Factual Summary: In what the court described correctly as a "very unusual transaction", the bank issued a series of standbys. In a manner not altogether clear from the opinion, the proceeds were assigned to the assignee. The applicant desired to obtain a loan from the issuer and the standbys were intended to be used to pay insurance premiums for a guarantee of repayment from a third party to the bank. The guarantees were the documents required to be presented by the standbys.

The beneficiary presented documents that conformed on their face but the issuer refused to honor. The issuer claimed fraud, a breach of a duty by the beneficiary to it regarding the acceptability of the guarantee, and set-off against the beneficiary. When the assignee moved for summary judgment, the trial court denied its motion. On appeal, affirmed.

Legal Analysis:

1. Summary Judgment: The assignee urged its entitlement to summary judgment based on "the long standing principles relating to letters of credit being treated as cash." Noting that "[i]t 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", the appellate court concluded, "[w]hen 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 ... ."

2. Fraud: Notwithstanding the absence of "clear evidence" of fraud at the date of presentation, the appellate court indicated that if at a later stage, "the bank can show that the only proper inference is fraud it would be absurd to think that the bank would have judgment entered against it. It would not seem right to hold that since the [issuer] can recover from its customer, it is legitimate to give judgment in favour of the fraudster allowing recovery from the fraudster only at the suit of the customer."

3. Set Off: The appellate court noted that it was "only on the rarest occasions ... that a separate dispute will arise between the bank and the beneficiary, since from the beneficiary's point of view the choice of paying bank is fortuitous, and it is only in the rarest cases that there will be any antecedent banking connection between them that could give rise to such a dispute." Since the amount was liquidated and arose out of the sum transactions, the appellate court ruled that "the case in favour of a right of set-off seems to me overwhelming."



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.