The Gazette 1986

GAZETTE

JULY/AUGUST 1986

held that the defendant had been right to refuse to

honour the plaintiffs' credit.

This was the first reported occasion when an English

court had held that a bank need not honour a letter of

credit which appeared to be true on its face but which

contained a false statement by a third party. If the

judgment of the Court of Appeal had been allowed to

stand, it would have introduced a new exception to the

general rule that a bank must pay. However, the

traditional principles were reasserted on appeal from the

Court of Appeal. It was held by the House of Lords,

reversing the decision of the Court of Appeal, that a

fraud to which a beneficiary was not a party would not

entitle a banker to refuse payment. The speech of Lord

Diplock, with which the other Law Lords agreed,

rejected the broad proposition that a confirming bank

was not under any obligation, legally enforceable

against it by the beneficiary of a documentary credit, to

pay to him the sum stipulated in the credit against

presentation of documents, if the documents presented,

although conforming on their face with the terms of the

credit,

nevertheless

contained

some

inaccurate

statement of material fact. He also rejected a narrower

proposition that, if any of the documents presented

under the credit by the beneficiary contained a material

representation of fact that was false to the knowledge of

the person who issued the document and was intended

by him to deceive persons into whose hands the

document might come, the confirming bank was under

no liability to honour the credit, even though, as in the

instant case, the persons whom the issuer of the

document intended to, and did, deceive included the

beneficiary himself.

Thus, the attempt to expand the fraud exception

failed. And it may be argued by analogy that the fraud

option may not be relied on to escape payment on a

performance bond where the beneficiary is not party to

the fraud.

The Hibernia Meats case

It was against this background that Keane J. enter-

tained an application for an interlocutory injunction in

Hibernia Meats Limited

-v-

Ministere de L 'Agriculture

et de Revolution Agraire and Trinity Bank LimitedJ

September 1983, the plaintiffs, meat exporters, entered

into a contract for the sale of meat to the first named

defendant. The amount of meat which they agreed to

supply was 1,500 tonnes and delivery was to be effected

in Algeria in three shipments on specified dates. The

contract required the plaintiffs to give a guarantee of

"good execution" of the contract in a sum representing

5% of the total amount of the contract. This was done

by means of a guarantee from an Algerian Bank in the

required amount (US$118,500) in favour of the buyers.

In order to obtain this guarantee, it was necessary for

the sellers to procure the issuing by the second named

defendants, an Irish bank, to the Algerian bank of the

customary matching performance guarantee. The latter

guarantee was expressed to be "payable on first written

demand without further formality".

The plaintiffs experienced difficulties in meeting the

agreed delivery schedule. In the affidavits grounding

their application to the High Court they referred to a

revision of the delivery dates specified in the contract

and in relation to which it was deposed by one of the

directors of the plaintiffs that he was assured by the

buyers that such revision would not result in penalties

for delay in deliveries under the contract. Despite this,

however, the sellers were notified by the Irish bank that

the guarantee had been called in by the Algerian bank

on the ground of delay and weight shortages in the

shipments and the sellers claimed injunctive relief.

Keane J. accepted the legal principles enunciated by

Kerr J. in the

Harbottle

case and Lord Denning M.R. in

the

Edward Owen

case, i.e., that the machinery of

irrevocable obligations assumed by banks are regarded

as collateral to the underlying contract between " t he

merchants at either end of the banking chain" and that

the only exception is when there is a clear fraud of which

the bank has notice.

He observed that it was very difficult to understand

how the buyers could have

bona fide

sought to call in

the guarantee on the grounds of delay. But he stated

that that was "very f a r " from saying that the sellers had

established a clear case of fraud which would entitle the

Irish bank to repudiate its obligations under the

guarantee. He issued the following warning:

"It must be said . . . . that business firms who

enter into contracts of this nature requiring the

provision of unconditional guarantees by banks

take the risk that they may have no remedy against

their overseas customers other than an action in

the foreign tribunal; and no remedy at all against

the bank because of the unconditional nature of

the guarantee."

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FRE TR IAL

173