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Case No: A3/2000/0221;2000/5272;2000/5331;2000/5332;2000/6338
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL)
Mr Justice Timothy Walker
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 20 July 2000
B e f o r e :
LORD JUSTICE SCHIEMANN
LORD JUSTICE WALLER
and
LADY JUSTICE HALE
- - - - - - - - - - - - - - - - - - - - -
|
SAFA
LTD
|
Appellant/
Claimant
|
|
-
and -
|
|
|
BANQUE DU CAIRE
|
Respondent/
Defendant
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr J Bogle (instructed by Grunfeld Davis for the Appellant)
Mr R Slade (instructed by Norton Rose for the Respondent)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE WALLER:
Introduction
This is an appeal from a decision of Timothy Walker J given on 21st
October 1999 by which he refused to give summary judgment in favour of the
claimant who claimed as assignees of a beneficiary under two letters of
credit.
The facts
Safa Limited (Safa) are the assignees of two letters of credit opened by Banque
Du Caire (the Bank) on 3rd July 1998, but amended on 30th
July and 3rd August. The beneficiary of the letters of credit and
the assignor was Paul Group International Insurance Brokers/T.L.Dallas (London)
Limited (PGI) a Lloyds Insurance broker. Under the letters of credit as
amended the Bank undertook to pay in one case a sum not exceeding US$
5,550,000, and in the other a sum not exceeding US$ 3,700,000 "available for
payment against the presentation of Financial Insurance guarantee in the name
of Banque Du Caire El Dokki branch to Barclays Bank PLC at 54 Lombard
Street....by Merrion Reinsurance Company Ltd, this guarantee to be
authenticated from [various bodies] and this financial insurance guarantee will
be: deed of guarantee for non-payment of loan's instalments with the following
text:
Whereas, we acknowledged that [the Bank]...has agreed to grant its client Aboul
Fotouh Establishment (the borrower) a loan amounting to [in the one case
$30,000,000, and in the other $20,000,000] with the terms mutually agreed upon
for which borrower issued cheques numbering 7 representing the instalments for
payment on said loan ...which said cheques are drawn and detailed in the
enclosed schedule...which is deemed to be integral and complementary part of
this deed....
"We, Merrion Reinsurance Company Ltd., (the guarantor). located at --
commercial registry no -- of the year issued in the city of hereby
declare that our liability is absolute, unconditional and irrecoverable now or
in the future for whatever reasons, to secure and guarantee, in our capacity as
joint guarantor vis-a-vis Banque Du Caire, Branch Dokki (lender), all
obligations of Aboul Fotouh Establishment (borrower) with the bank. and thus,
in the one case $30,000,000, and in the other $20,000,000, and we hereby
undertake to pay the lender bank any amount or amounts representing the value
of any of the cheques for the instalment mentioned in the enclosed payment
schedule in the event of non-payment by the borrower of the value of the cheque
or cheques on their maturity dates for whatever reasons, and thus, immediately
and upon first written request from the lender bank sent by fax confirmed by
registered mail to our address as above mentioned, without consideration to any
objection or dispute from the borrower or anybody whatsoever." "
The letters of credit as amended [see C1 169 and 178] continued
"1. The only document is the deed of guarantee...
2. Payments will be made against receipt of the deed of guarantee....
3. The total amount in [one case US$5,550,000, and the other US$3,700,000]
paid as follows:- ten equal monthly payments of [in the one case $550,000, and
the other $370,000] starting with receipt of the deed of guarantee for
non-payment of loan's instalments".
It will be apparent, as the judge himself remarked, that these letters of
credit are somewhat unusual on their face. Nothing has been made by Mr Slade
for the Bank of the fact that the sums due were to be paid in instalments which
might be thought to be unusual, but other features which are unusual are that
the letters of credit are undertaking to pay a sum to an insurance broker
against the obtaining of financial guarantees of which the Bank itself was to
be the beneficiary, in connection with a loan which the Bank was itself
negotiating with its customer. Even without looking at any surrounding
documents the inference would appear to be that the Bank is promising to pay
money for the obtaining of the financial guarantees. Indeed it is not
unimportant that the relationship between the beneficiary in this case and the
Bank is clearly not covered simply by the terms of the letter of credit. PGI
were acting as brokers. It is submitted by Safa that PGI were acting for the
borrower (AFE), but the financial guarantee they were obtaining was in favour
of the Bank, and that seems to me at least prima facie to demonstrate that they
were acting as brokers for the Bank.
