Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373
.pdfD em a nd in Breach o f an Agreement w ith the Account Party
2. Nature of the Exception
A. Scope
9 .1 4 The scope of the exception appears rather limited compared to the other exceptions dis cussed in this work. First, the exception only applies where the term relied on is a negative stipulation. Secondly, it only applies where the term relied on is an express term. Thirdly, the exception cannot be relied on by the account party to restrain the bank from making payment to the beneficiary. And, fourthly, it cannot be relied on by the bank as a ground on which to refuse to honour the beneficiary’s demand. It may be helpful to consider each of these points further.
(i) Negative stipulations
9.15 Since in general an injunction is normally available as a remedy for a breach of contract only where the term is a negative stipulation,14 the exception is available only where the express term relied on in the underlying contract is a negative promise. In the Sirius case the Court of Appeal did not emphasize the point that an injunction against the beneficiary will nor mally be available only where the term relied on is a negative promise. However, the court emphasized the fact that there was an express term restricting the circumstances under which Sirius would be entitled to demand payment under the letter of credit. And in stating that the court would have granted an injunction, the Court of Appeal relied on the well-known passage in the judgment of Lord Cairns, L.C. in Doherty v. Allman,'5a case concerned with an injunction to restrain the breach of a negative covenant. In other words, the injunction against the beneficiary of a letter of credit or demand guarantee, who has promised not to demand payment under the instrument in certain circumstances, is based on the normal principles relating to the enforcement by injunction of negative stipulations in contracts. And courts in some jurisdictions, such as Australia, have expressly stated that the exception is limited to negative stipulations in the agreement.1617
(ii) Express terms
9.16 In the absence of an express term in the underlying contract, the court is highly unlikely to imply a term to the effect that the beneficiary would not draw on the instrument unless certain conditions are satisfied. For example, where a letter of credit is issued in respect of an international sale of goods transaction, although it is the normal expectation that the seller would call on the credit as payment for the goods supplied, the English courts will not imply a term into the underlying contract of sale to the effect that the seller’s right to draw depends on whether he is entitled to payment under the underlying contract. In Deutsche RuckversicherungAG v. Walbrook Insurance Co L td 17 Phillips J. said that it would be wrong
14 Lumleyv. Wagner (\Z52) 1 De. GM & G 604; Doherty v. Allman (1878) 3 App. Gas. 709, 720.
15(1878) 3 App. Gas. 709 at 719-720, as explained in Insurance Co v. Lloyd's Syndicate [1995] 1 Lloyd’s Rep. 272 at 277.
16e.g. Reed Construction Services Pty Ltd v. Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158•, Australian Winch and Haulage Co Pty Ltd v. Walter Construction Group Ltd [2002] FCA 1181, concerned with a perform
ance bond, where Allsop J. stated that for an injunction to.be granted on this ground the applicant ‘must iden tify some contractual provision of a negative kind providing the foundation for the legal restraint upon the [beneficiary] in exercising unquestioned rights it has against the [issuer] of the bonds’.
17 [1995] 1WLR 1017 at 1030.
