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Injunctions

when it had knowledge that the beneficiary’s presentation under a letter of credit was fraudulent, the account party would have ‘a cast-iron claim ... for breach of contract’ against the bank.90

10.45In Czarnikow-Rionda v. Standard Bank9' RixJ. accepted the contract analysis. He said: ‘I do not see how payment in the face of fraud can be a mere matter of discretion by a bank: it must be either within its mandate or not, and either a matter of obligation or not.’ He went on to

explain the cause of action on the basis of an implied term. He said that the fact that the rationale of the fraud exception is the law’s prohibition on the use of its process to carry out fraud, as Lord Diplock explained in the UCM v. Royal Bank o f Canada,92 may be viewed as an authoritative expression of the source in law of the implied limitation on a bank’s mandate. Rix J. s analysis of the cause of action as based on an implied contractual term was endorsed by Potter L.J. in M ontrodLtd v. Grundkotter Fleischvertriebs.93 Thus, through the device of an implied term into the account party’s contract with his bank, the account party can rely on the fraud exception as the basis for an injunction to restrain his own bank from making payment to the beneficiary or to a paying bank that has paid the beneficiary with knowledge that the beneficiary’s demand was fraudulent.

10.46Even where the account party can show a good arguable case that there was fraud by the beneficiary, where the fraud is one that induced the account party to enter into the underly­ ing transaction, it may be necessary for the claimant to show, in addition, a sufficiently good case that the account party was entitled to rescind the contract so as to make it a fraud on the part of the beneficiary to demand payment at the time that it did. Where rescission of the underlying contract is no longer available then the court is likely to refuse to grant an injunc­ tion against the bank.94 Where the beneficiary has already received payment from the paying bank and the application for an injunction was to restrain the account party’s bank from reimbursing the paying bank, the courts have refused to grant the injunction if the underly­ ing contract had not been rescinded.9596In Czarnikow-Rionda v. Standard Bank London Ltd?6 for example, the paying bank had paid the beneficiary before the maturity date of the letters of credit and the claimant sought an injunction to restrain the instructing bank from paying on the ground that the claimant was induced to enter into the underlying transactions as a result of the beneficiary’s fraud. RixJ. said that even if he assumed that there was clear fraud it remained Very unclear’ whether the claimant would have been entitled to rely on such fraud to rescind the underlying contracts into which it had entered. The reason was because

90 See also Turkiye Is Bankasi As v. Bank o f China [1996] 2 Lloyds Rep. 611, in a claim by a paying bank against an instructing bank, under the latter’s counter-guarantee, the defence of fraud raised by the instructing bank failed. In Czarnikow-Rionda v. Standard Bank [1999J 2 Lloyd’s Rep. 187, R ixJ. said that the analysis of the fraud defence in the Turkiye case ‘would appear to have been that it was an implied term o f the counter­ guarantee either that the [paying bank’s] bond would not be paid where [the paying bank] had clear proofo f the beneficiary’s fraud or that [the instructing bank’s] counter-guarantee would not operate in such a case’.

91[1999] 2 Lloyd’s Rep. 187 at 203.

92[1983] 1A C 168 at 183. See para 5.04 above.

93[2002] 1 W L R 1975; [2002] 1 A ll E R (Comm) 257 at [41].

94Ihe majority decision o f the Court o fAppeal in Themehelp Ltd v. West[1996] Q B 84, where an injunction was granted against the beneficiary, is often criticized because the underlying contract had not been rescinded on the ground of the alleged fraud. In any event, in that case the majority stressed the fact that the injunction was against the beneficiary. 'Ihe position should be different where the application is for an injunction to stop the bank from paying.

95Deutsche RuckersicherungAG v. Walbrook Insurance Co Ltd [1995] 1 W L R 1017.

96[1999] 2 Lloyd’s Rep. 187 at 205.

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in that case the goods which were the subject matter of the contract had been supplied97 and

the claimant had dealt with the goods imported by selling them.

