness statement (made on the basis of instructions from MP and lengthy meetings with Mr B.M. Patel) Mr Simms says:

"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."

54. Dravya is an associate company of Hamco, and the tin contract involved a similar pre-export payment to the present. It is inconceivable that a company in Solo's position would not retain internal records, as well as documentation, regarding its realisations of quantities received under such contracts. It would need the same, not merely for accounting, but for commercial purposes in order to know how the contract was progressing and, above all, whether it was proving profitable. Yet the court is asked, by Mr Simms, to proceed on the basis that such documents exist, or have existed, but cannot be made available at the moment, or, by Mr Downes, on the basis that, even if it is to be assumed that they do not exist, there is still no sufficient case that the parties were not performing and never intended to perform the purported contract according to its terms.
55. There is also the question why and how it came about that Hamco was unable to continue to perform in 1998. At a meeting on 3^rd June 1998 Mr B.M. Patel told Canara that "the metal market was not doing well for past 2 years" and gave as the reason for non-performance break-down of an aluminium smelter and retrenchment of 145 workers in the plant. But how and why that led to complete inability to perform is unclear. The evidence before the judge did not, however, go into this aspect (although I note, in parenthesis that, since the hearing before the judge, Canara has on 29^th September 2000 served a defence, with a solicitor's statement of belief in its contents, and that paragraph 80 alleges that the reason given by Mr Patel was untrue, in particular because the aluminium smelting plant was only installed and commissioned in May/June 1997 and Hamco had 8 other rotary furnaces and a represented capacity in November 1995 of 20,000 tonnes per annum).
56. The way in which the evidence was put before the judge and the state of the documentation is in my judgment of great significance. First, the whole of Solo's evidence comes from witness statements by Mr Simms, its non-executive director and solicitor. Secondly, by order dated 24^th January 2000 Thomas J ordered Solo to provide extensive disclosure, including all relevant bills of lading and contracts of sale and documents disclosing the identity of third party purchasers, including names and addresses and any internal memorandum, board minutes or discussion documents relating to the on-going operation of the purchase contract. Various documents were produced and by his fourth witness statement dated 29^th February 2000, Mr Simms exhibited, or referred to the previous statements exhibiting, all or virtually all the documents produced, saying that he "had been hoping to obtain further documents from India but only a few additional documents have been found", and that:

"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."

57. The documents produced in annex 13 in particular included communications and internal documents, which on their face must have been produced from Solo/SILS's Sharjah office. In his fifth statement dated 28^th April 2000 Mr Simms said that:

"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.

…."

58. He explained that Solo maintained a London office, staffed daily by a Ms Faulkner, with periodical visits by Ms Hosain and occasional visits from MP. He explained that he had visited that office and taken possession of all relevant files and documents. Later, he said:

"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."

59. Again, I note that the documentation does not bear out Mr Simms' assertions regarding sales on LME warrant in Singapore or (save for the 119.935 tonnes) Rotterdam. There is no explanation why MP has not made any witness statement, although Mr Simms has taken extensive instructions from him. There is no explanation why any further relevant books and records of Solo in Sharjah have not been disclosed. It is true that SILS collapsed in Spring 1999, and that from July 1999 investigators from its banks and local authorities were looking intensively into its affairs. But, assuming that SILS was dealing with the receipt and onward transmission of shipping documents and with subsequent realisations, it must have been doing so on behalf of Solo, and would have no basis on which it could, if asked, refuse to make available, or at least allow inspection of, Solo's relevant records, documents and information. Further, by his fourth statement made in February 2000, pursuant to Thomas J's order, Mr Simms produced the documents relating to the Singapore shipments. These clearly originate in Sharjah, and even include an internal draft for a letter sent from there by Ms Hosain. It is difficult in these circumstances to accept that Solo could not have produced further records and documentation relating to the receipt and realisation of any material obtained from Hamco under the contract, if it wanted to and if they exist. No evidence has been given of any attempt to ask for or inspect such documents, if they are in Sharjah. So, Solo is (on its case that such documents exist) in apparent breach of the disclosure order made by Thomas J. It is no answer for Mr Simms to say that he is a non-executive director. The order was against Solo, not him. He does not appear to have been an appropriate director to make the disclosure ordered in the first place. If he was to make it, it was incumbent on him to seek the relevant records and documents, wherever they were. The faint suggestion, at one point in Mr Simms' evidence, that material documents may have gone missing between legal advisers, for which no basis or source of information is vouched, cannot conceivably explain the present situation, and is not relied on as doing so in Mr Simms' later statements or by Mr Downes.
60. Mr Simms in his evidence and Mr Downes in his submissions urged on us that this litigation is being pursued in the interests of Solo's unsecured creditors. Their identity has not been vouchsafed. But I observe that, on 9^th August 1999, the day before the issue of the claim form, Solo assigned and charged to a Gibraltar company, Roxton Investments Ltd., 60% of all sums recovered from Canara in the present litigation. In the course of submissions, Mr Downes confirmed that the present proceedings are being funded by MP or his family. There can be little doubt that Roxton Investments Ltd. is a vehicle for this purpose. Mr Downes urged on us that the appropriate course was that the bank should still be ordered to pay up, leaving it to obtain any injunctive relief that might be appropriate to freeze the sums once paid in Solo's hands. Solo could then pay its unsecured creditors. Any issue as to who might be a genuine unsecured creditor could be debated at that stage. For reasons I have already given, this case falls as a matter of law outside the class of cases in which the bank must pay up, and rely on whatever freezing relief it may then be granted. Further, in view of the difficulties in understanding what has occurred and the (clearly contentious) issues likely to arise in seeking to ascertain who might or might not constitute a genuine unsecured creditor, I would anyway view with marked lack of enthusiasm Mr Downes' suggestion that Canara should be left to seek a freezing order.

