The Gazette 1986

g a z e t t e

s e p t e m b e r 1986

case being made on behalf of the plaintiffs was (1) that

except in regard to the billion egg contract, there had

been no recent complaints or disputes; (2) documentary

evidence before the court established that there had

been full compliance with each contract; (3) Agromark

had agreed that, the billion egg contract apart, they

owed the plaintiffs a very large sum of money. The

Court of Appeal rejected each of these points. The

Court found that there was "considerable doubt"

concerning the first point. They were not satisfied on

the material before them that the documentary evidence

established that the plaintiffs had completely complied

with their obligations under the contracts. Nor was

there any document recording the agreement referred to

in the third point which the plaintiffs advanced. Several

unsuccessful attempts were made by the plaintiffs to

obtain a reply from Agromark to the charge that they

were guilty of wrongful repudiation of contract and that

their claim under the performance bonds was manifestly

fraudulent. The court found that there was a "wholly

understandable reason for Agromark not being

prepared to answer in any detail the claim made against

them by the plaintiffs." The court considered that it

would not draw "any strong inference of guilt from

Agromark's silence" in circumstances where each

contract between the plaintiffs and Agromark was made

and to be performed in Iraq, was subject to Iraqi law

and contained an Iraqi exclusive jurisdiction clause.

The Court's remarks concerning the balance of

convenience are particularly worthy of noting. It held

that even if they had concluded that the plaintiffs had

established a good arguable case on the issue of liability

and had decided the appeal purely on the issue of the

balance of convenience, they would have found against

the plaintiffs in the result as the bank demonstrably had

assets available to meet a claim for damages. In the light

of the authorities referred to above, it is difficult to see

how a plaintiff will succeed in establishing that the

balance of convenience lies in favour of granting interim

or interlocutory injunctive relief.

Summary

The current legal position regarding performance

bonds may be summarised as follows:

1. The contractual obligations arising under perfor-

mance bonds or guarantees payable on demand are

separate from and not dependent upon those existing

under the sale contract between seller and buyer. This

so-called principle of autonomy applies in a claim

against a bank, and may also apply in a claim against a

beneficiary.

'2. Once the beneficiary has made a demand within the

time and in the form, if any, stipulated in the bond or

guarantee, the bank is, apart from clearly established

fraud on the part of the beneficiary, of which the bank

has notice, under a duty to pay strictly in accordance

with the terms of such bond or guarantee.

3. A lack of honest belief on the part of the

beneficiary when apparently giving notice of default

niay be evidence of fraud.

4. All banks in the chain owe a duty of care to the

party ultimately liable at the end of the chain (the

customer), not to pay out on a performance bond if on

the information then available to the bank there is clear

evidence that the beneficiary's demand is fraudulent,

because it is the party at the end of the chain who may

have to bear the ultimate loss.

5. Where the bank pays in accordance with its obliga-

tion on foot of a guarantee, the seller's only remedy

may be to reclaim the moneys disbursed from the

beneficiary under the sale of contract. However, if the

bank pays in breach of its obligation on foot of the

guarantee, the sellers may well be able to resist any

demand on foot of counter-indemnities furnished by

them to the bank; or, alternatively, to recover the

amount involved from the bank as damages for breach

of contract between customer and bank.

6. For the purpose of the fraud exception the relevant

time for establishing knowledge of fraud on the part of

a bank is not when the demand for payment is first

made but prior to actual payment. The bank's

knowledge that the demand made by the beneficiary on

the first demand bond is fraudulent must be proved to

exist prior to actual payment.

7. The evidence of fraud must be clearly established.

Normally, the uncorroborated allegation of the plaintiff

will not be sufficient. Strong corroborative evidence,

usually in the form of contemporary documents,

particularly those emanating from the beneficiary may

be required. In general, for evidence of fraud to be

clear, it may be necessary to prove that the beneficiary

was afforded an opportunity to answer the allegation

and that he failed to provide any or any adequate

answer in circumstances where one could properly be

expected.

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