Indeed the relationship between PGI and the Bank was such that Mr Bogle, for
Safa, in my view very properly felt constrained to accept that, if the Bank had
paid money under the letter of credit to the brokers PGI, but the Bank had
decided not to lend money to its customer, and had cancelled the guarantee from
Merrion without Merrion ever having been on risk, the Bank would have had a
claim against the broker for the return of the moneys. Mr Bogle suggested that
the broker might not have to return brokerage or any remuneration agreed to be
paid to the broker for obtaining the financial guarantee, but without debating
that issue, the very proper concession demonstrates the unusual nature of the
relationship of the Bank and the beneficiary in this case, and demonstrates
that that relationship, I emphasise again, is not simply governed by the terms
of the letters of credit.
Background
The history of the matter appears to be as follows and I shall indicate where
disputes lie.
As is already apparent, AFE were desirous of borrowing money from the Bank. To
obtain those loans they were prepared to offer by way of security, financial
guarantees. PGI were insurance brokers who were to find insurers prepared to
offer such guarantees. Merrion were selected as those insurers. PGI would not
have recommended Merrion and PGI assert that they informed AFE that Merrion was
not to be recommended. They informed AFE, so it is alleged, that Merrion were
not in the security list of Lloyds. The Bank do not accept that AFE were told
these things, indeed the Bank allege that they were informed by their customer
Mr Fotouh that he had had excellent reports on Merrion from PGI. [see para 39
of Mrs Sapur C2 490]. This may be in dispute but it is certainly not alleged
by Safa that PGI ever told the Bank that it did not recommend Merrion. It
seems that references from bankers, solicitors and accountants were obtained by
AFE and passed to the Bank, and the Bank made its own inquiries of Citibank,
but it is not suggested that the Bank discovered the poor rating of Merrion.
AFE applied to the Bank for the opening of a first letter of credit (not the
subject of these proceedings) naming Merrion as the issuer of an insurance
policy and also at this stage naming Merrion as the beneficiary of the letter
of credit. At some stage PGI became the beneficiary. This letter of credit
undertook to pay $1,950,000, $1,250,000 within five days of receiving the
"complied documents", and $350,000 on 1st July 1998, and $350,000 on
1st August 1998. A financial guarantee was presented under the
letter of credit and the Bank paid the sums due. Unknown to the Bank, PGI had
instructed Barclays Bank to discount the letter of credit, and required
$1,053,000 to be paid to Merrion, $1,500 to be paid to Tower Risk Management (a
subsidiary of Merrion), and $600,000 to a Mr M. Shakir Ahmed [C2-296]. There
was a balance which presumably represented PGI's brokerage.
An instruction to distribute the proceeds of the two letters of credit the
subject of these proceedings included an instruction to make payments to Mr
Ahmed. Before the judge the Bank's case was that PGI were obtaining
dishonestly more under the letters of credit than they required for the payment
of premium to Merrion. Indeed, part of their case by a statement put in very
late before the judge was that PGI had represented to AFE that they were not
even taking brokerage on the deal, and that PGI were dishonestly obtaining all
moneys which were in excess of that which was required to pay premium. Safa,
having produced evidence that PGI were to be remunerated (see C3-648), the Bank
have not pursued that point on appeal. On the appeal Safa have sought to put
in statements from representatives of PGI, Mr Towey and Mr Sterry. They assert
that the payments to Mr Ahmed were payments made on the instructions of AFE
through agents of AFE. As Mr Towey states "As far as I was concerned the
surplus was not my property and neither that of PGI and I had to transfer it to
wherever AFE wished. Neither I or PGI were benefiting from this
surplus."[C3-544]
In June 1998 the arrangements were made for the issue of the further letters of
credit the subject of this action. Once again Merrion were named as the
providers of the financial guarantees. The credits were issued originally on
3rd July 1998, but amendments were made on 30th July and
3rd August. There are certain features emphasised on behalf of Safa
or the Bank.
First, Safa points to the fact that Mrs Sapur in her evidence for the Bank
suggests that she "objected vehemently about the idea to secure financial
guarantees by means of a letter of credit" and that Mr Fotouh (AFE) "dictated
it to us".[C2- 492]
Second, AFE lodged as security for the two letters of credit the full amounts
due to be paid under them following which on 3rd July 1998 the Bank
approved the issue of the same.
