Article

by Roger Fayers

In an earlier edition of DCInsight, I discussed the commercial court's judgement in Uzinterimpex JSC v Standard Bank Plc.1 The appeal by Uzinterimpex to the court of appeal has now been dismissed. It may be of interest to bankers and practitioners to learn how the aggrieved seller's arguments, which it developed and varied on appeal, were dealt with by the court2.

A complicated transaction

The financing of a commonplace contract for the sale by Uzinterimpex and purchase by AMJ of consignments of cotton involved a number of financial contracts and a complex intertwining of transactions. A brief description of these arrangements is necessary in order to understand the rather complicated submissions made to the court.

The Standard Bank Plc (SBL), as agent for a syndicate of banks under a Facility Agreement, provided pre-export finance to AMJ to enable it to make the advance payment of 90 per cent of the price, some USD 65.6m. SBL made this advance to the seller's bank (the National Bank of Uzbekistan - the NBU). In turn, the NBU issued an advance payment guarantee (APG3) to SBL. This was expressed to be by way of "security for the possible claim for the refund of the advance payment in the event that delivery obligations are not fulfilled". It also provided that the amount of the guarantee was to be automatically reduced by the value of each consignment that was delivered to AMJ. These arrangements should, therefore, have ensured that no cotton was released to AMJ other than against acceptance of documents of title and that as consignments were delivered liability under the guarantee was correspondingly reduced.

What happened next

Accordingly, what should have happened (and with some of the earlier consignments did happen) was this. Uzinterimpex would present conforming documents to SBL under a letter of credit and on the basis of these documents SBL, by tested telex, would "prove" to the NBU that delivery of that consignment had been made. Two things would then happen. The documents would be released to AMJ so enabling it to re-sell the cotton and to pay the proceeds into a "transaction account" at SBL (thus paying off the advance payment facility), and SBL would reduce the amount of the APG by the value of that consignment.

Both parties, however, experienced difficulties in performing their part of the contract and so what actually happened was slightly different. As a consequence of Uzinterimpex's failure promptly to present conforming documents in respect of consignments that were already afloat or in warehouses awaiting shipment, AMJ took steps to obtain the goods without receiving the documents and, with the assistance of SBL, it managed to do so and it resold them4. Disputes continued to arise between Uzinterimpex and AMJ, and eventually SBL made a demand on the APG in the sum of USD 37.7m.

On the same day the amount demanded was paid to SBL by the NBU.

Arbitration proceedings followed and an award was made that entitled Uzinterimpex to recover from AMJ US$8.1m together with interest and costs. However, AMJ went into liquidation and there was no prospect of recovering any part of this award, so Uzinterimpex took an assignment from the NBU of any rights of action that the bank might have against SBL.

Uzinterimpex's grievance

In essence, Uzinterimpex felt that SBL had received the value of the goods twice. It had received it once in the form of the proceeds of the sub-sales made by AMJ (which had been remitted to the transaction account and used to pay off the facility), and once again in the form of a recovery of the price by making a call on the APG for the full amount then outstanding. It felt it had been wrong for SBL to call under the APG to recover payments made in respect of the price of the cotton that its customer (AMJ) had already taken and delivered to third parties. It also felt that it was wrong for SBL to refuse to release to it documents of title relating to the goods still in warehouses once they had been rejected as non-conforming to the letter of credit5.

Uzinterimpex revamps its arguments

Before the appeal court Uzinterimpex raised alternative and varied arguments in support of its claim that there had been a double recovery. These arguments follow:

- That a term to prevent double recovery should be implied into the APG

As eventually formulated, the term contended for was that "the bank [would] account to the NBU (or to Uzinterimpex as its assignee) in circumstances where the bank had received both the proceeds of the guarantee and the proceeds of the cotton to which it related."

The court rejected the implication. It was not necessary in order to give business efficacy to the contract. Moreover, in the court's view, it was essential that documents such as URDG 458 should operate in accordance with terms that appeared on their face. The term contended for here would have the potential effect of imposing on the bank a liability that could not be identified from the face of the documents and which would be very uncertain in its effect. Furthermore, a term linking the scope of the obligations under the APG to the receipt of funds by SBL from other sources (viz the Facility Agreement between AMJ and the syndicate of banks) would be inconsistent with the nature of the instrument itself.

- That on the true construction of the APG, if SBL knew (or had the means of knowing) that AMJ had accepted the goods, whether or not conforming documents had been presented, then the bank was bound to reduce the amount payable under the guarantee by the invoice price of that consignment

As the court observed, this was but another way of seeking to imply into the APG a term to prevent double recovery. So it faced the same difficulties. The court considered that the argument not only sought to re-write the explicit terms of the explicit APG (which were quite clear), but that it would also introduce an element of uncertainty into the documentary mechanism that would be inimical to contracts of this kind.