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II. State o f the Exception in English L aw |
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for the court to ‘imply a term into the underlying contract that the beneficiary will not draw |
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on the letter of credit unless payment under the underlying contract is due’. A claim is not |
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itself a breach of the underlying contract if made in good faith.’8 Similarly, in the case of a |
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demand guarantee, if the beneficiary, such as a buyer, makes a call on the guarantee because |
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he honestly but mistakenly believes that the goods supplied are not ofcontract quality his call |
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on the guarantee is not a call made in breach of the contract of sale.198 Thus, where a perfor |
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mance bond required the beneficiary to give notice of default, the Court of Appeal rejected |
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the argument that there was an implied term in the underlying contract that the beneficiary |
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would only give notice of default if there was a reasonable and just cause for doing so.20 |
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The exception is therefore available only in a case where the term relied on in the underlying |
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contract is an express term. In the Sirius case the Court of Appeal noted that the underlying |
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contract was unusual’21 or ‘a variant of the more typical’ case22 because it contained an |
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express term restricting the circumstances in which Sirius would be entitled to demand |
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payment under the letter of credit. To the extent that the agreement contained express con |
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tractual restrictions on the circumstances in which Sirius would be entitled to demand pay |
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ment, the Court of Appeal considered that the letter of credit in this case was ‘less than the |
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equivalent of cash’.2324So, it is because the term relied on in that case was not an implied term |
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that the Court of Appeal said that a court would have granted an injunction to restrain the |
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beneficiary. |
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(Hi) Not available against the bank |
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It would appear that in English law the exception can only be deployed against the benefi- |
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ciary, who is a party to the underlying contract or other agreement containing the relevant |
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express terms. The court will not restrain the bank from making payment to the beneficiary |
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in accordance with its undertaking under the instrument. Thus, the account party may not |
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rely on the beneficiary’s breach or threatened breach of the underlying agreement as a ground |
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to restrain the bank front making payment to the beneficiary if the bank wishes to do so. If this position is maintained then in certain cases the practical value of the exception may be very limited since a bank may be entitled to make payment to the beneficiary even though the beneficiary will be committing a breach of contract (or even a breach of a court order) in demanding or receiving the payment. In Bolivinter Oil SA v. Chase Manhattan Bank,1* for example, the underlying transaction was a contract of affreightment by which Bolivinter Oil (Bolivinter) agreed to transport a cargo of oil for General Company of Homs Refinery (Homs) from Iran to Syria. Bolivinter agreed to procure a demand guarantee in favour of Homs. At the request if Bolivinter, Chase Manhattan Bank (Chase) instructed the Com mercial Bank of Syria (CBS) who issued the guarantee to Homs, in return for an irre vocable letter of credit issued by Chase in favour of CBS. Disputes arose between Bolivinter and Homs concerning the performance of the underlying contract. The parties entered into a second contract on similar terms, except as to the freight and amount of oil carried.
18 Deutsche Ruckversicberungv. Walbrook Insurance Co [1995] 1 WLR 1017, 1030 (letters of credit).
19Tradigrain v. State Trading Corporation o fIndia [2005] EWHC (Comm) at [20].
20The State Trading Corporation o fIndia v. ED &FM an (Sugar) Ltd [1980] Com. LR 235. Discussed above at para 5.42.
21[2003] 1 All ER (Comm) 865 at [30].
22Ibid., at [27].
23Ibid.
24[1984] 1 Lloyd’s Rep. 251.
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D em a n d in Breach o f an Agreement w ith the Account Party
Bolivinter alleged that negotiations followed and it was agreed, inter alia, that the guarantee would be released upon the arrival of the last vessel carrying oil to Syria under the second contract. Homs denied that such an agreement was reached but contended that even if it did agree to release the guarantee, its agreement was procured by duress in circumstances that its oil was wrongfully being withheld with very serious commercial consequences for its busi ness. After arrival of the last vessel Homs demanded payment under the guarantee on the ground of breaches of the first contract. Bolivinter obtained ex parte injunctions restraining Homs from demanding payment under the guarantee, restraining CBS from making pay ment under the guarantee and restraining Chase from paying CBS under the letter of credit. At the inter partes hearing, Staughton J. discharged the injunctions against the banks but maintained the injunction against Homs. The injunction against Homs was maintained because the judge со ncluded that there was an agreement that the guaranteewould be released upon the arrival of the last vessel under the second contract and that Homs acted fraudu lently in demanding payment under the guarantee after the arrival of the last vessel.