Third, as Safa would emphasise, only thereafter was the premium agreed with
Merrion. There is no documentary evidence of precisely what premium was agreed
or when, but in Mr Towey's statement that was not before the judge he says that
agreement was reached on 30th July 1998. [C3 -547]. That it should
be said was prior to the second amendment.
Fourth, it is Safa's case that a Mr Hamid and Mr Gamal were agents of AFE and
that they knew what premium had been negotiated with Merrion being parties to
that negotiation, that they knew thus that the sum payable under the letters of
credit exceeded the premium due and indeed that it was they that gave
instructions as for the distribution of the surplus to Mr Ahmed. Mr Towey says
in a statement not before the judge "Mr Hamid came to my offices on
30th July 1998, and requested that I instruct my bankers to transfer
the surplus of the Second and Third letters of credit to Mr Ahmed's account, as
before. Mr Hamid stated this was the minimum surplus and if I did not
immediately instruct my bank to make the transfer then the proposed transaction
would be cancelled immediately. I recall that he stood over me while applying
a great deal of pressure."
Fifth, on 5th August 1998, the Bank refunded the funds covering the
value of the letters of credit to AFE. The judge was informed otherwise on the
summary judgment application which is a matter about which Safa make serious
complaint. It seems that Mr Slade through inadvertence so informed the judge
but Safa's real complaint is that a representative of the Bank was present and
should have known the truth. The matter was of importance, Safa say, because
it provides the reason why the Bank might seek to escape liability under the
letters of credit in that following the return of the blocked funds they were
no longer secured if they paid out.
The financial guarantee was presented to Barclays on 7th August
1998. The Bank sought authority to pay "without responsibility on their part"
[C2- 341.3], and received such authority but without the last quoted words
[C2-345]. Mr Bogle made something of this point. I do not find it of great
relevance.
It is the Bank's case that at a meeting with Mr Fotouh on 17th
August a decision was taken to reject the guarantees of Merrion. What the Bank
however did was to reject the documents at that stage on the basis that they
were not properly authenticated. [C1-226]. That rejection was beyond the time
allowed under Articles 13 and 14 of the UCP 500.
In Mr Towey's statement (not before the judge) he says that towards the end of
August he was informed by Mr Hamid that there might be a problem in relation to
the Bank approving the loans to AFE as the Bank had some concerns in relation
to Merrion. Some investigation it seems went on to explore whether other
insurers might be available, and investigations as to Merrion's reinsurance
also took place. [see on the latter the letter dated 24th August
1998 at C2-345.1]
Safa suggests that at this stage there were collusive arrangements made between
AFE and the Bank to bring about cancellation of the letters of credit. That
allegation is based on the fact that AFE sent the Bank a draft of the letter it
required from the Bank [C2-347] and which the Bank ultimately sent [C2-349]
stating that the Bank rejected Merrion as "not financially well
established...it is also incapable financially to support issue these types of
guarantees." It does appear that the Bank and AFE were acting at this stage
together to try and negative any liability there might be under the letters of
credit, but it would also appear that the Bank did have concerns about the
viability of Merrion. It was this letter which AFE then sent to PGI under
cover of its letter dated 14th September 1998 in these terms:-
"To : Paul Group International
Att. : Paul Towey
Subject :Insurance Policies Issued By Merrion Reinsurance Co.
Ltd
Dear Paul,
Attached please find a copy of the letter received by us from Banque Du Caire
indicating their refusal of the subject policies based on the high risk
involved related to the financial stance of the issuing company. This decision
was based on thorough investigation conducted by the bank.
Based on this, the bank would be returning the policies back to Barclays Bank
and will be cancelling the letters of credit. However, we are still interested
to conduct business with you, and we have already sent the papers of "New
England Co." to the other banks we are dealing with, to explore the
possibilities for Re-issuing new policies through this company, but to other
banks and not Banque Du Caire. We are awaiting their reply within 2 weeks.
As for the old policy of $ 13,000,000, for which the premium has been paid,
please note that we would like upon receipt of acceptance from the other banks,
to transfer this policy, and the premium, to New England and just to change the
beneficiary from Banque Du Caire to the other banks.
