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

7he N ullity or Recklessness Exception

6.27Whatever may be the real justice of the case between the account party and the original beneficiary, the position is different where the beneficiary is a buyer in a chain of contracts. In Montrod, Potter L.J. argued that recognition of a nullity exception would be likely to act unfairly on beneficiaries participating in a chain of contracts in cases where their good faith is not in question. O f course to allow the beneficiary to be paid seems unfair to the account party who is also innocent. However, on balance, a rule in favour of payment to the benefi­

ciary should be preferred because, since the commercial purpose of the letter of credit is to provide prompt payment to the beneficiary, confidence in the system of financing inter­ national trade by means of letters of credit is likely to suffer if innocent beneficiaries along a chain of contracts will be refused payment against a document which appears on its face to comply with the requirement of the credit because of the fraud of a third party. Also, it should be noted that although, in the absence of a nullity exception, the bank will pay the beneficiary, the seller, the account party, the buyer, is likely to have a remedy against the seller under the underlying contract of sale.36

B.Reasons in favour of a nullity exception

6.28An argument advanced in favour of a general nullity exception is that the beneficiary is only entitled to payment if he makes a complying presentation and that a document which is a nullity is not a complying presentation since it is not a genuine document. The view is that documents which are forged cannot conceivably be treated as conforming documents.37 However, if the ground for the bank being entitled to refuse payment is that the document is not genuine and therefore non-compliant, then the same applies to any forged document, including cases where the forgery does not render the document a nullity (such as the falsely dated bill of lading). Indeed some commentators have argued that any fraudulent document should be a non-complying presentation.38 However, there may be problems with such an exception. First, it is likely to be too wide in scope. It may cover cases where the document is fraudulent in the sense that, for example, the date of shipment is untrue even though if the true date has been stated the document would not be discrepant, as where both dates (the false and the true date) fall within the terms of the credit. In such a case the bank would be entitled to reject the document under the proposed forgery exception even though it would not have been entitled to reject the document under the fraud exception if the beneficiary was aware of the false date at the time of presentation, since the fraud exception only applies to material false representations.

36For example, the buyer may have a claim against the seller in damages for breach of contract in tendering defective documents:James Finlay & Co. Ltd v. Kwik Hoo Tong [1929] 1 KB 400/ Kuiei Tek Chao v. British Traders Ltd[ 1954] 2 QB 459; Kleinjan & Holst NVRotterdam v. Bremer Handehgesellschafi mhH [1972] 2 Lloyd’s Rep. 11; Huillerie L’Abelle v. Societc des Huileries du Niger (The Kxstellon) [1978] 2 Lloyds Rep. 203.

37See, e.g. Goode, CommercialLaw (4th edn, 2009) 1105.

38e.g. A. Guest (ed), Benjamins Sale o fGoods (7th edn, 2009) [23-l43]-[23-l44], where the decision of the House of Lords in United City Merchants is criticized and it is argued that any fraudulent document is a non­ complying presentation. It is said that support for this view is to be found in FjahlissementEseflea International Anstalt v. CentralBank o fNigeria [1979] 1 Lloyd’s Rep. 445,447, where Lord Denning said that if a document presented is forged or fraudulent the bank has a defence against being liable to the beneficiary, where payment has not been made, and, where payment has already been made, the bank has a claim against the beneficiary on the ground of fraud or deceit. However, Lord Denning’s statement applies only where the beneficiary himselfis guilty of fraud. It is a different matter where the fraud or forgery is that of a third party and the beneficiary was not aware of it.

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39Art. 16.dof UCP 600 and Art. 24.e of URDG.

40United City Merchants (Investment) v. RoyalBank o fCanada [1982] QB 208 at 246 and 254. See also Beam

Technology (Mfg) Pte Ltd v. Standard Chartered Bank [2003] 1 SLR 597 at [30J and [31]. 41 See, e.g. Bolivinter Oil Sri v. Chase Manhattan Bank [1984 ] 1 Lloyd’s Rep. 251.

42Malek and Quest,jack: Documentary Credits (4th edn, Tottel Publishing, 2009) at [4.33].

43Certain documents other than a bill of lading may affect the bank’s security interest, as where a certificate of origin or quality is required for the goods to be sold in the country concerned.

44cf. the Singapore case of Mees Pierson NVv. Bay L’acific (S) Pte Ltd [2000] 4 SLR 393 at [42], where the relevant document, a health certificate, was considered not to be a document that affected the bank’s security.