(2) The wider picture

(a)The tin purchase contract

61. This purported contract constituted Solo's only other substantial activity. It was dated 19^th September 1997, and was for the supply of at least 7200 tonnes of high grade tin metal ingots at 200 tonnes per month over 36 months. Under it a $20 million pre-export advance was expressed to be payable by Solo to Dravya. A $10 million performance guarantee was issued by Canara, covering breach by Dravya of its obligations in similar fashion to the bond issued in the present case. The benefit of it was assigned by Solo to Standard Bank London Ltd. (which probably advanced part of the pre-export advance), and demand was made under it on the basis of a default by Dravya on 10^th December 1998. Proceedings were issued by Standard Bank against Canara. David Steel J refused Standard Bank's application for summary judgment. Mr Downes submitted, correctly, that David Steel J's views, in proceedings to which Solo were not party, are of no evidential weight. But David Steel J's account of the evidence and documents put before him stands on a different level.
62. Standard Bank's evidence showed that MP had approached it in May 1997, representing that Dravya had started its own mining activities, after obtaining concessions in a mine in an area of Vastar, Madia Predesh, and that the tin ore to be extracted there would be sufficient to increase Dravya's production from 3000 to 5000 tonnes per annum. Further, Dravya sought Reserve Bank of India permission for the issue by Canara of its bond on the basis that at least half of the pre-export advance was for the development of the mines in order to increase tin production at its Madia Predesh plant. A purported tin smelting contract between Hamco and Dravya dated (like the purchase contract) 19^th September 1997 recorded that Hamco would toll-smelt tin concentrates, which were to be supplied by Dravya and "procured from [Dravya's] own mining operations in the Vastar district of Madia Predesh" at the rate of at least 200 tonnes a month. MP put evidence before David Steel J attesting to his understanding in September 1997 that "Dravya was in a position and intended to supply tin from its mines and that the tin supplied pursuant to the purchase contract would indeed come from Dravya's own mining operations. I understood that Dravya had the necessary mining concessions". MP, through his father and his close connection with the Hamco group of companies, including Dravya, might be expected to know the actual position regarding Dravya and any mines.
63. The evidence recited by David Steel J (including a letter dated 14^th September 1998 from the Madia Predesh State Mineral Corporation) shows that the most that Dravya ever had was a survey and research award that terminated on 30^th June 1998. It never had any extraction or mining lease, let alone a mine. The smelting agreement must have been a sham. It is said that this does not mean that the contract between Dravya and Solo was a sham. But it certainly throws a very odd light on it, bearing in mind what was said to Standard Bank and to the Reserve Bank of India. It is said that this conclusion is undermined because the tin contract dated 19^th September 1997 was a renewal of a previous contract pre-dating the smelting contract by more than a year. In that connection, however, I note that David Steel J referred (on page 2 of his judgment) to the guarantee being in substitution "for an earlier guarantee in relation to a similar transaction". In any event, if either the earlier or the later contracts were genuine, there is no explanation why false pretences regarding mining operations and a bogus smelting contract would be invented even in 1997. It is said, as in relation to the present contract, that there is evidence of deliveries under the contract. But, as here, these deliveries were not, on any view, those contemplated under the contract as made. To adopt David Steel J's words "If this [was] performance under the contract, it is slow and dilatory performance". By August 1998, only 672 tons were delivered. As here, attempts were made to show that these were genuine commercial deliveries, and not tokens designed to encourage belief in genuineness. The 672 tonnes were said to have gone to a concern called Sogem and to have been on-sold without problem. But, Sogem itself is on record as having written to MP on 1^st February 1999 referring to a supposed visit by its engineer, a Mr van der Bendem, "to the tin mining concessions of Dravia in Madia Predesh" and to satisfactory results of the analysis brought back by him (including slags from "the Dravya Rapour smelter" which David Steel J concluded did not exist, although the evidential basis for this aspect of his judgment may be said not to be clear and it is unnecessary to place reliance on it). When questioned, Sogem said that "the visit of our mining experts to Drabya's tin deposits has been a very quick review which confirmed the reserves are likely to be significant of good quality". Some, at least, of the sub-buyers also appear to have been agents, rather than users. As in this case, so in that case it seems to me that very real questions about the genuineness of the transaction are not resolved by establishing minor shipments. It is true that any shipments reduce liability under each guarantee. But, if the object of either contract and guarantee was to raise money and transfer it into India with a possibility of later claiming sums under the guarantee, some degree of performance would be likely, in order to maintain appearances.
64. It is said that any doubt about the genuineness of the intention to perform the tin contract is irrelevant to the aluminium contract. But these are similar transactions, even if they originated in series in successive years (rather than both in 1996 as may well be the case). The parties' submissions to the judge on the admissibility of similar fact evidence proceeded with reference to the position in criminal law prior to the House of Lords decision in DPP v. P [1991] AC 447. That decision establishes that striking similarity is not the ultimate test, even in criminal proceedings. What matters is whether the evidence has sufficient probative force to outweigh its prejudicial effect. In civil law, the test has always been as stated by Lord Denning MR said in Mood Music Publishing Ltd. v. De Wolfe Ltd. [1976] 1 Ch. 119, 127:

