Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373

D em an d in Breach o f an Agreement w ith the Account Party

enforce by injunction the protection which the account party has negotiated in the underly­ ing contract.

9.40 Secondly, as a matter of principle, if the beneficiary has given an undertaking in the underly­ ing contract not to call on the bond unless certain conditions are satisfied, he should not be allowed to hide behind the independence principle in order to break his promise in the underlying contract. The difficulty is that there are two conflicting contractual rights: the beneficiary’s absolute right under the credit or guarantee and the account party’s right under the underlying contract. The problem is to decide which of the two competing rights should prevail. On the one hand, the independence principle suggests that the beneficiary should be able to enforce his entitlement under the credit or guarantee free from any restrictions con­ tained in the underlying contract. On the other hand, the account party is entitled to judicial protection, by injunction, of his bargained for restrictions in the underlying contract and, if damages are inadequate in the circumstances as a remedy, the court could intervene by means of injunction. O f the two, the right of the account party under the underlying con­ tract should prevail because the letter of credit or demand guarantee was given on the basis of the beneficiary’s promises in that contract concerning the circumstances when he will exercise his right under the instrument. He should not be allowed to abuse his right under the instrument by violating the account party’s right under the underlying contract. It is one thing to say that the account party is not entitled to use disputes about the performance or breach of the underlying contract in order to stop the beneficiary from enforcing the instru­ ment and quite a different matter to say that the beneficiary can agree to express limitations on the circumstances when the instrument is to be enforced and later ignore them.57

2. Some Concerns

9.41 A wider policy concern is that interference on this ground would deprive letters of credit and demand guarantees of their main attraction and would be detrimental to commerce. Since the purpose of these instruments is to put the beneficiary in funds when there is a dispute, they are rightly regarded as equivalent to cash in hand.58 The integrity of the instruments as equivalent to cash depends on the entitlement of the beneficiary to draw down as against the bank and the account party notwithstanding any dispute unrelated to the rights under the terms of the instrument itself.5960Frequent interference by the courts on the grounds of restric­ tions in the underlying contract will destroy confidence in the instruments as equivalent to cash and this will adversely affect commercial activity. For example, a few years after the exception was recognized in Australia, Brooking J. A. observed in Bachmann Pty Ltd v. ВНР Power New Zealand60 that it was becoming more common for the contractor or supplier under a building or engineering contract to seek an injunction against the owner to prevent

57 Leaving the account party with only a claim in damages for breach ofcontract, which the beneficiary may not be in a financial position to answer for.

ss e.g. Wood H all Ltd v. The Pipeline Authority (1979) 141 CLR 443, 445; Fletcher Construction Australia Ltdv. VarnsdorfPty Ltd [1998] 3 VR812, 825; Olex Focas Pty Ltdv. Skodaexport Co Ltd[\99S\ 3 VR380, 134 FLR 331 at 353; Australian Winch and Haulage Co Pty Lad v. Walter Construction Group Ltd [2002] FCA 1181 at [68]; Lane-Mullins v. Warrenby Pty Ltd[2Q0A\ NSWSC 817 at [47].

59Australian Winch and Haulage Co Pty Ltdv. Walter Construction Group Ltd [2002J FCA 1181 at [76J—[77]; Bachmann Pty Ltd v. ВНР Power o fNew Zealand Ltd[ 1099] 1 VR420, 437.

60[1999] 1 VR 420.

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9.43 Another concern which may be raised against the exception based on restrictions in the underlying contract is that it will bring too much uncertainty in this field. This is because in each case the court will have to determine whether there is a negative stipulation in the underlying contract restricting the right of the beneficiary to demand payment under the instrument. If a stipulation is in a positive form the court will also have to decide whether it is in substance negative and therefore within the exception. And if there is a negative stipula­ tion, the court will have to determine whether it is seriously arguable that the demand is a breach of the stipulation. The Australian experience shows that there can be uncertainty at the level of both questions. Thus, in some of the Australian cases, injunctions have been granted on the basis that a clause in the underlying contract imposed a limitation on the beneficiary’s right but in others, sometimes with similar clauses, the courts have construed the relevant clause in the underlying contract as imposing no such limitation on the right under the guarantee66 and so have refused to grant the injunction against the beneficiary.67 Some commentators have questioned the findings in some cases that there were restrictions in the relevant clauses of the underlying contracts.6869In Fletcher Construction Australia Ltd v. VarnsdorfPty L tdb<) Callaway J.A. recognized the ‘doubt attending the line of cases that begins with Pearson Bridge’. He said that most of them are cases where it is question­ able whether it was right for the court to have held that there was a provision in the under­ lying contract prohibiting a call by the beneficiary. Uncertainty of this kind encourages litigation70 which defeats the beneficiary’s purpose of requiring an instrument that is the equivalent of cash.