(ii) Illegality

relationship with the paying bank99 and so cannot have a cause of action in contract against the paying bank. In the case of a letter of credit, if the paying bank is simply an advising bank that has not confirmed the credit the paying bank will be acting only as the agent of the issu­ ing bank. In such a case, payment by the advising bank could be prevented by an injunction against the issuing bank restraining it from paying by itself or by its agents. But where the paying bank is a confirming bank that has given its own undertaking to pay (or a bank that has issued a demand guarantee in the beneficiary’s country) so that it has a contractual obli­ gation to the beneficiary and is entitled to make its own decision whether or not to pay, an injunction against the confirming bank would be necessary in order to prevent it from making payment to the beneficiary. The problem is that the account party has no contractual

97W ith the exception o f the goods under contract 005 where there had not been permission as yet to import the goods into Brazil.

98Since in many cases the paying bank will be a bank in the beneficiary’s country, an account party in England w ill face the additional difficulty o f showing that the English courts have jurisdiction and that they should exercise it. See the discussion in Chapter 13.

99U nited Trading Corp SA v. A llied A rab Bank L td [1985] 2 Lloyds Rep. 554, 559-560, where Ackner L J . rejected as ‘hopeless’ a proposition that there was a contractual relationship between the account party and the paying bank.

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relationship with the confirming bank. Therefore, in such a case, any cause of action by the

account party would have to be non-contractual.

(ii)Tort?

10.50Whether the account party has a cause of action in the tort of negligence is a question that has given rise to some controversy. In United Trading Corp SA v. AlliedArab Bank Ltdm the ben­ eficiary (in Iraq) had called on aperformance bond issuedby an Iraqi bank (Rafidain). Rafidain then calledon its counter-guarantee given by Barclays Bank International which had instructed Rafidain. Barclays in turn called on its counter-guarantee given by the account party’s bank, which had instructed Barclays. The account party, alleging fraud on the part of the benefi­ ciary, applied for injunctions against the instructing banks and the paying bank, which had a branch in London. The injunctions against the instructing banks were to prevent them from making payments to the paying bank under the counter-guarantees, the object being to prevent moneys getting into the hands of the paying bank which, in that case, was the banker of the allegedly fraudulent beneficiary. If that was not possible, the injunction applied for against the paying bank was to prevent it from making payment to the beneficiary.

10.51It was accepted by the banks that the paying bank (Rafidain) would arguably be liable to the account party in the tort of negligence if the paying bank honoured the beneficiary’s call when it knew at the time of payment that the call was fraudulent. The reason given for this liability is that it was arguable that a paying bank owed a duty of care to the account party, who was ultimately liable at the end of the chain of contracts, not to pay out on a perfor­ mance bond if, on the information available to it, there was clear evidence that the benefi­ ciary’s demand was fraudulent, ‘because it is the party at the end of the chain who may have to bear the ultimate loss’.101 On this basis the Court of Appeal stated that the court could grant an injunction against the paying bank.10213

10.52However, doubts have been expressed about such a cause of action. In GKN Contractors Ltd

v. Lloyd’s Bank Plcm the Court ofAppeal followed its decision in United Trading that a cause of action in tort is arguable, even though Parker L.J. said that such a cause of action is one which he found difficulty appreciating. Again in Group Josi Re v. Walbrook Insurance Co

Z,fe/104Staughton6015 L.J., whilst not expressing a final conclusion on the matter, said that he was inclined to hold either that there was a cause of action in tort as described in the United Tradingcuse or that letters ofcredit and performance bonds constitute a rare exception to the rule that requires a cause of action for an injunction. But in Czarnikow-Rionda v. Standard Bank105 Rix J. was doubtful whether the idea of a tortious cause of action would be accepted nowadays following developments in the law of negligence. He argued that since the argu­ ment in the United Trading case was accepted on the basis of the decision in Anns v. Merton London Borough Council,ш ‘in the light of further developments in the law of negligence

100United Trading Corp 5/1 v. AlliedArab Bank Ltd [ 1985] 2 Lloyd’s Rep. 554.