9.19 The Court of Appeal upheld the judge’s decision on the ground that the banks did not have sufficiently clear evidence of fraud by Homs, since if Homs genuinely was of the view, whether rightly or wrongly, that it was not bound by the release agreement because its con sent was procured by economic duress then although its demand under the guarantee may constitute a breach of the agreement (if there was a valid agreement), it was not a fraudulent demand. Sir John Donaldson M.R., who delivered the judgment of the court, observed that ‘[i] t is clearly debatable whether Homs have acted fraudulently in making their claim on the CBS guarantee or whether they have merely acted in breach of their release agreement with Bolivinter’.25 Since that was all that the banks knew, it was held that such knowledge was quite insufficient to justify an injunction against the banks on the ground of fraud. Thus it appears to have been assumed that even if Homs had acted in breach of a valid release agree ment with Bolivinter that was not a ground for Bolivinter to obtain injunctions against the banks. For this reason the banks were not restrained from making payment.
9.20 However, the court noted that the injunction restraining the beneficiary from demanding or receiving payment created a problem because the banks already had notice of it. In those circumstances they may be in contempt of court if they made payment in accordance with the beneficiary’s instructions thereby aiding and abetting the breach of the injunction against the beneficiary. In other words, a bank may be indirectly bound to refuse payment even though a court has refused to grant a direct order prohibiting the bank from making payment. This was considered to be unsatisfactory and to deal with the problem the Court of Appeal made it clear that nothing in the injunction granted against Homs was in any way to inhibit the freedom of the issuing bank to make payment in accordance with its con tractual obligations under the performance guarantee if it was minded to do so.26 This free dom of the bank to make payment if it wished to do so made it easier for the beneficiary to demand and receive payment in breach of both its agreement with the account party and the injunction of the court. In cases where, as in the Bolivinter case, both the beneficiary and the issuing bank are in a foreign country, it is very likely that this will happen. To the extent that the bank is not affected by this exception, the protection that it affords the account party is not as extensive as account parties would wish.
25Ibid., at 256.
26Ibid., at 257.
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II. State o f the Exception in English Law
(iv) Not a defencefor the bank
The exception is only available to the account party or other third party with whom the |
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beneficiary has an agreement restricting the beneficiary’s right to demand payment under the |
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instrument. It cannot be relied on by the issuer (the bank), who is not a party to the relevant |
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underlying transaction or other agreement. The doctrine of privity of contract precludes the |
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bank from relying on the fact that a demand, which complies with the requirements of the |
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instrument, has been made in breach of an agreement to which the bank is not a party.27 This |
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is an important difference between this exception and the other exceptions, since in the case |
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of the other exceptions (fraud, nullity, recklessness, unconscionability, and illegality), where |
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the exception is available, the bank is entitled to rely on it in proceedings between the bank |
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and the beneficiary. |
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B. Standard of proof |
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At a full trial it must be established that the demand is or will be in breach of an express term |
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of the underlying contract or some other agreement between the beneficiary and the account |
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party. It may be expected that at the interlocutory stage, such as an application for interim |
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injunction, the standard of proof required should be the lower standard of a ‘seriously argu |
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able’ case, by analogy to the standard in the case of the fraud exception.28 But this appears |
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not to be the case. In the Sirius case the Court of Appeal said that an injunction would have |
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been granted because the account party did not have only a seriously arguable case. They had |
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‘positively established’ that the beneficiary was not entitled to demand payment under |
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the letter of credit.29 This was interpreted in PerrnasteelisaJapan KKv. Bouyguesstroi,30a case |
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concerned with a performance bond, as requiring the higher standard of ‘positively estab |
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lished’ case. In that case Ramsey J. said that although the Court of Appeal indicated that a |
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court might grant an injunction where there is an express term in the underlying contract |
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restricting the circumstances in which the beneficiary can draw on a letter of credit ‘and |
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where it is positively established that the [beneficiary] was not entitled to draw down, the |
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same will not apply where there is only a serious, arguable case to that effect. Otherwise, the |
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commercial effectiveness of letters of credit would be eroded’.31 And on the facts of that |
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case the learned judge refused to grant the injunction sought because there was ‘only a seri |
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ously arguable case’ that the call on the performance bond was in breach of the terms of the |
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underlying contract.32 |
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However, it is submitted that it is not entirely clear that in the Sirius case the Court ofAppeal |
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stated that the standard of proof required is that of a ‘positively established’ case. It is arguable |
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that the Court of Appeal was simply stating that on the evidence available in that case the |
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account party had not merely satisfied the required standard o f‘seriously arguable’ case but |
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had actually gone further since on the evidence they had positively established that the ben eficiary was not entitled to demand payment. In other words, in saying that the account party had positively established the case, the Court of Appeal was merely appreciating the
27Unless the bank is entitled to rely on the agreement under the provisions of the Contract (Rights of Third Parties) Act 1999.