Your Cooperation and understanding would be highly appreciated
Best Regards,
Hossam A. Fotouh
Chairman"
Thereafter occurred the following relevant events
1. On 2nd October 1998 PGI entered into a joint venture for the
purchase of a vessel MV Brandall Viking, Mr Towey says on the basis that PGI
would receive payment under the letters of credit. The joint venture involved
Safa and its beneficial owner Mr Naser Taher, and the collapse of the venture
resulted in the assignments on which Safa brought these proceedings;
2. On 8th October 1998 PGI represented the financial guarantee duly
stamped and authenticated, and as the judge held fully in compliance with the
terms of the letters of credit. On 16th October 1998 they were
rejected on the basis of a note from the Bank "L/cs no longer existing and we
closed our files"
3. Negotiations for the issuing of a fourth letter of credit took place as
between PGI and AFE and AFE and the Bank. In broad terms it is alleged that
agreement was reached between PGI and AFE that the previous letters of credit
would be cancelled; $2m would be paid under the fourth letter of credit subject
to that cancellation and the presentation of an authenticated commitment letter
in the terms of C2-371-1 as follows:-
"To : Al Fotouh Establishment
10-11, 12 Zamalek Club
Giza, Egypt
Mr. : Hossam Aboul Fotouh
We hereby irrevocably undertake to supply an insurance policy against
non-payment guarantees to a finance house of your choice within 8 weeks of
receiving the following documents via a courier pouch.
1 - Consolidated balance sheet for Aboul Fotouh Establishment Group
for 3 years.
2 - Listing of Eng. Hossam shares in various companies.
3 - Feasability study for Lagouna Taba.
4 - Video for Al Fotouh major companies.
5 - Eng. Hossam internet address.
The guarantees will be supplied by an "A" rated insurance company.
The total premium for the guarantees of $ 63m will be $ 9.25m. We will issue a
receipt for $2m as the deposit premium when received from Barclays Bank."
The fourth letter of credit was never in fact issued. Its relevance, however,
so far as Safa is concerned, is to seek to use it to undermine the Bank's
assertion that the second and third letters of credit had expired, and to
demonstrate that as between the Bank and AFE it may now be that AFE is only
liable for $2m because the Bank's failure to issue that credit is what has
exposed it to the difference between $2m and the sums due under the second and
third letters of credit.
So far as the Bank is concerned it points to the fact that even the commitment
letter to be supplied under the fourth letter of credit contemplates $9.25 as
being premium with no suggestion that part payments are due to others.
.
Discussion
The above history demonstrates even further just how integrated the letters of
credit are with a transaction in which the Bank is itself intimately concerned.
The Bank has the role of possible lender. It has the role of beneficiary under
the financial guarantees which will secure that loan if made. The premium for
the guarantee will be paid by virtue of funds to be paid under the letters of
credit. It also seems to me clear, and I did not understand Mr Bogle to
dispute this, that if the Bank had in fact made the loans envisaged by the
words of the financial guarantee above quoted, and if the Bank had paid against
the presentation of the financial guarantee to PGI the sums due, PGI would vis
a vis the Bank have been under an obligation to pay premium to Merrion, and on
the basis of Mr Towey of PGI's statement a further obligation to the Bank's
customer to pay a certain sum to a Mr Ahmed because the money being received
"was not PGI's". All that PGI would have been entitled to retain was a sum in
respect of their brokerage.
It is now accepted that the Bank have not entered into any loan arrangement
with its customer. Merrion it seems has in fact been rejected by the Bank as
an insurer. It furthermore seems to me highly arguable that Merrion in the
result never came on risk. The financial guarantee by its terms seems to me to
contemplate the risk only arising once the Bank has entered into the loan
arrangement contemplated. It is also highly arguable that PGI would not be
entitled to any brokerage, and highly arguable that whatever Mr Ahmed's role
was, no sum was due to him either.
Safa's case is however that they are entitled to the whole of the proceeds
under the letters of credit. They submit that if either the Bank have claims
to be repaid or if by chance contrary to the above Merrion or Mr Ahmed are due
sums, then all such claims should be made hereafter following payment to them
of the total proceeds.
I admit from the outset that the concept of the Bank being forced by a summary
judgment to pay Safa sums which PGI very arguably would have had no right to
retain, is unattractive. The question is whether, as Mr Bogle submits, the
principles now well established in relation to letters of credit bring about
that result.