"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."

65. Applying that test, I have no doubt that evidence regarding the tin contract would be admissible on the issue whether there was a genuine intention to perform the present aluminium contract which was the only other significant business transaction in which Solo is alleged to have engaged.

(2) The fraud in India

66. Before us, it was effectively common ground that the Hamco group of companies had been involved prior to September 1998 in a very large-scale fraud on the Indian exchange control authorities. Mr Downes submits that a fraud of that nature is irrelevant, and should have been disregarded by HHJ Hallgarten. It is necessary to examine that proposition more closely with reference to the facts. A judgment dated 16^th February 1999 in arrest proceedings between the Indian Enforcement Directorate and Mr B.M. Patel sets out a statement dated 1^st December 1998 made by a senior executive of Hamco, Mr Paresh Mehta. This explains that the fraud involved more than exchange control violations. It arose from the group's critical financial position, and it involved the creation of huge fictitious turnover. Large numbers of letters of credit (436 or 437, according to an investigation instituted by the Enforcement Directorate) were procured in favour of associated companies, including SILS, from Indian banks under the false pretence that these were required to complete genuine commercial import transactions. The sums paid under these credits totalled some Indian R.9,327.3 million. No goods were however imported. Over two-thirds of the total was paid out under the credits against the presentation of forged shipping documents. According to the judgment and other documents, these included forged bills issued by companies controlled by Mr Verma. The balance was the subject of forged insurance company documentation, purporting to show that the goods had been lost in transit. Sums were remitted to India on the pretence that they represented insurance recoveries. In fact, they came from within the Hamco group and associated companies, in particular from beneficiaries under letters of credit. Mr Mehta was asked by Mr B.M. Patel to keep liaison with the beneficiaries under the credits. Amounts received by beneficiaries under the credits were, according to Mr Mehta, "remitted back to Hamco Group to clear liabilities under the L.Cs. which had become due and I was given further instructions to arrange fresh L.Cs. to the extent of the limit cleared".

(3) The fraud in Sharjah

67. SILS collapsed in Spring 1999. Mr Timothy Wormington, a vice-president of Citibank NA, recounts in an affidavit sworn 19^th August 1999 the findings of banking investigators who then examined SILS's affairs. Mr Tan of the ICC-International Maritime Bureau in a report dated 23^rd July 1999 also throws light on what was happening. In short, SILS was engaging in fictitious business with associated "importers" or "exporters" under purported transactions in relation to which banks were deceived into issuing letters of credit. Forged shipping documents were presented under these credits, and the proceeds of the credits used to pay off sums due in respect of earlier credits. Of over 700 bills of lading examined by the ICC report, only 20 covered completely genuine shipments. Bills of lading related to shipments on vessels which were nowhere near the ports of shipment at the time. Over 350 of the bills listed vessels, but failed to list any container numbers at all. Around 300 of them, which did list vessels and containers, listed high value tin cargo, but contained low value tin cargo. The forged bills of lading included bills of lading issued by Mr Verma's companies, including MEXP. Computer programmes were found on SILS's computers for creating and issuing such bills with the name of the purported shipowners. Further, there were instances of such frauds as early as 1991 and 1994.
68. Mr Downes points out that the forgeries were crude, and that there is no evidence that the device of pretending that cargo was of higher value than it was (increasing the sums paid under the credit) could be applied to aluminium, as opposed to tin. That may be so, but it is in my view both legitimate and necessary to look at the context and purpose of what was happening in the round.