101In support o f the alleged duty the account party relied on Anns v. Merton London Borough Council [1978]

A C 728, at 751; А ш и Caunters [1980] Ch297; The IrenesSuccess [ 1982] 1 Q B 481; [1981] 2 Lloyd’s Rep. 635; and Standard Chartered Bank v. Walker [1982] 1W L R 1410.

102Ibid., at 560.

103(1985) 30 B L R 48,62.

104[1996] 1 W L R 1152 at 1159-1160.

105[1999] 2 Lloyd’s Rep. 187.

106[1978] A C 728.

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since that time I am doubtful whether such an argument would be accepted today’.107Judicial opinion is therefore divided on the question whether the account party has a cause of action in the tort of negligence against a paying bank instructed by the account party’s bank, with the most recent judicial opinion firmly against such a cause of action. Against this back­ ground, an account party in England seeking an injunction against a foreign paying bank is likely to face a challenge to show that he has a cause of action against the paying bank.

2. The Balance of Convenience Test

ment or under its counter-guarantee to the paying bank will be seriously damaged if it is unable to honour its undertaking. In R.D. Harbottle v. National Westminster Bank Ltd, 109 for example, an account party sought an injunction to stop its bank from paying under a counter-guarantee that the bank had given to a foreign bank in return for that bank issuing a performance bond to a beneficiary with whom the account party had entered into a contract. The court refused to grant the injunction. One reason was that if the bank was prevented from paying under its guarantee its commercial reputation would be seriously damaged. Kerr J. said: ‘The bank had given its own guarantee, and in effect pledged its own credit, to the Egyptian banks to pay on demand. Its reputation depends on strict com­ pliance with its obligations. This has always been an essential feature of banking practice.’

107[1999] 2 Lloyd’s Rep. 187,200.

108R.D. Harbottle (Mercantile) Ltd v. National Westminster Bank Ltd [1987] Q B 146 at 155, cited with approval by the Court of Appeal in United Trading Corp SA v. AlliedArab Bank Ltd [1985] 2 Lloyd’s Rep. 554 at 565.

109[1978] Q B l4 6 a t 151.

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Injunctions

In Turkan Timber Ltd v. Barclays Bank Plc,no where an injunction was sought to restrain a bank from honouring a demand under a letter of credit, the bank opposed the application. An affidavit on the bank’s behalf argued in favour of restricting the ability of the account party from intervening to stop payment. It stated:

The reputation o f Barclays depends on strict compliance with its obligations. This has always been an essential feature o f banking practice. Barclays has widespread connections with banks and trading concerns in South America - indeed all over the world. Its reputation is part of its stock in trade and depends on prompt and scrupulous fulfilment o f its obligations. The machinery o f irrevocable obligations assumed by banks is essential to international commerce. Unless such commitments by banks can be honoured, trust in international commerce could be irreparably damaged.111120

10.56 In United Trading v. Allied Arab B ankjn while accepting the need to protect the reputa­ tion of the international banking community, Ackner L.J. said the risk should not be exaggerated.11314However, the risk of damage to the reputation of banks remains a relevant factor in the balance of convenience exercise. In Consolidated Oil Ltd v. American Express Bank L td j14 where the Court of Appeal refused to grant an injunction to prevent a bank from paying under a performance bond, Clarke L.J. said that ‘[i]t is an important feature of this class of case that the courts should have in mind that bankers’ reputations depend upon strict compliance with their obligations under guarantees of this kind’.11516

(ii)Inadequacy o faccountparty’s undertaking in damages

10.57In many cases the courts take the view, depending on the financial standing of the account party, that if the injunction is granted against the bank it may cause the bank greater damage than the account party could pay on his undertaking as to damages. A significant aspect of the potential damage which the bank is likely to suffer is injury to its reputation, as indicated in the preceding paragraph. In United Trading Corporation SA v. Allied Arab Bankuf> the account party’s application for an injunction to stop the bank from paying failed because the evidence was not enough to establish that it was seriously arguable that fraud had occurred. However, the Court ofAppeal went on to hold that even if the court had concluded that the account party had established a good arguable case that there was fraud and the case was decided purely on the issue of the balance of convenience the court would still have found against the account party. A principal reason for this was because the account party did not have enough assets within the jurisdiction to back their cross undertaking as to damages. In that case, if the court granted the injunction and the account party subsequently failed in the action the damage to the bank would consist of loss of interest which the bank would have to pay to the beneficiary and injury to the reputation of the bank. The court noted that the loss of interest alone could amount to a very large figure - several million dollars’.