28See discussion at paras 5.71 to 5.74 above.
29[20031 1 All ER (Comm) 865 at [30].
30[2007] EWHC 3508 (QB).
31Ibid., at [50].
32Ibid., at [51].
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D em and in Breach o f an Agreement w ith the Account Party
strength of the evidence in that case rather than laying down the standard of proof required. This interpretation of the statements of the Court of Appeal has two advantages. First, it makes the standard required for interlocutory application lower than that required at a full trial, in keeping with ordinary principles. Secondly, it secures harmony in the standard of proof required for the fraud exception and the underlying contract exception since in both cases the required standard would be a ‘seriously arguable’ case. Moreover, the standard of ‘seriously arguable’ case has been adopted by courts in Australia.33 If the Court of Appeal wanted to enunciate a standard that is different from the well-known ‘seriously arguable’ case standard that applies in the case of the fraud exception it might have used clearer language to state the difference.
III. EXPERIEN CE OF SOME O TH ER
COUNTRIES
9 .24 The experience in some other jurisdictions shows that different positions have been adopted concerning the underlying contract exception. Whereas in England there is a shift in judicial opinion towards acceptance of this exception, although there is no case in which an injunc tion has been granted on this ground, in Australia the courts have been applying the excep tion for almost two decades now. And more recently the exception has also been applied by courts in other countries, notably Scotland and Malaysia. But the trend towards acceptance is by no means universal. In the USA, for example, the exception has no place under the Uniform Commercial Code (UCC). It may be helpful to examine the experience in Australia before considering the authorities in other jurisdictions.
1. Australia
A. Exception available
9.25 The present position in Australia is that courts other than the High Court of Australia have now accepted that ‘[tjhere is an exception to the principle of autonomy where there is an underlying contract between the applicant for the guarantee and the beneficiary which restricts the beneficiary’s power to demand payment under the guarantee’.3435 The court can intervene on this ground to restrain a beneficiary from demanding payment under a guarantee where the making of the demand is or will be in breach of a term in the underlying contract restricting the beneficiary’s right to demand payment, although the demand is or will be a complying and valid demand which, if made, the bank will be bound to honour. One of the earliest cases in which an injunction was granted on this ground by an Australian court is Pearson Bridge v. State RailAuthority}5There, a construction contract required the
33e.g. Rejan Constructions Pty Ltd v. Manningham Medical Centre Pty Ltd (formerly Sovereign Gardens Pty L,td) (Supreme Court ofVictoria, 20 December 2002, Byrne j.).
34Lane-MuUinsv. Warrenhy Pty £fe/[2004] NSWSC 817 at [53]. See also Clough Engineering Ltd v. Oiland
NaturalGas Corporation Ltd [2008] FCAFC 136 at [77]; Reed Construction Services Pty Ltd v. Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158, 164.
35 (1982) 1 Aust Construction LR 81.