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The N ullity or Recklessness Exception

documents in international trade with a real danger that trust in international trade will thereby be undermined.45 Reference is often made to the statement of Cresswell J. that antedated and falsely dated bills of lading are ‘a cancer in international trade’.46 However, the baud exception already deals with forgery of this kind where the beneficiary is aware of it before presentation. Where the beneficiary is unaware of the forgery, a nullity exception, which affects the innocent beneficiary but not the third party forger, is unlikely to have a significant deterrent effect.47 Whereas forgery in commercial transactions must be con­ demned and, as Ward L.J. has said,4849‘[h]ighwaymen in commerce forfeit the right to just and equitable treatment’, a beneficiary who, acting in good faith, presents a document that has been forged by a third party is hardly a highwayman in commerce.

III. RECKLESSNESS EXCEPTION?

I . What is the Exception?

6.32A recklessness exception may apply where the beneficiary has presented a document that appears on its face to comply strictly with the requirements of the credit but which is in fact a nullity and the beneficiary’s conduct in the creation or presentation of the document, though not amounting to fraud, was reckless. Such an exception will allow a bank that is otherwise bound to pay against a document that is a nullity to refuse payment to a benefi­ ciary who is not guilty of fraud but whose reckless conduct facilitated the creation or presen­ tation of the document. The exception is necessary only where a general nullity exception is not recognized so that without the recklessness exception the bank would be bound to pay the beneficiary against a document that is a nullity. The exception has been discussed by the courts in Singapore and in England.

6.33A recklessness exception was first considered by the High Court of Singapore in Lambias (Importers and Exporters) Co Pte Ltd v. Elong Kong & Shanghai Banking Corp.m A letter of credit called for a quality and weight inspection certificate to be signed by the buyers and counter-signed by a named individual in the presence of the bank. The sellers, the beneficiary of the credit, took someone to the offices of the bank where he signed the document in the presence of an officer of the bank. That person was an impostor. The bank rejected the document that was later tendered because it was signed by the beneficiary instead of the account party and counter-signed by an impostor. It was held that the bank was right to reject the document because it was not compliant since it was signed by the beneficiary instead of the account party. There is nothing novel in that part of the decision. However, the court went further and held that the document tendered was a nullity as a result of the fraud or forgery of the impostor. It held that there was a further ground for the bank refusing to pay in such a case where the beneficiary, although not guilty of fraud, ‘was nonetheless in some way clearly responsible for the turn of events that led to the perpetration of the fraud

45R. Hooley, ‘Fraud and Letters of Credit: Is there a nullity exception?’ [2002] CLJ 279, 281.

46Standard Chartered Bank v. Pakistan N ational Shipping Corp (No 2) [1998] 1 Lloyd’s Rep. 684, 686.

47The position is different in relation to a recklessness exception, discussed at paras 6.32 to 6.39.

48Standard Chartered Bank v. Pakistan National Shipping Corpn (No 2) [200012 Lloyd’s Rep. 5 П at [126].

49[1993] 2 SLR 751.

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T would not seek to exclude the possibility that, in an individual case, the conduct of a beneficiary in connection with the creation and/or presentation of a document forged by a third party might, though itself not amounting to fraud, be of such character as not to deserve the protection available to a holder in due course.’53 He referred to the Lambias case and the passage from the judgment quoted in the preceding paragraph and said that although a finding of recklessness was not necessary for the result in Lambias, the statement of the court fell within the reservation of Lord Diplock in United City Merchants. He said that the recldessness exception suggested in Lambias ‘has certain attractions’.54 However, he did not decide whether or not it was correct, as it was not necessary to do so since in Montrod there was no finding by the judge of recklessness, haste, or blame on the part of the beneficiary.

50Ibid., at 764.

51Ibid., at 765—766.

52However, since the nullity exception recognized in Singapore is a limited one, the recklessness exception

may be relevant in a case where the nullity exception does not apply, for example, because the document is not a material document.

53[2002] I All ER (Comm) 257 at [59].

54Ibid.

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The N ullity or Recklessness Exception

6.37 A recklessness exception may apply both to the case of a document created or issued by a third party (whether acting fraudulently or not) and to one created by the beneficiary him­ self. In the Lambias case the required document was to be signed by a third party. The benefi­ ciaries’ fault was that they unknowingly assisted a fraud by taking an impostor to the bank to sign the document. In Montrod, where the required document was to be signed by the account party but was in fact created and signed by the beneficiary acting under an honest mistake that it had the authority of the account party to do so, Potter L.J. made the point that the judge found no recklessness in the conduct of the beneficiary. This suggests that the exception he had in mind extends to the case where the document that is a nullity was issued and signed by the beneficiary.