110[1987] 1 L loyd’s Rep. 171.

111Ibid., at 217.

112[1985] 2 L loyd’s Rep. 554 at 561.

113 See also H udsons B u ilding a n d Engineering Contracts (1 1 th ed n , Sweet & M axwell, L o n d o n , 1995) para 17.01.

114[2002] C L C 488 .

115Ibid . C h a d w ick L.J. agreed, saying th a t the appeal failed ‘because to gran t the in ju n ctio n so u g h t w o u ld

infringe tw o im p o rta n t principles. The first is th at the needs o t intern atio n al com m erce require th at banks sh o u ld be allow ed to h o n o u r letters o f credit a n d perform ance guarantees w ith o u t interference from the courts, save in exceptional circu m stan ces.’

116 [1985] 2 L loyd’s Rep. 554 .

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And the damage to the bank’s reputation would be very difficult to quantify. The evidence showed that the assets available to the account party were clearly inadequate to cover the bank’s potential losses.

(Hi) Damages an adequate remedy

out of a concern that it may not be recognized by the foreign court of the place of payment, with the result that the bank could find itself hilling between two stools. If the foreign court does not recognize the English injunction, the beneficiary could obtain judgment in the foreign court against the bank.1211If that happened the bank’s remedy down the line would have to await the outcome of the account party’s claims in England. A bank in that position will be running the risk that the court in England might reach a different result. The bank could therefore fall between two stools. This does not appear to be right since in most of these cases there is no charge of dishonesty against the bank, the allegation of fraud being made against the beneficiary. In United Trading Corporation SA v. Allied Arab Bank)21where the application was against a paying bank in Iraq, Ackner L.J., who delivered the judgment of the Court of Appeal, explained how if the injunction is granted the bank could end up in this unsatisfactory position. He then asked the rhetorical question: ‘Why should [the paying

117 See, e.g. R.D. Harbottle (Mercantile) Ltd v. National Westminster Bank Ltd\\97%\ Q B 146, 155; United Trading Corporation SA v. AlliedArab Bank [ 1985.1 2 L loyds Rep. 554, 566.

118[1975] 1 L loyds Rep. 444 .

119[1987] 1 L loyd’s Rep. 171.

120Ib id ., at 177.

121cf. Power Cuber InternationalLtd v. NationalBank ofKuwaitЛ74ЛГ[1981] 1 W L R 1233; [1981] 2 L loyds

Rep. 394, w here the English C o u rt o f A ppeal refused to recognize a K uw aiti o rd er o f attach m en t against a b an k a n d gave ju d g m e n t in favour of the beneficiary o f a letter o f credit in spite o f the K uw aiti order.

122 [1985] 2 L loyds Rep. 554.

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bank], who have merely acted on instructions passed down the line from the [account party’s] own bank, be put in this perilous situation?’123 In the case of a demand guarantee subject to the URDG 758, this point is reinforced by the indemnities for foreign laws and usages contained in Article 31.124

(v)Risk o fdamage to international trade

10.60 A further factor which weighs against an injunction to stop a bank from paying is the possi­ ble damage to international commerce in general if banks are prevented from honouring undertakings under demand guarantees and letters of credit.12516In Bolivinter Oil SA v. Chase Manhattan Bank'16 where the Court of Appeal accepted that an interim injunction should not be granted to prevent the banks from paying under a performance bond and counter­ guarantee, it was stated that frequent injunctions against banks could undermine ‘the value of all irrevocable letters of credit and performance bonds and guarantees’.12718So too, in