9 .4 4 However, the problem of uncertainty coulcl be diminished by confining the exception to express stipulations, as already suggested. It is interesting to note that the some Australian judges appear to be heading in that direction. In Fletcher Construction Australia Ltd v. VarnsdorfPty Ltd1' where the Court ofAppeal of Victoria rejected a contention that the right of the beneficiary under a guarantee was qualified by the provisions of the underlying con­ tract, Callaway J.A. expressed the view that the court should be slow to grant restraining relief on this ground on the basis of an implied term. He said that no implication should be made that is inconsistent with the commercial purpose of the demand bond and clauses in the [underlying] contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect’.72

66e.g. Hughes Bros v. TeledePty Ltd (1989) 7 BCL 210,215, where a clause similar to that in BarclayMowlem Construction Ltd v. Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 was given a construction opposite to that given in Barclay Mowlem and other cases.

67e.g. Lane-Mullins v. Warrenby Pty Ltd [2004] NSWSC 817; Australian Winch and Haulage Co LHy Ltd (Administrator Appointed) v. Construction Group Ltd [20021FCA 1181; Fletcher Construction Australia Ltd v.

VarnsdorfPty lad \1998] 3 VR 812.

68 e.g. Hudson on Building and Engineering Contracts (11th ecln, 1995) at para 17,075, expressing the view that the decision of Yeldham J. on this point in Pearson Bridge (NSW) Pty Ltd, v. State RailAuthority (NSW)

(1982) 1 Aust Construction LR 81, ‘does not seem entirely convincing’.

69[1998] 3VR812, 831.

70It is no surprise, therefore, that there have been several cases dealing with this ground of intervention in

Australia where it is recognized.

71[1998] 3VR 812.

72Ibid., at 827.

2 2 6

10

INJUNCTIONS

I. IN TRO D UCTIO N

The independence principle requires chat the courts should not grant an injunction to stop 10.01 payment under a letter of credit or demand guarantee on grounds outside the terms of the instrument,1except on the basis of a recognized exception, for example fraud. An account

party who has a claim based on a recognized exception may require an interim injunction where the circumstances are such that if the beneficiary is allowed to draw down and use the money as he pleases, there will be no assets to satisfy any judgment against the beneficiary if the account party is successful on the substantive claim. Such a situation may occur where there is a risk that the beneficiary may become insolvent or where the beneficiary is in a foreign jurisdiction where legal proceedings are likely to be difficult or where the proceed­ ings are in England but the beneficiary is abroad with no assets in England to satisfy any judgment against him. This chapter considers the extent to which, byway of exception to the principle of independence, the court will interfere in the operation of a letter of credit or demand guarantee by granting restraining relief in favour of the account party.2*

1 Injunctions to stop payment on the basis of the terms of the instrument itself, such as that a demand does not comply with the requirements of the instrument, do not affect the independence principle. This is the case, for example, where an injunction is granted to restrain the bank from making payment pursuant to a demand made after the expiry date specified in the instrument: e.g. Lome StewartPic v. Hermes KreditversicherungsAG, 22 October 2001, Garland J. It is also the case where a mandatory injunction is granted requiring the account party to perform an obligation required by the terms of the instrument, such as to co-sign a notice required as part of the documents to be tendered by the beneficiary for payment: e.g. Astro Exito Navigacion SA и Chase Manhattan Bank NA [1983] 2 AC 787.

