The Gazette 1986

g a z e t t e

s e p t e m b e r 1986

held further that if the circumstances were not such as to

justify the grant of a

Mareva

injunction (it will be

recalled that the judge below held that they were not)

then the judge below erred in attempting to freeze the

proceeds of the performance bond. Accordingly, he

allowed the appeal.

Although both Eveleigh and May L.J. agreed on the

result, both allowing the appeal, there is a remarkable

difference of opinion in their judgments concerning the.

situation in which a dispute arose between the seller and

the buyer out of the underlying contract and this dispute

extended to the bond facility. Here, i.e., as between

buyer and seller, Eveleigh L.J. was prepared to admit

certain defences arising from the underlying contract,

the avoidance of the underlying contract and a total

failure of consideration, in addition to that of fraud. In

such circumstances, in his view, the seller might be

entitled to restrain the buyer from making use of the

performance bond, i.e., from making a call upon it.

May L.J. on the other hand simply applied the principle

that the bond was equivalent to cash in hand and that,

as a matter of law, the defendants were entitled to

demand payment of the bond and that the bank was

bound to pay. It is submitted that May L.J.'s judgment

is more consistent with the authorities and is to be

preferred to that of Eveleigh L.J.

The English Court of Appeal gave judgment in two

actions a few months later in

United Trading Corpora-

tion S.A.

-v-

Allied Arab Limited and Others; Murray

Clayton and Others

-v-

Rafidain Bank and AnotherF

The plaintiffs, three associated companies, applied for

injunctions and other relief as a result of what they

alleged to be fraudulent calling in of certain

performance bonds. The plaintiffs carried on trade with

Iraq by supplying foodstuffs to the Iraqi government

controlled State Establishment for Agriculture Products

Trading, Baghdad ("Agromark"). Their evidence was

that since 1979 their trade with Agromark consisted of

19 contracts for the supply of eggs and other foodstuffs

to a total value of about US$950 million up to the end of

1983. In most cases, the contracts were subject to

standard performance bonds from an Iraqi state bank,

Rafidain Bank. On receipt of the plaintiffs' perfor-

mance bond Agromark would open an irrevocable letter

of credit in favour of the plaintiffs with Rafidain and

thus the sale could ordinarily proceed to completion.

For the purpose of procuring the requisite

performance bond, the plaintiffs did not themselves

make the direct approach to Rafidain. They arranged

through a number of banks (the "Banks"), to instruct

Rafidain to issue the performance bond. In

consideration of the Banks complying with this request,

the plaintiffs would give them a written indemnity by

which typically the plaintiffs agreed to indemnify the

bank against all losses, etc., which it might incur by

reason of giving such instructions and agreed that

"any demand upon you by [Rafidain] for the

payment of any sums of money in pursuance of

your having instructed them as aforesaid shall be a

sufficient authority to you for your making any

such payment and it shall not be incumbent upon

you to enquire whether any such amount is in fact

due."

The indemnity also provided that all matters arising

out of it were to be construed and determined according

to English law. Rafidain itself always required a counter

indemnity from the bank at whose request it issued the

performance bond. One of the standard terms of such

counter indemnity provided:

"in case of implementation, any claim or claims

will be paid to us on first demand, despite of any

contestation between principals and beneficiaries."

The Iran-Iraq war caused the plaintiffs and

Agromark difficulties in carrying out the contracts and

disputes arose, including disagreements stemming from

the performance bonds. On occasion, it was necessary

to use ports of delivery other than those designated in

the contracts. There had been delays, diversions and

disruptions in the administration of the contracts at the

Iraqi end. As a result, the plaintiffs claimed their

billings under the contracts had not been properly

considered by Agromark and they were owed substan-

tial sums under the various contracts. Agromark

insisted on the bonds being renewed over and over

again, and asked the plaintiffs to transfer all the perfor-

mance bonds relating to all the other contracts to one

particular contract, the contract for the sale of one

billion eggs. The plaintiffs refused. A few days later, on

3rd June, 1984, Agromark began to call them in. The

plaintiffs took the view that the demands made on the

performance bonds, other than those relating to the one

billion eggs contract were manifestly fraudulent in that

they related to contracts which were performed many

years earlier and in respect of which no complaint had

been made in the intervening years. They feared that, if

their own accounts came to be debited as a result of

these demands, they would have no hope of recovering

the equivalent sums from Agromark or its bankers,

Rafidain.

Actions were commenced against a number of the

Banks and Rafidain Bank and, upon interlocutory

applications being made by the plaintiffs, injunctions

were granted restraining the Defendants from paying on

the bonds. The High Court discharged the injunctions

granted against the Banks on the grounds that there was

insufficient evidence of fraudulent demands by

Agromark. Appeals were taken in both actions. The

judgment of the Court of Appeal on the two appeals

was delivered by Ackner L.J. on 17 July. The Court

concentrated in giving its judgment on the second

action.

It was "common ground" that the courts could only

interfere by way of injunction "in order to prevent the

alleged breach of a legal duty owed by the defendant to

the plaintiff or by way of ancillary relief required by a

party to proceedings who asserts a cause of action

against the other party".

Ackner L.J., therefore,

considered three potential causes of action asserted by

the plaintiffs, one of which was in negligence.

It was

accepted by the respondents that Rafidain (and the

Banks

mutatis mutandis)

would arguably be liable to the

plaintiffs in negligence if they complied with a demand

made by Agromark which, to the knowledge of the

bank at the time of payment, was fraudulent. In the

opinion of Ackner L.J.:

198