CPR 24.2
"The court may give summary judgment against a defendant on the whole of claim
if
(a) it considers that -
(ii) that defendant has no real prospect of successfully defending the claim
...; and
(b) there is no other reason why the case or issue should be disposed of at a
trial.."
It will be noted that the word used is "may".
There is no reason to think that the previously established principles in
relation to bills of exchange and of letters of credit or performance bonds
were intended to be altered. Those principles in summary were that where bills
of exchange were issued by reference to an underlying transaction:
(a) if the underlying transaction was as between parties who were not immediate
parties to the bill those transactions are irrelevant;
(b) even if the underlying transactions were as between immediate parties a
claim for unliquidated damages under a contract for the sale of goods did not
afford a defence, nor was it available for a set-off or counterclaim, nor could
it afford a ground for a stay of execution [see Nova Jersey Knit Ltd v
Kammgarn Spinnerei GmbH [1977] 1 WLR 713 negativing Salmon LJ in
Saga of Bond Street Ltd v Avalon Promotions Limited [1972] 2 QB 325 at
327];
(c) between immediate parties a partial failure of consideration might be
relied upon as a pro tanto defence but only when the amount involved was
ascertained and liquidated. [see Lord Wilberforce in Nova Jersey Knit
720 c-d].
The basic rule, so far as letters of credits were concerned, was that they too
must be treated like a bill of exchange. Thus if the documents conformed and
were in order, and the terms of the credit satisfied, the letter of credit was
like a bill of exchange and ranked as cash. Therefore, the English court did
not, for example, impose a stay of execution because foreign buyers had
obtained a foreign attachment order in relation to the underlying contract.
[see Power Curber International Ltd v National Bank of Kuwait SAK [1981]
1 WLR 1233].
The above principles applied so that summary judgment should be available to
those claiming by virtue of bills of exchange and letters of credit because
otherwise the principles are not effective. The court, save in exceptional
circumstances, gave judgment and left the counterclaim to be pursued, and did
not stay execution in the meanwhile. [see Lord Denning MR in Brown Shipley
& Co Ltd v Alicia Hosiery [1966] 1 LLR 668 at 669].
In the instant case the judge has held, and there is no appeal from his
finding, that a conforming document was presented under these letters of
credit, and that the Bank had no right to reject the document as such.
Furthermore, the Bank did not, at the time of presentation of the document,
raise any other defence to payment which could justify non-payment.
By the time of the summary judgment application however the Bank were raising
various defences. First, they sought to establish an arguable case that the
demand made by PGI had in fact been fraudulent. Second, they sought to allege
that arguably PGI were in breach of duty in advising on the credit-worthiness
of Merrion. Third, they alleged that there was an arguable case that PGI had
made representations as to the creditworthiness of Merrion to AFE knowing the
representations would be passed on to the Bank, and that the Bank had relied on
them in entering into the letter of credit transactions. Fourth, they alleged
that they had a strongly arguable case that the Bank had an entitlement to be
repaid by PGI the liquidated sum represented by the sums payable under the
letters of credit because Merrion never came on risk.
The judge ruled that no summary judgment should be entered, and Safa's attack
on that judgment is that the judge has failed to apply the long standing
principles relating to letters of credit being treated as cash.
The above principles do have to be adapted to the new language of the CPR. As
indicated already the word is "may" give summary judgment where the defendant
has no real prospect, and there is no other compelling reason. It seems to me
that so far as bills of exchange and letters of credit were concerned the
authorities held that normally a defence of set-off was not available; it was
only available between immediate parties in relation to liquidated sums. Under
the CPR that principle will continue to apply, in considering whether the
defendant has any real prospect of defending the claim at trial.
Furthermore, in most circumstances that will leave the defendant making a
counterclaim which will be disposed of at a trial, and the fact that a
defendant may have that counterclaim will not normally produce a compelling
reason for the issue that arises on the letter of credit or bill of exchange
not to be resolved on the summary application. It is only if the Bank can
raise an actual defence with a real prospect of success as opposed to a
counterclaim, and/or if it appears as it might in exceptional circumstances
that there is a compelling reason why there should be a trial of the issue of
liability on the letter of credit or bill of exchange that summary judgment
should be refused.