2. Evaluation

6.38 In the absence of a nullity exception, a recklessness exception seems necessary. A strong objection that is likely to be raised against a recklessness exception is that it will be too vague. There will be some force in that objection since there will be difficulties in defining the type of conduct on the part of the beneficiary that will be required for the exception to apply. In

Montrod, for example, Potter L.J. referred to conduct ‘of such character as not to deserve the protection available to a holder in due course’. In that regard he also noted the reference by Mocatta J. in United City Merchants to ‘unscrupulous conduct’. This can lead to confusion.55 However, the risk of uncertainty should not be exaggerated. And any danger of uncertainty must be weighed against the benefits of the exception.

6.39 First, the exception provides an incentive for the beneficiary to act with greater care in con­ nection with the creation or presentation of documents required under a letter of credit or performance bond. This will go some way to disrupt the circulation of forged documents in international trade and to that extent afford some protection to the account party. Secondly, if the exception extends to cases where the third party fraud or forgery does not render the document a nullity it will offer a wider protection against fraud than a nullity exception, since it will give the beneficiary an incentive to look out not only for forgery that will make a document a nullity but for any type of forgery, including falsely dated bills of lading, which has been described as a cancer in international trade.56 Thirdly, unlike the nullity exception which applies even where the beneficiary is blameless, a recklessness exception seems more just as it applies only where the beneficiary’s conduct is blameworthy in that it is reckless. Fourthly, as between the beneficiary and the account party, it is fair that a beneficiary whose fault is responsible for the creation or presentation of a document that is a nullity should bear the loss rather than the innocent account party.

55 Indeed some commentators appear to conflate the recklessness exception with the separate unconscionability exception, discussed in Chapter 7 below: see, e.g. M. Bridge, ‘Documents and Contractual Congruence in International Trade’ in S. Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing,

2003) 237.

56 Standard Chartered Bank v. [Pakistan N ational Shipping Corp (No 2) [1998] I Lloyds Rep. 684, 686, per

Cresswell J.

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7

THE UNCONSCIONABILITY EXCEPTION

I.INTRODUCTION

1.Nature of the Exception

This chapter is concerned with an unconscionable conduct exception which seeks to provide 7.01 protection to the account party in cases where there is no defect (such as fraud or nullity) in

the documents presented but the beneficiary’s conduct in demanding payment under the instrument, though not amounting to fraud, is unconscientious or lacking in good faith, in that he is taking an unfair advantage of his right to demand payment under the instrument. The exception allows the court to restrain the beneficiary from demanding payment not because the demand is not compliant or that the bank is otherwise entitled to refuse payment1but because in the circumstances the demand is or will be an abuse of the benefi­ ciary’s undoubted right. An example is where a beneficiary, who is negotiating a new contract with the account party, uses the threat of a demand for payment under a demand guarantee in order to put pressure on the account party to accept terms that are favourable to the beneficiary. In such a case, even if the beneficiary has an absolute and unqualified right to demand payment under the instrument, in using that right to apply pressure on the account party in respect of a new contract the beneficiary is taking an unfair advantage of the right which is being used for a purpose different from that for which the instrument was issued. To prevent such an unconscientious use or abuse of right judicial intervention may be allowed on the ground of unconscionable conduct.

1 Whether on the ground of fraud, nullity, or recklessness on the part of the beneficiary.

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The Uncomcionability Exception

7.02 The juristic basis for the exception is the general idea of unconscionability. However, the unconscionable conduct exception should be distinguished from the specific and wellestablished doctrine of unconscionable conduct as a ground for relief against a transaction which is substantially unfair and which has been procured in a morally reprehensible manner short of fraud, duress, or undue influence.2 In this context, unconscionable conduct is a factor which vitiates the complainant’s consent to enter into the impugned transaction. In other words, it relates to conduct before the conclusion of the contract. By contrast, unconscionable conduct as a ground for judicial intervention to restrain a demand for pay­ ment under a letter of credit or demand guarantee relates to conduct in the execution or performance of the contract. The court intervenes not because the complainant’s consent to the transaction was vitiated but because the defendants conduct in exercising his right under the transaction is an abuse of right. In this respect the unconscionable conduct exception resembles the doctrine of abuse of right which is well-known in French law and other civilian systems. Indeed the juristic basis of the French counterpart of the unconscionable conduct exception is the doctrine of abuse of rights.3 However, since English law has not recognized a general doctrine of abuse of rights or even good faith in the performance of contracts and has kept the pre-contract doctrine of unconscionable conduct within very narrow limits, the juristic basis for a post-contract formation unconscionable conduct exception in English law is not obvious. Even in Australia where the pre-contract doctrine of unconscionable conduct has assumed a much wider scope embracing situations akin to the doctrine of abuse of right,4 the post-contract unconscionable conduct exception has been recognized only on the basis of special statutory provisions.5

