Article

Factual Summary: Buyer/Applicant and Broker/Beneficiary contracted for the production of 660,000 light bulbs for USD 763,725.50 DDU. The contract specified that Broker/Beneficiary would supply the details which produced the bulbs under a license, and that Buyer/Applicant would be allowed of the manufacturer to inspect the products before shipping to the final destination. Buyer/Applicant obtained a LC subject to UCP600 for payment that was transferable. The LC did not require production of an inspection certificate. The LC was partially transferred to Manufacturer by a nominated bank.

Subsequently, Buyer/Applicant requested that the LC be amended to require presentation of an inspection certificate and a written statement by Buyer/Applicant releasing goods for shipment.

Broker/Beneficiary did not consent to amendment. Broker/Beneficiary emailed Buyer/Applicant to establish a meeting place for inspection of the goods, having previously stated on 25 or 26 October that failure to respond by 29 October would be understood to signal that inspection was void. On that date, Buyer/Applicant stated it was "'finalising the modalities of the inspection by early next week,' and that they would inform [Broker/Beneficiary] accordingly." Consecutive emails followed, but by 9 November, Broker/Beneficiary informed Buyer/ Applicant that he had not heard from their agent. On 10 November, Buyer/Applicant asked for the name of the manufacturer and on 11 November, sought an injunction restraining Issuer from paying. On 13 November, the goods were shipped, allegedly without knowledge of Broker/Beneficiary.

Broker/Beneficiary represented to the trial court that no shipment would occur without satisfactory inspection.

On 17 November, an ECOTRANS bill of lading issued, showing Transferred Beneficiary as consigner. According to the bill of lading, the goods were "stated to be consigned to the order of [Issuer]" with Buyer/ Applicant as the notify party. Subsequently, Broker/ Beneficiary presented documents to Nominated Bank. Issuer claimed that the documents showed 11 discrepancies. There was then a re-presentation. Standard Bank refused this presentation as well.

Buyer/Applicant alleged fraud and sought injunctive relief. The trial court granted the injunction, which was affirmed on appeal. On reference to the Privy Council, an appeal was allowed and the injunction reversed.

Legal Analysis:

1. Standard of LC Performance

The trial judge ruled, and was affirmed by the Privy Council, that a court "will not intervene to stop payment under an irrevocable [LC]...that, subject to the fraud exception, the paying bank must pay under a [LC] provided only that the documents presented to it conform to the formal requirements of the [LC]. The bank is not concerned with any underlying dispute between the parties." In reaching its conclusion, the trial judge cited with approval Bolivinter Oil SA v. Chase Manhattan Bank NA, which provided that, "The unique value of [a LC] is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank's customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met."

2. Fraud Exception

The trial court ruled, and was affirmed on appeal, that "an injunction should only be granted to restrain a bank from paying under a [LC] where the fraud exception applies and the bank is aware of the fraud." The Privy Council affirmed the trial court's statement of the law, but criticized the trial court for its failure to clearly articulate the legal test for fraud. The trial court ultimately concluded that a bank is not required to investigate allegations of fraud, but that it is the client's responsibility to produce evidence that fraud has been committed.

The trial court judge concluded that the test for fraud was whether the man making the statement made it without care to its truth or falsity. Applying this standard, the trial court concluded that a court cannot enjoin or prohibit payment under a LC "if all the conditions ha[ve] been complied with and that it is only in the case 'where there is fraud on the part of the beneficiary which is to the knowledge of the bank that the court will interfere.'"

The trial court found that "[Buyer/Applicant] had raised "a serious prima facie arguable case that there might be an attempt to defraud it which must be left to the competent court or to the arbitrator to determine as provided for in the contract." The Judge concluded on this basis that the balance of convenience "tilted heavily in favor of [Buyer/ Applicant] ... [until] [Broker/Beneficiary]...has been cleared on the maxim of [from a dishonorable cause, an action does not arise.]"

The appellate court affirmed the trial court, "but [according to the Privy Council] went somewhat further," holding "that the contract required 'the lamps be manufactured by Philips or under license by Philips in the Republic of China.'" The appellate court concluded that Broker/Beneficiary should have been estopped from drawing on the LC, "in view of (a) commitment it took in the presence of the Bank not to claim payment under the [LC] unless verification of the lamps had taken place at the factory to the satisfaction of [Buyer/Applicant] before the shipment; and (b) its shiftiness to name the factory where the lamps were to be manufactured and its inability to arrange for inspection at the factory before shipment."

The Privy Council rejected the trial judge's test for injunction, which required a court or arbitrator to determine the issue of fraud on the merits, and then grant or deny the injunction on the balance of convenience. Instead, the Privy Council held that the test for an injunction "cannot be quite the same as at a trial and that the test at the interlocutory stage." The test preferred by the court is "whether it is seriously arguable that, on the material available, 'the only realistic inference that is [the beneficiary] could not honestly have believed in the validity of its demands on the performance bonds' and that the bank was aware of this fact." The Privy Council further concluded that, "it must be clearly established at the interlocutory stage that the only realistic inference is (a) that the beneficiary could not honestly have believed in the validity of its demands under the [LC] and (b) that the bank was aware of the fraud."

3. Transshipment and Identity of Consigner

Buyer/Applicant submitted to the trial court that Broker/Beneficiary had misled it by causing the goods to be shipped from Singapore instead of China from a consignor who was unknown to Buyer/Applicant. The Privy Council noted that LC "expressly permitted transshipment," and concluded that the goods were shipped in China and transshipped in Singapore, both of which were permitted by the LC.

4. Decision Based on Witness, not Documents

The Privy Council criticized the trial court for basing its decision "not so much...upon the documents presented to [Issuer] as upon the view he took of the representations made to the court by Mr. Dookhee," an agent of [Broker/Beneficiary]. The Privy Council ruled that it was more likely than not that Mr. Dookhee believed his statements to be accurate, because there was no evidence that he knew that the goods in question had already shipped.

5. Knowledge of Broker/Beneficiary

Weighing the credibility of Broker/Beneficiary's agent, Mr. Dookhee, the Privy Council noted that, "Mr. Dookhee had spent a good deal of time and effort into trying to arrange a time and place for inspection without any very satisfactory response from the [Buyer/Applicant]. Moreover, there was no requirement in the [LC] that it was [Broker/ Beneficiary] which was to ship the goods; so it is far from incredible that Mr. Dookhee did not know that shipment had taken place, especially since the first bill of lading was dated 17 November, which was two days after the hearing before the judge on 15 November."

6. No Basis for Fraud Exception

Following evaluation of the documentary evidence, the court concluded that there was "no possible basis upon which the fraud exception could apply, whatever the test."

7. Injunction Not Warranted on Contractual Basis

The Privy Council also determined the judgment of the appellate court went too far. Privy Council ruled that because the appellate court's decisions "depend upon an analysis of the true contractual position between [Broker/Beneficiary] and [Buyer/Applicant], they cannot form a proper basis for the grant of an injunction against [Issuer]."

8. Amendment of LC

The Privy Council found it striking that neither court considered whether Issuer had agreed to an amendment in the LC. In order for such an amendment to be valid, it "would have to be agreed by [Issuer]." The court's decisions were predicated on the understanding Broker/Beneficiary "dishonestly gave undertakings to the court which it had no intention of honouring." There was no evidence that Issuer agreed to an amendment to the LC, and the court accepted Issuer's representation that it was not put on notice of any fraud and was aware only of a contractual dispute between the parties.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.