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III. Experience o f Some O ther Countries |
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contractor to provide certain security for due and proper performance of the contract. Clause |
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15.5 then provided that |
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if the principal becomes entitled to exercise all or any ofhis rights under the contract in respect |
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of the security, the principal may convert into money the security that does not consist of |
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money, ihe principal shall not be liable for any loss occasioned by such conversion. |
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Although this clause is positive in form, Yeldham J. concluded that in substance it was a |
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negative stipulation which defined the only circumstances in which the beneficiary could |
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call on the security. He granted injunctions preventing the beneficiary from making the |
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demand under the security on the ground that there was a serious issue to be tried about |
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whether the circumstances justifying a call had been satisfied. So too, in Reed Construction |
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Services Pty Ltd v. Kheng Seng (Australia) Pty Ltd36 there was a clause in the underlying con |
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tract stipulating that the guarantee shall be ‘available’ to the beneficiary in certain specified |
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circumstances. Austin J. held that the effect of the clause was to limit what would otherwise |
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be the beneficiary’s absolute entitlement to call on the guarantee. He granted an interlocu |
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tory injunction restraining the beneficiary from making or continuing any demand for |
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payment under the guarantee because there was a serious issue to be tried whether under the |
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underlying contract the beneficiary had become entitled to make a call. Injunctions have |
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been granted on this ground in other cases.36738 |
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The case usually cited as authority for this exception in Australia is the decision of the High |
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Court of Australia in Wood Hall Ltd v. Lite Pipeline Authority}* There, the underlying con |
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tract was for the construction of a pipeline. The performance guarantee was a suicide type |
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which gave the beneficiary an unqualified right to payment on demand. The account party |
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argued that the beneficiary had no right to make a demand under the guarantee because the |
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account party was not in breach of the underlying contract. The High Court of Australia |
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rejected that contention and held that the beneficiary was entitled to make his demand |
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under the guarantee even though: (a) the demand was made when performance of the under |
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lying contract was almost complete, and (b) the demand was made in order to put financial |
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pressure on the account party so that a dispute between the beneficiary and the account party |
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arising from the underlying contract could be settled more advantageously to the beneficiary. |
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It was held that there was no justification to qualify the clear and unqualified words of the |
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guarantee by which the bank was to pay unconditionally and on demand. |
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However, Stephen J. said that if the underlying contract had contained some qualification |
9.28 |
upon the beneficiary’s power to make a demand under the performance guarantee, ‘the |
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position might well have been different’.39 The majority did not express a view on this |
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point.40 Yet, Australian courts below the High Court have relied mainly on the statement of |
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36Supreme Court of NSW, 20 November 1998, Austin J.
37e.g. Selvas Pty Ltd v. Hansen & Yuncken (SA) 1‘ty Ltd (1987) 6(4) ACLR 36; Tenore Pty Ltd v. Rolleystone Pty Ltd (Supreme Court of NSW, 14 September 1990, Giles J.); Barclay Mouilem Construction Ltd v. Simon
Engineering (Australia) Pty Ltd (1991) 23 NSWR 451; Rejan Constructions Pty Ltd v. Manningham Medical Centre Pty Ltd (formerly Sovereign Gardens Pty Ltd) (Supreme Court ofVictoria, 20 December 2002, Byrne J.).
38(1979) 141 CLR443.
39Ibid., at 459.
40Gibbs J., with whom BarwickCJ. and Mason], agreed, said (at 452) that it was unnecessary to consider the point.