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1.The Court s Power to Grant Injunctions

10.02 An account party may apply for an interim injunction under CPR Part 25. Under section 37 of the Senior Courts Act 1981 the High Court may by order (whether interlocutory or final) grant an injunction in all cases in which it appears to the court to be just or convenient to do so. The order may be made either unconditionally or on such terms and conditions as the court thinks just.2 Under section 25(1) of the Civil Jurisdiction and Judgments Act 1982 (as amended3 and extended4) the High Court has power to grant interim relief in support of foreign proceedings.5 So, in principle, an account party may apply for an injunction to restrain the beneficiary from demanding payment under a letter of credit or demand guarantee that is payable in England in support of proceedings abroad.

10.03 An interim injunction may also be granted by an arbitral tribunal in support of arbitral pro­ ceedings if the parties have agreed that the tribunal should have such powers.6 In such a case, an account party seeking to restrain the beneficiary from demanding or receiving payment under a letter of credit or demand guarantee will be able to apply for appropriate interim relief from the arbitral tribunal.7 However, if the relief sought is to prevent the issuer (the bank) from paying under the instrument that can only be achieved by means of an injunc­ tion from the court, since the bank is not a party to the arbitration agreement (between the account party and the beneficiary). Under section 44 of the Arbitration Act 1996 the court has powers to grant interim relief in support of arbitral proceedings.8 By section 2(3) (b) of the 1996 Act, the powers conferred by section 44 apply even if the seat of the arbitration is outside England and Wales or if the arbitration has no seat.9

10.04 Where the case is one of urgency, then under section 44(3) of the 1996 Act the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving assets.10 Such an order is likely to be neces­ sary where a call on the letter of credit or demand guarantee is imminent and the arbitral

tribunal has not yet been constituted. The purpose of the injunction in such a case is to

2S 37(2) of the Act.

3By the Civil Jurisdiction and Judgments Act 1991.

4By the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997.

5It should however be noted that s 25(2) of the 1982 Act states that, on any application for interim relief under s 25(1) the court may refuse to grant that relief, if in the opinion of the court, the fact that the court has no jurisdiction apart from s 25(1) in relation to the subject matter of the proceedings in question makes it inexpedient for the court to grant it. For a number of particular considerations to be borne in mind when con­ sidering inexpediency see Motorola Credit Corporation v. Uzan (No 2) [2003 ] EWCACiv752; [2004] 1 WLR 113, CA; Banco N ational de Commercio Exterior SNC v. Empresa de Telecommunicationes de Cuba SA [2007] EWCA Civ 662; [2007] 2 Lloyd’s Rep. 484, CA.

6Sees. 38(1) of the Arbitration Act 1996.

7cf. Framatone v. Atomic Energy Organisation o fIran, 1983 Clunet 914, where the tribunal proposed that the defendant should not call on a performance bond until the arbitral proceedings were concluded. See also Sperry International Trade Inc v. Government o fIsrael, 532 F. Supp. 901 (SONY 1982), where an award directed that proceeds of a letter of credit be paid into an escrow account.

8The range of interim measures which could be granted by the court is listed in s 44(2) of the 1996 Act.

9However, the court may refuse to exercise any such power if, in the opinion of the court, the fact that the seat of the arbitration is outside England and Wales or that when designated or determined the seat is likely to be outside England and Wales, makes it inappropriate to do so.

10 e.g. Cogentra AG v. Sixteen Thirteen M arine SA [2008] EWHC 1615 (Comm).

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/. Introduction

preserve the asset so that when the arbitral tribunal is constituted, an application could be

made to that tribunal for an interim measure in relation to the demand for payment.1112

2. The Duty of Disclosure

been improperly obtained and to serve as a deterrent to others to ensure that they comply with their duty to make full and frank disclosure on applications without notice.16 However, discharge of the injunction for non-disclosure is not automatic. The court has a discretion whether or not to discharge an order obtained without notice and whether or not to grant fresh injunctive relief.17 In exercising that discretion the court takes into account all relevant circumstances. The overriding question for the court is what is in the interests of justice. On the one hand, it is only in exceptional circumstances that a court would not discharge an injunction where the non-disclosure was deliberate. On the other hand, as Slade L.J. indi­ cated in Brinks M at Ltd v. Elcombe,18 a court would not be impressed by a defendant who alleges material non-disclosure on rather slender grounds, as representing substantially the only hope of obtaining the discharge of the injunction in a case where there is little hope of doing so on the substantial merits of the case or on the balance of convenience.19

11e.g. PermasteelisaJapan UKv. Bouygesstrai [2007] EWHC 3508 (QB).