Consolidated Oil Ltd v. American Express Bank Ltd,m where the Court of Appeal upheld a refusal by the court below to grant an injunction to prevent a bank from paying under a performance bond, Chadwick L.J. said that the appeal failed ‘because to grant the injunction sought would infringe two important principles. The first is that the needs of international commerce require that banks should be allowed to honour letters of credit and performance guarantees without interference from the courts, save in exceptional circumstances’.129130This is the ‘life-blood of international commerce’ factor. In Czarnikow-Rionda Trading Inc v. Standard Bank London L td 130 it was held that even if the account party had established fraud, its claim for a pre-trial injunction against its bank failed on the balance of convenience. One of the factors taken into account was the importance that must be attached to the ‘life­ blood of international commerce’ factor. Rix J. emphasized the general interest in integrity letters of credit and demand guarantee contracts. He said that ‘[u] nless the banking commit­ ment can be insulated from disputes between merchants, international trade would become impossible’.131

(vi)Availability o ffreezing Mareva injunction

10.61The availability of alternative interim relief for the account party in the form of the freezing injunction is another important factor which could weigh against the making of an order restraining the bank from paying.1321Where the account party has already been granted a freezing injunction against the beneficiary this will be a weighty factor against granting an injunction preventing the bank from paying. In Czarnikow-Rionda Sugar Trading Inc v. Standard Bank London Ltd,'33 by the time the application for an interim injunction against the bank was heard, the defendants were all already subject to a Mareva injunction so that they could not dispose of the fruits of the alleged fraud (the proceeds of the letters of credit).

123 Ibid ., at 566 .

124 See discussion in paras 3 .5 3 to 3 .54 .

125 R.D. Harbottle (Mercantile) Ltd v. National Westminster Bank £ * /[1 9 7 8 ] Q B 146, 151.

126[1984] 1 L loyd’s Rep. 2 5 1 , CA .

127Ibid., at 257 .

128[2002] C L C 488 .

129The second p rinciple is n o t relevant to th e present discussion.

130[1999] 2 L loyd’s Rep. 187.

131Ibid., at 2 02 .

132Even th o u g h in m an y cases the freezing in ju n ctio n will n o t be a com plete solution to th e acco u n t party ’s

problem s (since it does n o t give security or p rio rity over c o m p etin g claim s).

133 [1999] 2 L loyds Rep. 187 at 203 .

2 5 0

134 e.g. R .D . H arbottle (M ercantile) L td v. N a tio n a l Westminster B a n k L td [1978] QB 146; E dw ard O wen Engineering L,td v. Barclays B a n k International L td [1978 ] 1 QB 159\ B olivinter O il v. Chase M an h a tta n B ank [1983] 1 Lloyd’s Rep. 251; U nitedTrading Corporation v. A llied A rab Bank[\9?>5\ 2 Lloyds Rep. 554, CA; G K N Contractors L td v. Lloyd’s B a n k Pic (1985) 30 BLR 48, 64, CA; Tukan Tim ber L td v. Barclays B a n k 14c [1987] 1 Lloyd’s Rep. 171; Consolidated O il L td v. A m erican Express B a n k L td [2002] CLC488.

135[1999] 2 Lloyds Rep. 187.

136Ibid., at 204.

137[1983] 1 Lloyd’s Rep. 251 at 257.

138[1998] CLC 446. An injunction was also granted against a bank in L o m e Stew art Pic v. Hermes KreditversicherungsAG, 22 October 2001, Garland]. But in that case the injunction was based on the terms of the instrument and so the principle of independence or exceptions to it did not come into play.

139C zarnikow -R ionda Sugar Trading Inc v. Standard B an k Lwndon l,td [ 1999] 2 Lloyd’s Rep. 187 at 190.