As regards a fraud defence when it is raised by the paying Bank, and where the
Bank had no clear evidence of fraud as at the date of presentation of the
documents, but wished to raise the same on an application for summary judgment,
the matter was dealt with, so far as Order 14 under the previous rules was
concerned, in Balfour Beatty Civil Engineering v Technical & General
Guarantee, (Court of Appeal Transcript 14th October 1999). That case was
concerned with a performance bond and an allegation that the beneficiary had
made a fraudulent demand, albeit it was common ground that on any view the
surety had no evidence of the same as at the date of the demand. What was said
on that occasion was as follows:
"If at the Order 14 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 Bank 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.
However, as it seems to me, whatever the context in which Edward Owen
was decided, [Owen (Edward) Engineering Ltd v Barclays Bank International
Ltd (C.A.) [1978] QB 159 was concerned with an application by the customer
for an injunction to restrain the Bank from paying] it is authority for the
proposition that the Bank or surety is only entitled to refuse to pay on a bond
where it has clear evidence of fraud. The liability of the surety or Bank
cannot, as it seems to me, alter depending on the context. How then can the
absurdity be avoided?
The answer, as it seems to me, is that on analysis if a Bank or surety has a
clear case at the Order 14 stage which it did not have at the demand stage,
that the demand was fraudulent, the Bank has a counterclaim against the
fraudster which it is capable of establishing for the return of the money.
Just to expand on that theme a little. It is clear that simply because after
demand on a bond it turns out that no sum was due from the customer to his
contractor, that does not lead to the Bank or surety having any remedy against
the beneficiary of the bond. The customer who of course must indemnify the
Bank or surety may have a right as against the beneficiary under their contract
but that is all. If however the beneficiary has made a fraudulent
representation to the Bank in order to obtain money under the bond, I cannot
see why in addition to any remedy that the Bank's customer may have (if the
customer has been forced to indemnify the Bank), the Bank does not have its own
remedy directly against the beneficiary. That may be very important in the
context of a case such as the present in which the customer of the surety or
the Bank has gone into liquidation.
Now, coming back to the Order 14 application, and seeing where the above
analysis would lead. 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 that counterclaim is being fought
out. Of course if a defendant is in a position to bring its own Order 14 on a
counterclaim, then if judgment were obtained one would simply cancel out the
other.
If the above is the correct analysis, it seems to me to lead to a sensible
solution which fits with Edward Owen but also produces a just result.
The questions to be asked are:-
1. When the demand was made did the surety or the Bank have clear evidence
from which the only inference to be drawn is fraud? If the answer is no then
prima facie the beneficiary is entitled to judgment.
2. What, on the information now available, is the strength of the surety's
case that the demand was fraudulent?
(a) If the evidence is now clear, then no judgment will be given in favour of
the beneficiary because of the fact that the surety would be entitled to a
judgment for the equivalent sum.
(b) If the evidence is powerful but not quite sufficient to enable Order 14
judgment to be entered in favour of the surety on the basis that the demand was
fraudulent, then either judgment would be entered with a stay of execution or
probably no judgment would be entered at all until what is in effect the
counterclaim had been fought out.
(c) If the evidence is less powerful, judgment will be entered in favour of
the beneficiary, and the surety will be left either to pursue his remedy
against the customer or pursue a claim or counterclaim for reimbursement if so
advised."
Mr Slade was anxious about the use of the words "set-off and counterclaim" in
the fourth paragraph of 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 Order 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.
HSBC v Kloeckner [1989] 2 LLR 323 is also of relevance in the context of
this case..
In HSBC the position was that the Bank had issued a letter of credit in
relation to transactions in which the Bank was also involved. The Bank was
making a claim for $8m in relation to those transactions against the
beneficiary. Part of the argument before Hirst J by the beneficiary was that
the letter of credit was as good as cash and thus the Bank had no right to
set-off its claims under the related transactions. Hirst J said this at 330:-
"The present situation is quite different; it is only on the rarest occasions,
as Mr Havelock-Allan recognised, 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. Moreover, if a beneficiary wished to avoid the nomination of a
particular bank as paying bank he would, as Mr Havelock-Allan recognised, be in
a position to do so before completion of the underlying contract, though I
accept that it is unlikely that he would always be alert to the risk.
Consequently the same policy reasons do not apply to the present problem and
give no justification for a similar restriction.
There is thus nothing in the Edward Owen line of authorities which
compels me to adopt the conclusion sought by Mr Havelock-Allan. I should add
that the statement in Lord Denning's judgment in the Power Curber
case that "no set-off or counterclaim is allowed to detract from (the letter of
credit)", must be interpreted as meaning a set-off or counterclaim by the buyer
against the seller and not one by the bank against the seller, the latter
situation not being under consideration in that case.