12For the circumstances where an application may be made without notice, see CPR Pt 23.3(2) and 23PD.3.

13Brink’s MAT Ltd v. Elcombe [1988] 1 WLR 1350; Marc Rich & Co Holding GmbH v. Krasner [1999] CLY 487.

14Czamikow-Rionda Sugar TradingInc v. StandardBank London [1999] 2 Lloyd s Rep. 187, 206-207.

15e.g. Czamikow-Rionda Sugar Trading Inc v. Standard Bank London [1999] 2 Lloyds Rep. 187; Bank o f Scotland v. A Ltd [2000] Lloyd s Rep. Bank 271 •

17Dubai Bank v. Galadari\ 1990] 1 Lloyd’s Rep. 120.

18[1988] 1 WLR 1350,1359.

19cf. CongentraAG v. Sixteen Thirteen Marine SA [2008] EWHC 1615 (Comm).

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3.The Structure of this Chapter

10.07The discussion is divided into five main parts. After this introduction, part II considers the controversial question whether an injunction against the beneficiary should be more easily available on the basis that it does not affect the principle of independence. Part III considers injunctions to restrain the beneficiary from demanding payment under letters of credit or demand guarantees. Part IV deals with injunctions to restrain the bank from making pay­ ment to the beneficiary. Such an injunction may be required where it is too late to stop the beneficiary from demanding payment. Where, for any reason, the court would not grant an injunction restraining the beneficiary from demanding payment or restraining the bank from making payment to the beneficiary, the account party may seek a freezing injunction preventing the beneficiary from disposing of the money once received from the bank pend­ ing judgment on the substantive claim. This is discussed in part V.

II.INJUNCTIONS AGAINST TH E BENEFICIARY AND T H E IN D EPEN D EN CE PRINCIPLE

10.08Whereas it is generally accepted that an injunction to prevent the bank from honouring its undertaking to make payment interferes with the independence principle, there has been some controversy as to whether an injunction to prevent the beneficiary from demanding payment from the bank also interferes with the independence principle. It has been said that the independence principle is not affected by an injunction preventing the beneficiary from demanding payment from the bank and that therefore the courts may be less reluctant to grant such an injunction than to grant an injunction to prevent the bank from paying the beneficiary. A similar view was adopted by a majority of the Court of Appeal in Themehelp Ltdv. West.10After explaining the majority view in the Themehelp case, the question whether it is well-founded will be considered.

1.The Majority View in Themehelp Ltd v. West

10.09Prior to the decision in Themehelp the view that the courts should be more willing to grant an injunction where it is against the beneficiary than where it is against the bank had been expressed by Eveleigh L.J. in Potton Homes Ltd v. Coleman Contractors Ltd,2' Eveleigh L J s suggestion, obiter, was to the effect that the stringent rules which restrict the availability of an injunction against a bank should not apply where the injunction is sought by the account party against the beneficiary. A distinction was drawn between an injunction against the bank and an injunction against the beneficiary. Over a decade later, a similar distinction

20[1996] QB 84.

21(1984) 28 BLR 19.

22[1996] QB 84 at 89-91.