Conclusion

69. The Hamco Group and SILS must have been in desperate straits for a considerable period prior to 1998. It is perhaps not insignificant that, when seeking to explain Hamco's problems to Canara on 3^rd June 1998, Mr B.M. Patel himself identified weakness of the market for some two years. In the deepest of financial straits, Mr B.M. Patel, his son MP and others engaged in a very high degree of fraudulent and fictitious trading, with a view to raising money from banks and staving off insolvency. The larger part of the activities of the Hamco Group and SILS appear to have become little more than the management of vast and presumably ever increasing spirals of money, gigantic exercises in teeming and lading. Solo only enters the picture, because it is said, no doubt correctly, that SILS could not raise the further money needed to fund the pre-export advance for the proposed aluminium transaction. Against the background of the other information, it might seem quite surprising if the purported aluminium and tin contracts between, respectively, Hamco and Dravya on the one hand and Solo on the other represented genuine long-term commitments. When one considers the peculiarities of the aluminium and tin contracts, their potential place in an overall pattern of false trading, with a view to raising and circulating as much money from banks as possible in order to stave off insolvency, is clear.
70. In my view, it would not in these circumstances be appropriate to grant Solo summary judgment, even if the "fraud exception" test applied, as Mr Downes contends. Before expanding on this, I note that the judge posed the straightforward questions whether the evidence clearly established fraud and whether there was a reasonable or real prospect of establishing fraud. The former he took as representing the "fraud exception" test, while the latter was the ordinary civil test which in his (as in my) view was relevant. As I have already indicated, the judge's approach is one with which I have some sympathy, but it is not one which follows the letter of the guidance given in the United Trading case. If he had followed that guidance, he would have asked himself whether there was a seriously arguable case (or now real prospect) for saying, on the material now available, that the only realistic inference was that the purchase contract was never intended to be performed according to its terms. If that is a more relaxed test, it is perhaps possible, although I for my part would think unlikely, that the judge might have held that Canara had satisfied even the "fraud exception" test.
71. More fundamentally, the factual situation regarding receipt and realisation of any aluminium supplied under the alleged contract between Hanco and Solo is so remarkable and unsatisfactory that there are only two real possibilities. Either there are no further records and documents at all. In that case, the only inference seems to me, at this interim stage and in the absence of any other explanation, to be that such performance as occurred under the Hamco purchase contract cannot have been part of any genuine trading by Solo. In so far as goods were shipped, they must have been token shipments, which never went to Solo or to Solo's benefit, but were, presumably, either recycled or disposed of in or from Dubai, and not for any purpose of making profit for Solo. Or, if there are further records and documents, their nature and effect is quite uncertain, and Solo is in clear breach of Thomas J's order in not even seeking to obtain and disclose them. Even if Solo's breach of Thomas J's order means that it cannot be said unequivocally that the Hamco contract was not intended for genuine performance, Solo cannot benefit from uncertainty that only exists as a result of its own breach of the court's order. Even on this basis, therefore, there would have to be a trial, if only for some "other compelling reason": see CPR 24.2(b).
72. As it is, I consider that the applicable test is whether Canara has a "real prospect of successfully defending the claim" (CPR 24.2(a)(ii)) by justifying its claim to have avoided the bond. On that basis I consider that the judge was without question correct to hold that Canara does have such a prospect, and to refuse summary judgment. I would accordingly dismiss the appeal on the point on which the judge gave permission to appeal. I would grant permission to appeal on the factual points sought to be raised, but, having heard full argument, dismiss the appeal on those points also.

Security

73. HHJ Hallgarten ordered security for Canara's costs up to and including disclosure of documents in the substantial sum of £80,000. Solo sought permission to appeal against this order. During submissions, it emerged that this order had (by consent before Andrew Smith J) later been substituted by an order for security for costs of this appeal in the sum of £20,000. Mr Downes nonetheless expressed concern that, unless Solo could appeal the original order, Canara might seek to deploy it or rely on it against Solo on some future application for security for the costs of the action. Mr Hunter QC confirmed before us that, although his clients would on any future application outline to the judge the course of events as I have set it out, they would not rely on HHJ Hallgarten's approach or figure. The question of the appropriate quantum of any security would be argued afresh. That being so, there is, in my judgment, no basis on which it would be appropriate for us to consider giving permission on this aspect, and permission should therefore be refused.
74. SIR MARTIN NOURSE: I agree
75. LORD JUSTICE POTTER: I agree and have nothing to add.
ORDER: Appeal dismissed on the point which the judge gave permission to appeal; permission to appeal granted on factual points sought to be raised; appeal on those points dismissed. Application for permission to appeal refused. Costs below to stand; respondents' costs of appeal subject to detailed assessment, payment on account £20,000 within 7 days. (Order does not form part of approved Judgment)