- That Uzinterimpex was entitled to recover from SBL the funds (or an amount equal to them) that the bank had received from AMJ deriving from the sub-sales of cotton of which AMJ had obtained delivery.

There was no dispute that AMJ had obtained delivery of several parcels of cotton without taking up and paying for the documents, nor that AMJ had remitted the proceeds of these sub-sales to SBL. Uzinterimpex adopted alternative approaches to this submission. The first sought recovery on the basis that the proceeds, if held by AMJ, remained its property or, if held by SBL, were trust property, whilst the second founded the claim on the basis that the proceeds were recoverable from SBL as a constructive trustee.

The court did not consider that the proceeds remained Uzinterimpex's property. When AMJ sold its customers cotton over which it had obtained control, but to which it had not acquired title, the legal title to the proceeds of that sale vested in AMJ itself, although it did hold them in trust for Uzinterimpex. The alternative argument fared no better. The difficulty here was that AMJ (as it was required to do) had paid these proceeds into the transaction account at SBL. So, how were they then to be recovered from the bank?

The court gave two reasons for rejecting Uzinterimpex's right to claim them. First, because the overriding intention of their payment into that account was to transfer the beneficial, if not the legal, interest in them to the syndicate of lenders to AMJ (of which SBL was one); and second, because it was not possible to identify within that account just what funds were derived from wrongful sales and what were not, and in any event no attempt had been made to do so.

The second strand of Uzinterimpex's argument was that SBL had knowingly received funds that were trust property. Since AMJ had received the proceeds of the misappropriated cotton on the basis of its being a constructive trustee for Uzinterimpex, the receipt of those proceeds by SBL was such that the bank itself was then bound to account to Uzinterimpex as a constructive trustee.

Under English law, liability to account as a constructive trustee of trust property (here the proceeds) depends upon receipt of that property otherwise than in a ministerial capacity with the requisite degree of knowledge. Each of these elements was disputed by SBL.

Court's findings

On the former, the court found against SBL. The bank argued that it acted purely as an agent. The court did not accept this. In operating the Facility Agreement, and in particular the transaction account, the bank was dealing with an integral part of the machinery for repayment of the loan made to AMJ and in making payments to AMJ. Moreover, it held the security documents (which included the APG) as trustee for itself and the syndicate banks. It followed that it also held the proceeds of the guarantee as trustee.

Accordingly, the court concluded that when SBL received the proceeds paid into the transaction account, it did so in a capacity which gave it a sufficient interest to render it liable as a constructive trustee, if it had the required degree of knowledge.

On this latter element, however, Uzinterimpex foundered. The test for the requisite degree of knowledge is that the recipient's (SBL's) state of mind must be such as would make it "unconscionable" for it to retain the benefit of the funds. But this needed to be established by evidence.

Uzinterimpex's evidentiary difficulties

Uzinterimpex faced two difficulties in this respect. The first was that the trial judge had rejected all the allegations of dishonesty against the bank and, in so doing, had rejected any suggestion that it had become aware that AMJ was selling cotton to which it had no title. Before the judge no case of SBL's having a clear suspicion that AMJ had no title had been advanced other than in relation to the proceeds of those sales in respect of which SBL had itself counter-signed letters of indemnity or provided releases. But these cargoes, and accordingly the evidence relating to them, had then ceased to be of any relevance because the bank had already settled all the claims in respect of them.

The second difficulty arose from the inaccurate focus of the evidence. For the purposes of this argument it was necessary to consider the state of SBL's mind at the time of each receipt by it of the funds. However, at the trial no attempt had been made to investigate the state of mind of the relevant employees at the time of any particular receipt. Whilst this may not have been surprising given the nature of Uzinterimpex's principal case (viz that the bank made a false statement when it made its demand on the APG), it did mean that there was no evidential basis for asking the appeal court to find that SBL had received any particular funds paid into the transaction account with knowledge of a kind that would make its retention of those funds unconscionable. Nor was there any evidential basis for a finding that it acquired such knowledge before they were distributed.

In the result, Uzinterimpex's claim based on SBL's knowing receipt of trust property failed, as did its submission that the bank had dishonestly assisted in a breach of trust by AMJ.

Roger Fayers' e-mail is r.fayers@ntlworld.com

1."A fraudulent or excessive demand?" - DCInsight, October- December 2007 at page 19; [2007] 2 Lloyds Rep. 187.

2. [2009] EWCA Civ. 819.

3. The APG was subject to URDG 458 and expressed to be construed in accordance with English law.

4. A more detailed description of how this took place was given in the earlier article.

5. This gave rise to a claim against SBL in conversion, but this aspect is not dealt with here.