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II. Injunctions Against the Beneficiary a n d the Independence Principle

beneficiary of a performance guarantee from demanding payment from the issuer on the ground that the underlying contract was induced by the fraudulent misrepresentation of the beneficiary. The majority accepted that in cases where a demand has been made under a performance bond and the application was for an injunction against the bank and the benefi­ ciary, the independence principle may be threatened if the very limited instances in which the court could intervene were extended. But they rejected the contention that the indepen­ dence of a performance guarantee was threatened where the application for injunction to restrain the beneficiary from enforcing the guarantee was made before the beneficiary had demanded payment under the guarantee and where the bank was not involved in the proceedings. The reasoning was that in such a case the dispute was between the parties to the underlying contract and it arose at an early stage before the bank was involved. Thus, Waite L.J., with whose Judgment Balcombe L.J. agreed, said that in such a case ‘it does not seem to me that the slightest threat is involved to the autonomy of the performance guaran­ tee if the beneficiary is injuncted from enforcing it in proceedings to which the guarantor is not a party’.2324The majority therefore made a distinction between an injunction to restrain the bank from making payment to the beneficiary and an injunction to restrain the benefi­ ciary from demanding payment from the bank. The former, it was accepted, threatens the independence principle but the latter, it was said, presented no such threat. It is, with respect, submitted that the distinction is not well-founded in principle and is insecure in authority for the reasons explained below.

2. Themehelp Doctrine Questionable?

First, the purpose of the independence principle is to provide an assurance to beneficiaries 10.10 that they will receive payment pending the resolution of any dispute arising under the under­

lying contract with the account party. As has been indicated in Chapter 4, it is this assurance of payment that gives letters of credit and demand guarantees their cash equivalence’ quality which enables them to perform their vital role as ‘the lifeblood of international commerce’. If the account party can prevent the beneficiary from receiving payment, the assurance of payment is threatened. It makes no difference to the beneficiary that he cannot receive pay­ ment because of an injunction preventing him from demanding payment from the bank or because of an injunction preventing the bank from paying him. In either case, the indepen­ dence of the instrument and its ‘cash equivalence’ value are diminished. The effect of an injunction against the beneficiary on the independence principle was recognized by Sir John Donaldson M.R. in Bolivinter Oil SA v. Chase Manhattan Bank.2*There, the account party had obtained ‘without notice’ injunctions restraining the beneficiary of a performance bond from demanding payment, restraining the bank that issued the bond from making pay­ ment and restraining the instructing bank from reimbursing the issuing bank. A judge later discharged the injunctions against the banks but maintained the injunction against the beneficiary. On appeal, Sir John Donaldson M .R., who delivered the judgment of the Court of Appeal, noted that there was no appeal against the decision to maintain the injunction against the beneficiary and said that the injunction therefore stood ‘notwithstanding that

23Ibid., at 99. See also 106, per Balcombe LJ.

24[1984] 1 Lloyd’s Rep. 251.

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it has the effect of breaching the great and fundamentally important separation maintained by the Courts between the rights ol the parties under the underlying contract. . . and the rights of one of them under the independent banking contract’.25 So, the independence principle is not limited to the obligation of the bank to make payment; it extends to the right of the beneficiary to demand payment under the instrument.

10.11Secondly, as Evans L.J., dissenting, pointed out in Themehelp itself, in commercial terms, if it is easier for an account party to obtain an injunction against the beneficiary including on the ground that the underlying contract arguably has been or could be rescinded on grounds other than fraud, then it might create an incentive for a bank that does not wish to honour its obligations under the instrument but is unable or unwilling to rely on the fraud exception to encourage the account party, its customer, to launch a pre-emptive strike. If the injunction is granted the account party would not have to decide whether to rescind the underlying contract or not. The account party will retain the benefits derived from the contract whilst disputing his liability to make payment under it and the bank will obtain at least a temporary release from its obligation to pay in circumstances where it may not have been able to refuse payment on the ground of fraud. It is hard to disagree with Evans L.J. that in such a case the

integrity of the bank’s separate undertaking is threatened.

10.12Thirdly, where an account party obtains an injunction against the beneficiary (with or with­ out the encouragement of the bank), if the account party serves it on the bank, the bank will no longer be free to make payment under the instrument without running the risk of being guilty of aiding and abetting the beneficiary’s breach of the injunction. In other words, an injunction obtained against the beneficiary alone in proceedings in which the bank is not a party will affect the bank’s freedom to make payment under the letter of credit or demand guarantee once the bank is given notice of the injunction.262789

10.13In terms of authority, the distinction drawn by the majority in lThemehelp is also open to question. First, it did not take account of earlier authorities adopting the contrary view. For example, in the earlier case of DongJin Metal Co Ltd v. Rayment Ltd27 the Court of Appeal rejected a submission that a different test applied where an injunction was sought against the bank to that which applied where an injunction was sought against the beneficiary. Again, in

Deutsche RuckversicherungAG v. Walbrook Insurance Co Ltd2BPhillips J. expressly rejected a submission that a different test should be applied to an application to restrain a beneficiary as distinct from one to restrain a bank.