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general commercial viability.140 In determining whether the claimant will suffer irreparable damage where the account party is a company, the fact that directors of the company might be called upon to meet personal guarantees which they had given is not a matter which is taken into account.14112

VFREEZING/A^ £ ^ 4 INJUNCTION

10.66The restrictive approach of the English courts to injunctions to restrain the beneficiary from demanding or receiving payment or to restrain the bank from making payment means that in most cases the bank will be allowed to pay the beneficiary. This is likely to be the case even where the account party has established a recognized exception to the principle of indepen­ dence. In these circumstances an alternative remedy for the account party which was sug­ gested by the Court of Appeal in Bolivinter Oil SA v. Chase Manhattan Bankul is that, although the beneficiary will be allowed to receive the money, ‘restrictions may well be imposed on the freedom of the beneficiary to deal with the money after he has received it’. This could be achieved by means of a freezing injunction (formerly known as the Mareva injunction143). A freezing injunction144 is an order: (i) restraining a party from removing from the jurisdiction assets located there, or (ii) restraining a party from dealing with any assets whether located in the jurisdiction or not.145 A freezing injunction restraining the beneficiary from disposing of the proceeds of a letter of credit or demand guarantee once received does not prevent payment under the instrument.146 It only applies to the proceeds as and when received by or for the defendant.147

10.67Where the beneficiary has no account with the paying bank, the order may require the bank to open an interest bearing account in the name of the beneficiary and, in the event of a demand being made by the beneficiary which the bank considers to be in compliance with the terms of the instrument, to pay the sum payable into that account. In such a case, the order will prohibit the beneficiary from moving the money from the account without the written permission of the account party or the court. The order may also take the form of requiring payment into court of the sums due from the bank.148

140 See lukan Timber Ltd v. Barclays Bank pic [1987] 1 Lloyd’s Rep. 171, 177, where there was only a bare assertion ‘without any details whatsoever as to the strength or weakness of the plaintiffs’ business generally, or as to the possible impact on them of payment of the amount demanded under the letter of credit, or generally as to their commercial viability’.

141Ibid.

142[1984] 1 Lloyd’s Rep. 251 at 257.

143The label is derived from the case of Mareva Campania Naviera SA v. International Bank Carriers SA

[1980] 1 AUER 213.

144See generally, M.S.W. Hoyle, Freezing and Search Orders (4th edn, 2006); ED. Rose, ‘ The Mareva Injunction - Attachment in Personan’ [1981] LMCLQ 1, 177.

145C P R P t2 5 .1 (l)(f).

146Z Ltdv. A-ZandAA-LL [1982] QB 558 at 574.

147cf. Benda L^ty (trading asZone Communications) v. Sitep SocietyperAzioni [1997] NSW LEXIS 569, freez­ ing order in respect of payment under a letter of credit once received by beneficiary’s banker on behalf of the beneficiary.

148Themehelp Ltdv. West [1996] QB 84 at 103E

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1. A Good Arguable Case

judge believes to have a better than 50 per cent chance of success’. This is more than the American Cyanamid requirement of serious issue to be tried.153 This means that an account party who has been unable to establish a serious issue to be tried on the issue of liability against the beneficiary for purposes of an interim injunction to stop the beneficiary from demanding payment will also fail to establish a good arguable case for purposes of a freezing injunction against the beneficiary. The cause of action need not be actionable in England. It is enough if it is actionable abroad, since the High Court now has power to grant interim

149[1996] QB 84 at 103.

150Ibid.

151Comp. Britten Norman Ltd (in liq) v. State Ownership Fund o fRomania, 6 July 2000, High Court, where, however, the court refused to accept the account party’s contention that the demand for payment was in breach of a term to be implied into the underlying contract.

152 Ninemia M aritime Corporation v. Trave Schiffahrtgesellschafi mbH und Co KG (The Niedersachen) [1983 ] 1 WLR 1412; Derby v. Weldon [1990 ) Ch 48, 57; Polly Peck International Pic v. N adir (No 2) [1992] 4 All ER 769; Aiglon Ltd v. Gau Shan Co Ltd [1993] 1 Lloyds Rep. 164; Rowland v. Guljpac L td [ 1999] Lloyds Rep. Bank 86.

153 Rowlandv. Gulfpac Ltd[ 1999] Lloyds Rep. Bank 86.

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