Article

Factual Summary: To pay for a shipment of flannelette pajamas to be resold to a major retailer, intermediate Buyer caused a commercial letter of credit to be issued in favor of Seller. Among other documents, the LC required presentation of a "supplier inspection certificate" to be signed by a principal of the Applicant.

Prior to shipment, a dispute occurred between the Applicant and Beneficiary which led to an exchange of communications and a cancellation of the order on the part of Applicant. There was evidence that suggested Seller was aware that Applicant "considered the goods to be defective." It is unclear from the opinion when these defects were discovered.

Notwithstanding the cancellation of the order, Seller shipped the goods and presented documents under the LC including a "supplier inspection certificate" that purported to bear the signature of Applicant's principal.

Claiming that the signature was forged, Applicant sought an interlocutory order restraining payment on the letter of credit from Issuer to Beneficiary. The trial court, citing the likelihood of fraud, granted the order.

Legal Analysis:

1. Injunction, Standard; Fraud: The court agreed with Applicant's formulation of the standard to be used in determining whether injunctive relief should be awarded. Citing prior Australian cases, the trial court determined that injunctive relief was available where the party seeking relief could show a "strong prima facie case of fraud." The court quoted Staunton, L.J. in Group Joshi Re v Walbrook Insurers & Co Ltd, 1 WLR 1152, 1160 (1996), which stated that:

[t]he short answer to this question is to be found in the judgment of Ackner LJ in the United Training Corporation case: 'Have the plaintiffs established that it is seriously arguable that on the material available the only realistic inference is that [the beneficiary] could not honestly have believed in the validity of its demands on the [letter of credit]?'

2. Signature, Forgery: Applicant asserted that the signature on the supplier inspection certificate presented under the LC was forged. The court stated that

on the uncontradicted evidence presently before the court [the supplier inspection certificate] was not signed by [Applicant's principal] but was purportedly signed by him. Someone, one assumes for the purposes of this application, has forged [Applicant's principal's] signature. There is no evidence before the court that [Beneficiary] was involved in that forgery although if the question simply was, is there a serious question to be tried, one might think that the circumstances would automatically raise that question.

3. Underlying Contract; Injunction: The court also noted that there had been a dispute regarding the underlying contract which led to its cancellation by Applicant. It also indicated that there was evidence to indicate that Beneficiary was aware of the cancellation. The court noted that the action of Beneficiary in shipping the goods and drawing on the LC under these circumstances was a factor to be considered in determining whether injunctive relief should be granted.

4. Injunction: Considering the evidence before it, the court concluded that "it is the only realistic inference open that the [Beneficiary] could not honestly have believed in the validity of its demands [and] it is at least seriously arguable that the only realistic inference is that the [Beneficiary] could not have honestly believed in the validity of its demands on the letter of credit." Concluding that the "balance of convenience" weighed in favor of Applicant, the court granted the application to extend injunctive relief.

5. Unpublished Opinion: This opinion is published in an unofficial reporter and is technically an unreported judgement.

Comments:

1. Apart from the conclusion that the judge was convinced that an extension of injunctive relief was warranted, this opinion, surprisingly brief for a court in the tradition of English jurisprudence, leaves several questions to be answered. Perhaps the least is whether one is correct in making the logical assumption, as was done here, that the Plaintiff/ Intermediate Buyer was the Applicant for the LC.

2. More significant is the test formulated by the court based on Australian precedent. Formulations of standards for LC fraud are no substitute for a systematic jurisprudence which assures that all aspects of the issue are taken into account. Otherwise, a formula, however meaningful it may sound, will depend for its application on unstated assumptions.

3. There are two issues that the court took into account in reaching its decision, the forgery and the contract dispute.

4. The court started with the forgery and indicated that its conclusions were reinforced by the contract dispute. It is here that the opinion is most problematic for LC jurisprudence. The second ground, the contract dispute, is not a basis for interrupting the obligation of Issuer to honor a compliant presentation. Whether or not the goods were defective, whether or not Buyer had cancelled the contract, and whether or not it was entitled to do so are all issues that, absent a material failure on the part of Beneficiary to perform under the LC, would not justify injunctive relief. Certainly, nothing that the court recites rises to that level. Rather than strengthening its conclusion, this evidence weakens it, giving the impression that the parties are engaged in a dispute and that the applicant is seeking to reallocate the risk for which it contracted by agreeing to an LC, namely that the beneficiary would hold the money (and that the applicant would have the goods such as they were) pending resolution of the contractual differences on the underlying contract.

5. As to the first issue, the forged signature, it is much more serious. A forged signature would justify injunctive relief and excuse the issuer from honoring a presentation by the beneficiary. The question would then be whether or not there was sufficient evidence of a forgery to warrant a full trial on the issue before allowing payment on the LC. Here, the opinion leaves one wondering. It would appear that the only evidence before the court was that the signature was not that of the purported signer. It was this evidence that lead the court to assume "for purposes of this application" that someone had forged the signature. Perhaps this conclusion was justified. It may well have been that an agent of the applicant or another person with real or apparent authority signed his signature in the normal course of the applicant's business. In this respect, one would be interested in how and in what condition the beneficiary obtained the document. Absent such evidence, the inference of forgery would be warranted.

6. One would have preferred some details regarding this aspect of the case in the opinion instead of the details about the contract dispute. It is the presence of the latter and absence of the former that makes this opinion somewhat unsettling.

[JEB/fkd]

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