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D em a nd in Breach o f an Agreement w ith the Account Party
Stephen J. as the basis for judicial intervention where the call on the guarantee is in breach of a negative stipulation in the underlying contract.41
B. Comparison with the English exception
9.29 The way the exception has been applied in Australia is similar to the exception recognized by the English Court of Appeal in the Sirius case. In both jurisdictions the exception is only available where there is a specific term in the underlying agreement (or other agreement between the beneficiary and the applicant) which restricts the circumstances when the beneficiary would be entitled to demand payment under the instrument. Restraining relief against the beneficiary is not available on the basis of this exception if a demand is not in breach of such a term.42 Secondly, in both jurisdictions the exception applies only in the case of negative stipulations in the underlying agreement.43 And, thirdly, the exception is not a basis for restraining relief against the bank44 and is not available to the bank as a ground for refusing payment in accordance with its obligation under the letter of credit or demand guarantee.45
9.30 Although the exception recognized in the Sirius case is similar to that which the Australian courts have been applying, there are a number of differences between the two in terms of scope, the standard of proof and the extent to which the court has a discretion in deciding whether to grant an injunction. In terms of scope, in many of the Australian cases the excep tion is stated as applying not just to express terms but also to implied terms.46 This contrasts with the position of English law where injunctive relief on the basis of an implied term appears to have been ruled out. By limiting the exception to express terms only the English exception is kept within narrow confines and so is likely to escape from some of the difficul ties involved in a wide exception which includes implied terms.47
9.31 Secondly, with regards to the standard of proofrequired for an interim injunction, at first the Australian courts adopted the general low standard of ‘a serious issue’ to be tried about whether restrictions or conditions in the underlying contract had been satisfied.48 However, more recent authority appears to suggest that the standard required by the Australian courts
41 e.g. Pearson Bridge (NSW) Pty Ltd. v. State R ailAuthority (NSW) (1982) 1 Aust Construction LR81; Selvas Pty Ltd v. Hansen Yuncken (SA) Pty Ltd (1987) 6 Aust Construction LR36; Barclay Mowlem Construction Ltd v. Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR451; TransfieldPty Ltd v. Fuller-EL Smith (Pacific) Pty Ltd&Deutsch Bank AG (NSW Supreme Court, 9 May 1997, BaintonJ.); Bachmann Pty Ltd v. ВНР PowerNew Zealand Ltd [1999] 1 VR 420.
42Fletcher Construction Australia Ltd v. VarnsdorfPty Ltd [1998] 3 VR 812; Malaysia H otel (Australia) Pty Ltd v. Sahemo Pty Ltd (1993) 11 BCL50; Bachmann Pty Ltd v. ВНР Power New Zealand /,fe/[1999] 1 VR420; GECM arconi Systems Pty Lad (t/a EASAMSAustralia) v. ВНР Information Technology Pty Ltd [2003] FCA 50, at [719\\Hughes Bros Pty Ltd v. Telede Pty L td( 1989) 7 BCL 210, 215.
43Pearson Bridge (NSW) Pty Ltd v. State R ail Authority (NSW) (1982) 1 Aust Construction LR 81; Reed
Construction Services Pty Ltd v. Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158.
44See, however, Tenore Pty Ltd v. Rolleystone Pty Ltd (Supreme Court ofNSW, 14 September 1990, Giles J.) where the bank was restrained from making payment in proceedings in which the bank was also a party.
45N EI Pacific Ltd v. Cigna Insurance: Australia Ltd (Supreme Court ofNSW, 29 August 1991, Giles].).
46e.g. Australian Winch and Haulage Co Pty Ltd v, Walter Construction Group Ltd [2002] FCA 1181; Reed Construction Services Pty Ltd v. Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158. In Fletcher Construction
Australia Ltd v. VarnsdorfPty Ltd [1998] 3 VR 812, 826-827, where CallawayJ.A. argued that the court should not be quick to find implied restrictions. See discussion in para 9.43 below.
47See discussion in para 9.43 below.