There are two striking features of the present case. First, the standby letter
of credit was opened for the specific purpose of financing the liabilities on
the dry cargo transactions, so that it would seem very unjust if the bank were
precluded from enforcing a set-off in relation to the present claims which
arise directly out of selfsame transactions. Secondly, this is a liquidated
set-off, and it would seem to me anomalous that such a set-off should be
unavailable in letters of credit cases, but available against bills of exchange
which, as the judgments quoted above show, are closely analogous in that a bill
of exchange is also virtually equivalent to cash.
Had it been necessary to decide the point I should have been prepared to hold
that there is no principle equivalent to that laid down in the Edward
Owen line of cases that debars a bank setting off against a beneficiary
under a bill of exchange a claim by the bank themselves against that
beneficiary. Given the additional circumstances present here, namely, that the
bank's claim is liquidated and relates to the very banking transactions which
gave rise to the letter of credit itself, the case in favour of a right of
set-off seems to me overwhelming."
Mr Slade also referred us to Clovertogs Ltd v Jean Scenes Ltd [Court of
Appeal Transcript 5 March 1982]. 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.
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.
The evidence
We had before us a great deal of material that was not before the judge. Safa
sought to put in two statements from Mr Towey dated 9th December
1999 and 1st February 2000, one from Mr Sterry dated 1st
January 2000 (both of PGI), and a statement from Mr Naser Taher dated
4th February 2000. The Bank objected to the new material but was
content that we should read it and put in eight witness statements of their own
in response. They desired to put in a ninth statement but there was objection
on the ground of privilege, and thus the full statement was not put before us
but Mr Slade told us that what he wanted to establish from it was that Mr Towey
had said that his statements had been drafted for him by lawyers for Safa.
Safa wanted to put in some further four witness statements including a further
statement from Mr Towey, all dated very shortly before the date that this
appeal came on for hearing. At the hearing Mr Bogle did not persist with his
application to put in this last group of statements albeit in some parts of his
submissions he referred to one or two matters that he said were covered by
them. If those statements had been allowed in the Bank was itself going to
seek to put in further evidence including a handwriting expert to challenge the
authenticity of the signature of Mr Towey. Mr Slade accepted that if the
application to put in those last statements was not pursued he would not be
pursuing his application to put in the evidence of the handwriting expert.
Even at the last minute of the hearing before the Court of Appeal an attempt
was made by Safa to put in a further statement referring to newspaper reports
and conversations which attempted to impugn certain of the Bank's employees,
Mrs Sapur and Mr Abdel Salam, and suggested that Mr Fotouh had been accused of
corruption.
This is a very unusual case. In former days if a defendant had summary
judgment entered against it, it was not uncommon for the Court of Appeal to
allow fresh evidence to be produced, in case that should demonstrate that an
arguable defence was available. It was always unusual to allow a plaintiff to
put in evidence to attempt to reverse a decision granting leave to defend. But
Safa are clearly concerned that if this matter goes to trial it may be beyond
them to put up security for costs ordered by the Commercial Court. Their case
is that in the letter of credit context, they were entitled to summary judgment
and that justice may be denied if they cannot establish that the judge was
faced with an inaccurate picture in the court below.
The difficulty for them is first, that a decision would seem to have been taken
to proceed with the summary judgment application and not request an
adjournment, and prima facie having chosen that course the Court of Appeal will
be reluctant to allow a party to go back on that choice; see Krakauer v
Kratz [1954] 1 WLR 278. Second, and this may have had something to do with
the decision taken at that time, the more material which is put in on a summary
application and the more areas of dispute that arise the more likely it is that
the court will find that a trial is the appropriate place to resolve
matters.
In this instance some pragmatism, as it seems to me, is called for. The
application to put in the evidence dated shortly before the hearing is not
pursued, and it should not therefore be admitted. If it had been pursued its
very lateness would have been a good ground for rejecting it, particularly as
some dispute would have then emerged as to authenticity of the signature of Mr
Towey which this court could not conceivably have resolved. The evidence
sought to be put in right at the conclusion of the hearing should also not be
admitted. Apart from the fact it was hearsay upon hearsay and the Bank had no
opportunity to deal with the same, it did not go to the critical issues on this
appeal.