10.14Furthermore, the distinction of the majority in Themehelp has not attracted any significant

this point were obiter, Staughton L.J. stated that such a distinction ‘cannot be right. The effect on the lifeblood of commerce will be precisely the same whether the bank is

25Ibid., at 256-257.

26Except in a case where in granting the injunction, the court specifically states that the injunction is not to

affect the banks freedom to make payment even though the bank may have notice of the injunction. See, e.g.

Bolivinter OilSAv. ChaseManhattan Bank [1984] 1 Lloyds Rep. 251.

2712 July 1993.

28[1995] 1 WLR 1017at 1030-1031.

29[1996] 1 WLR 1152; [1996] 1 Lloyd’s Rep. 345 at 361.

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//. Injunctions Against the Beneficiary a n d the Independence Principle

restrained from paying or the beneficiary is restrained from asking for payment’.30 Similarly, in Czamikow-Rionda Sugar Trading Inc v. Standard Bank London Ltd31 Rix J. said that the majority decision in Themehelp gave rise to ‘difficulty’ and that the distinction was contrary to settled doctrine ,32 Rix J. went on to say that in the case of a letter of credit, a buyer can no more seek to prevent his seller from drawing on the letter of credit for which the seller has stipulated than the buyer can seek to prevent his bank from making payment under it. The reason is that otherwise the special rule could be subverted, and the integrity and insulation of banking contracts could be overthrown, simply by the device of injuncting the beneficiary rather than the bank’.3334More recently, in Sirius International Insurance Corp v. FAI General Insurance Co Ltd?AMay L.J., with whom the other members of the Court ofAppeal agreed, described the majority decision in Themehelp as questionable’.35

In the United States, the Uniform Commercial Code (UCC) Article 5-109 does not make 10.15 such a distinction. It is stated in the Official Comment 5 that:

[ajlthough the statute deals primarily with injunctions against honor, it also cautions against granting similar relief’ and the same principles apply when the applicant or issuer attempts to achieve the same legal outcome by injunction against presentation . . . These attempts should face the same obstacles that face efforts to enjoin the issuer from paying. Expanded use o f [this device] could threaten the independence principle just as much as injunctions against honour. For that reason courts should have the same hostility to [it] and place the same restrictions on [its] use as would be applied to injunctions against honour.

The generally accepted view, therefore, is that an injunction restraining the beneficiary 10.16 from demanding payment on grounds outside the terms of the instrument is no less a threat

to the independence principle than an injunction restraining the bank from making pay­ ment to the beneficiary. However, that does not mean that the bases for an injunction against the beneficiary are or should be the same as those for an injunction against the bank. An account party may have a cause of action against the beneficiary and therefore a basis for an injunction against the beneficiary but no cause of action against the bank and therefore no basis for an injunction against the bank. For example, if the exception based on a demand made in breach of a promise in the underlying contract is recognized, an account party may be able to apply for an injunction against the beneficiary on this ground but will not be able to apply for an injunction against the bank on the same ground, since the bank is not a party to the contract between the account party and the beneficiary. For this reason, it is convenient to discuss injunctions against the beneficiary separately from injunctions against the bank.

30Ibid., at 1161.

31[1999] 2 Lloyds Rep. 187.

32Ibid., at 190.

33Ibid., at 202.

34[2003] 1 All ER (Comm) 865 at [31].

35See also Britten Norman Lim ited (in liq) v. State Ownership Fund o fRomania (Ch D, 6 July 2000), where Peter Leaver QC, sitting as a Deputy Judge of the Chancery Division, preferred the dissenting judgment of Evans L.J. to that of the majority in the 'Themehelp case.

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