48e.g. Pearson Bridge (NSW) Pty Ltdv. State RailAuthority (NSW) (1982) 1 Aust Construction LR 81; Selvas
Pty Ltd v. Hansen Yuncken (SA) Pty Ltd (1987) 6 Aust Construction LR 36;/. H. Evans Industries (NT) Pty Ltd v. Diano Nominees Pty LtdandA nor (Supreme Court of Northern Territory, 30 January 1989); Barclay Mowlem
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III. Experience o f Some O ther Countries |
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is the higher standard of whether it is ‘seriously arguable’49 that the account party will be able |
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to show at trial that a demand will be in breach of restrictions in the underlying contract. By |
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contrast the English courts appear to require the even higher standard of a ‘positively estab |
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lished’ case. This has the effect of raising the evidential hurdle which an applicant in England |
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would have to overcome. It therefore restricts the availability in practice of the remedy offered |
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by the exception. |
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Thirdly, whereas the courts in Australia apply the balance of convenience test in the normal |
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way in the exercise of their discretion, it would appear that under English law the court has |
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very little discretion and the balance of convenience test is not applicable or is applicable only |
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to a limited extent.5051The result will be that once the account party can show that the benefi |
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ciary’s demand is in breach ofa negative stipulation in the underlying contract, an injunction |
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will normally be available under English law even though the account party has shown no |
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loss, whereas in Australia the position appears to be the reverse in that even if the account |
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party has established that the beneficiary’s demand is in breach of contract, restraining relief |
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will normally not be granted unless the applicant can show irreparable damage. |
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The overall position appears to be that in Australia the broad basis of the exception (breach |
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of express as well as implied terms) and the lower standard of proof which favour the claim |
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ant are counterbalanced by a discretionary power exercised through the balance of conve nience test which favours the defendant beneficiary, since the claimant is required to show that he will suffer irreparable damage if the injunction is not granted. By contrast under the Sirius exception of English law, the narrower basis of the exception (no implied term) and the higher standard ofproofare obstacles in the way of the claimant but the compensation is that once these hurdles are surmounted injunctive relief will normally be available even where there is no damage, save in exceptional cases.
2. Other Jurisdictions
A. Scodand
In Scotland the exception has not only been recognized in judicial statement, it has been 9.34 applied in Peak Well Management Ltd v. Globalsantafe Drilling UK Ltd5' where the benefi
ciary of a standby letter of credit was restrained from demanding payment under it on the ground that the demand was in breach of the underlying contract. By a written contract the parties agreed that Globalsantafe Drilling (the beneficiary) would supply a mobile drill ing rig to Peak Well Management (the account party) for the purpose of drilling some wells in the North Sea. The contract required the account party to procure a standby letter of credit which was issued by a bank. A dispute arose between the parties, and the account party applied for an interdict preventing the beneficiary from demanding payment under the standby letter of credit. The contention was that under the underlying contract the benefi ciary had a right to make a demand only in respect of any unpaid invoice for which the
Construction Ltdv. Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR451; TransfielclPtyLtd v. Fuller-FL Smith (Pacific) Pty Ltd drDeutsch Bank AG {NSW Supreme Court, 9 May 1997, Bainton J.).
49Rejan Constructions Pty Ltd v. Manningham M edical Centre Pty Ltd (formerly Sovereign Gardens Pty Ltd)
(Supreme Court ofVictoria, 20 December 2002, Byrne J.).
50See discussion in paras 10.33 to 10.37 below (Chapter 10).
51[2006] ScotSC 3.
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account party had not given a notice challenging the invoice and that in this case such a notice had been given so that the beneficiary had no right to demand payment in respect of the invoice in question. The beneficiary argued that since fraud was the only exception, in the absence of fraud the account party had no basis for the interdict. However, the court rejected this contention and held that the question whether the beneficiary was entitled to make a demand for payment depended upon the terms of the underlying contract between the parties. In other words, the question was whether if the beneficiary made an application to the bank for payment under the letter of credit it would be in breach of its contract with the account party.52 And, as it was held that such a demand would have been in breach of contract, the interdict was granted against the beneficiary.
B.Singapore and Malaysia
9.35The courts in Singapore have not directly relied on this exception, although in certain cases where restraining reliefhas been granted on the ground of fraud or unconscionable conduct, the account party’s complaint has been, in effect, that the beneficiary was not entitled to demand payment under the instrument because a condition precedent in the underlying contract had not been fulfilled. Thus in one case,53 where the underlying contract was for the sale of equipment, restraining relief was granted to prevent payment to the buyer under a performance bond where the buyer had failed to open a letter of credit which, under the agreement, was a condition precedent to the buyer’s right to demand payment under the bond. The court said that opening the letter of credit was ‘a condition precedent to [the buyers’] right to call the performance bond. And they failed to fulfil the condition precedent. Accordingly it was eminently just and convenient to restrain a party from taking advantage of his own wrong’.54 However, it was also held that the buyer’s demand was fraudulent or amounted to unconscionable conduct as being utterly lacking in good faith. So, although the case indicates that restraining relief may be available where a demand is in breach of a condition precedent in the underlying contract, it is not a clear authority for the proposition that a court in Singapore would grant restraining relief in the absence of fraud or unconscio nable conduct on the sole ground that the demand is in breach of a condition precedent in the underlying contract.