As regards the other material, there might have been strong grounds for
rejecting it in the light of the stance taken by Safa in the court below, but
it was read, as was the Bank's material in response, and both counsel in their
addresses found considerable difficulty in making submissions without reference
to it, Mr Bogle sometimes referring to what Mr Slade's clients had put in in
response and Mr Slade sometimes wishing to refer to the material put in by
Safa. It would not make practical sense to refuse to admit that evidence
now.
Assignee point
One of Mr Bogle's points was that Safa were an assignee without notice of the
defences which might be raised as against PGI. He was referred to Banco
Santander S.A. v Banque Paribas [Court of Appeal Transcript dated
25th February 2000] He rightly did not pursue the point thereafter.
The position is as recorded as common ground before the judge that Safa can be
in no better position than PGI the assignor.
Defences
I have formed the conclusion, even taking account of the material that was not
before the judge, and taking account of the important principles that apply in
the context of claims under letters of credit, that the Bank has established
that this is not a case where Safa should have summary judgment. My starting
point for so thinking is already foreshadowed in what I have said above. The
history seems to me to demonstrate first that no loans have ever been entered
into, and that very arguably Merrion never came on risk, that PGI were not
entitled to any brokerage, and that whoever Mr Ahmed was he was not entitled to
any payment and thus that even if payment was due under the letters of credit,
the Bank were entitled to immediate reimbursement by PGI. That claim would be
for a liquidated sum, and the connection between the Bank obliged to pay under
the letter of credit and its relationship with PGI its broker for the purpose
of placing the financial insurance was such, that a set-off would be allowed if
the claim were established.
As to the other defences it seems to me that I should say a little because if
they were unarguable they should be disposed of at the summary stage. I should
not however say too much if there is to be a trial.
So far as the fraud defence is concerned, if the Bank's allegations are right,
the complaint is not simply that an improper demand is being made on a Bank
under a letter of credit but that the Bank in this case was being deceived into
believing that what it was agreeing to pay under the letter of credit was
premium to Merrion (from which it is now accepted by the Bank brokerage would
be deducted), whereas in fact it was agreeing to pay that premium plus a
payment to Mr Ahmed.
On the material before the court it seems to me that there is a real prospect
of the Bank establishing that PGI was leading the Bank to think that the
letters of credit were to pay the premium (less brokerage). The role of Mr
Ahmed is unexplained at present but there is also material before the court
which indicates that Mr Ahmed may well be connected to PGI and thus the
recipient of a payment on their behalf to which they were not entitled. The
inter-connection of the letter of credit with the Bank's role as lender and
beneficiary of such policy as PGI were meant to be negotiating on its behalf
would make it unjust if the Bank were not entitled to set up their claim for
fraud against PGI which again would be for the liquidated sum otherwise due
under the letters of credit as a set-off.
The claim for breach of duty, and the claim for misrepresentation are also
arguable. PGI, through Mr Sterry, assert that they were brokers for their
client AFE, but this overlooks the fact that the beneficiary under the policy
was the Bank. It seems to me arguable that PGI had a duty not to place the
insurance with an Insurer that they themselves would not recommend, without the
fully informed consent of the insured. The consent of AFE would arguably not be
enough. It is not suggested that PGI obtained the consent of the Bank.
As regards misrepresentation there is material on which a court could find that
PGI represented to AFE that they had excellent reports on Merrion and that it
was intended that those representations were to be passed on to the Bank for
the beneficiaries under the insurance proposed. 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. Its claim would include a
claim to the return of the premium.
Conclusion
I would dismiss Safa's appeal.
Lady Justice Hale: I agree
Lord Justice Schiemann: I agree that the general principles established
in relation to bills of exchange and letters of credit should continue to guide
the practice of the courts in relation to applications for summary judgment.
The purpose of those principles is to facilitate normal trade and commerce.
However, as appears from my Lord's judgment, the facts of the present case are
most unusual and it is clear that we are not here dealing with a normal
commercial transaction. I am not persuaded that refusing summary judgment in
the present case runs the risk of creating some adverse effect on normal
commercial transactions. The facts cry out for further investigation and it
would not be just to give summary judgment against the Bank.
For the reasons given by my Lord, I also would dismiss this appeal.
Order: Appellant to pay £30,000 on account to respondents; detailed
assessment; leave to appeal refused.
(Order does not form part of the approved judgment.)
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