9.36However, in Malaysia the exception was applied in Daewoo Engineering & Construction Co
Ltd v. The Titular Roman Catholic Archbishop o fKuala Lumpur55 where the court restrained a beneficiary from demanding payment under a demand guarantee on the sole ground that the demand was in breach of the underlying contract between the beneficiary and the account party. The guarantee was issued to fulfil one of the conditions imposed by the beneficiary on the account party in consenting to the installation of ground anchors on the beneficiary’s land which was adjacent to a project which was being constructed by the account party as the contractor for a third party. The underlying agreement between the beneficiary and the account party required a guarantee payable on demand ‘subject to’ a number of conditions. However, the conditions were not contained in the guarantee that was issued. When a dis pute arose and the beneficiary demanded payment under the guarantee the account party applied for an injunction on the ground that the beneficiary had failed to follow the terms of
52Ibid., at [24].
53Kvaerner Singapore Pte Ltd v. UDL Shipbuilding (Singapore) Pte Ltd [1993] 3 SLR 350.
54Ibid., at 353.
55[2004] 7 MLJ 136.
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IV. Evaluation
the underlying agreement before making the demand. It was held that as it was pursuant to the terms of the underlying contract that the guarantee was issued any demand on the guar antee must be in compliance with the terms of the agreement. An interim injunction was granted against the beneficiary because there was a serious issue to be tried as to whether the demand was in breach of the underlying agreement and the balance of convenience favoured granting the injunction.
C. USA
The position under the UCC seems to be directly opposite to that in jurisdictions such as 9.37
Australia and Scotland where the underlying contract exception has been applied by the courts. Under the UCC injunctive reliefis not available against the beneficiary on the ground that the demand for payment under a letter of credit is in breach of the underlying contract with the account party. Article 5—110(a)(2) of UCC provides that ‘[i]f its presentation is honoured, the beneficiary warrants . . . to the [account party] that the drawing does not violate any agreement between the [account party] and beneficiary or any other agreement intended by them to be augmented by the letter of credit’. However, this warranty is only given if the beneficiary’s presentation under the letter ofcredit has been honoured. Therefore, as the Official Comment56 makes clear, the bank cannot rely on this breach of warranty in order to refuse payment and the applicant cannot rely on it in order to refuse to reimburse the bank. For the same reason the account party cannot rely on a breach of the warranty in order to obtain an injunction to restrain the beneficiary from making a demand for payment. As the warranty is only given after honour, breach of it can only occur after honour. Consequently, the remedy for breach of the warranty is damages rather than an injunction.
IV. EVALUATION
It has been seen that there is no English decision where the court has refused to grant an 9.38 injunction restraining the beneficiary from demanding payment under a letter of credit or performance bond even though the demand is held to be in breach of a negative stipulation
in the underlying agreement between the beneficiary and the account party. And there is now judicial statement at the level of the Court of Appeal stating that the court can grant an injunction in such a case. As a matter of legal policy, it is submitted that, although there are some well-founded policy objections that may be raised against recognition of the under lying contract exception, on balance, the reasons in favour of recognition outweigh the countervailing reasons against it.
1. Reasons in Favour of the Exception
The first reason is that the exception should be accepted on policy grounds as a useful 9.39 device to combat the serious problem of abusive calls. The account party should be empowered to protect himself from abusive calls by suitable provisions in the underlying agreement. The court should, as an exception to the independence principle, intervene to
56 Para [1].
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