7.03 The unconscionable conduct exception is separate and different from the fraud exception discussed in Chapter 5, since for the exception to apply it is not necessary that the benefi­ ciary’s unconscionable conduct should amount to fraud. The exception is also to be distin­ guished from the nullity exception (discussed in Chapter 6) which applies only where a document presented is a nullity. The exception also differs from the recklessness exception (discussed in Chapter 6) in that the recklessness exception only applies in relation to the beneficiary’s failure to exercise due care in connection with the creation or presentation of a document that is a nullity. Unlike the nullity or recklessness exceptions, the unconscionable conduct exception applies even where there is no complaint about the conformity or genu­ ineness of any document presented. A beneficiary’s conduct in demanding payment may be unconscionable even though all the documents presented are perfectly in conformity with the requirements of the instrument and none is a nullity. And, unlike the illegality exception, discussed in Chapter 8, the unconscionable conduct exception deals with situations where there is no allegation that the beneficiary is involved in any illegality. Finally, the unconscio­ nable conduct exception is not concerned with cases where the beneficiary is making a demand for payment under the instrument in breach of restrictions to his right contained in the underlying contract. In this regard it is different from the exception discussed in Chapter 9 (where the demand for payment is made in breach of the underlying contract).

2See, e.g. N. Enonchong, Duress, Undue Influence and Unconscionable Dealing (Sweet & Maxwell, London, 2006) Part III.

3See discussion below at para 7.60.

4 See, e.g. Garcia v. NationalAustralia Bank Ltd{ 1998) 194 CLR 395 at 409, upholding the doctrine ‘that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct’.

5 See discussion above at paras 7.40 to 7.42.

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II. Status o f the Exception Under English Law

2. Consequences of the Exception

considers the question whether as a matter of legal policy English law should recognize such an exception. Section III considers the position in some foreign jurisdictions, including certain Commonwealth jurisdictions where the issue of recognition of the exception has been debated in the courts.

II. STATUS OF TH E EXCEPTION

UNDER ENGLISH LAW

The question whether an unconscionable conduct exception is currently available under 7.06 English law is not settled. Whereas in T T I Team Telecom International Ltd v. Hutchison 3G

UK L td6it was said, obiter, that there are circumstances where, in the absence of fraud, the court may intervene on the ground that the beneficiary’s conduct in demanding payment is or will be unconscionable or lacking in good faith, there are conflicting statements in many cases to the effect that fraud is the only exception.7 And there appears to be no reported case in which an English court has granted an injunction restraining a demand or payment on the ground that the beneficiary’s conduct in demanding payment was unconscionable.89

1.Recognition in the T T I Case

A.Towards a lack of good faith exception

In T T I Team Telecom International Ltd v. Hutchison 3G UK Ltd9 Judge Thornton QC 7.07 expressed the view that a lack of good faith is an established ground on which a beneficiary

may be restrained from demanding or receiving payment under a performance bond. The case concerned a contract for the claimant (TTI) to supply computer hardware and software to the defendant, Hutchison 3G UK (H3G). IT3G made an advance payment of part of the contract price and T T I procured an advance payment bond to be issued by its

6[2003] EWHC 762 (TCC); [2003] 1 All ER (Comm) 914.

7See paras 7.27 to 7.28 below.

8The decision in Elian andRabbath v. Matsas [1966] 2 Lloyds Rep. 495 which may be seen as an example of such a case is open to different interpretations. See discussion at paras 7.17 to 7.19 below.

9[2003] EWHC 762 (TCC); [2003] 1 All ER (Comm) 914.

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U)e Unconscionability Exception

bank guaranteeing payment to the defendant of the same sum as the advance payment. When a dispute arose about delays in T T I’s performance of the contract, H3G gave notice of its intention to demand payment under the bond. T T I applied for an interim injunction to restrain H3G from making the demand. The application was based on the ground, inter alia, that the demand was in bad faith. That raised the question whether, in addition to the fraud exception, there was a separate exception in English law based on a lack of good faith.

7.08 The court concluded that a ‘lack of good faith has for a long time provided a basis to restrain a beneficiary from calling a bond or guarantee’.10 However, the injunction was refused because in the circumstances of that case the alleged lack of good faith on the part of the beneficiary could not be supported on the available evidence. The allegation that the benefi­ ciary’s demand was in bad faith was based on two matters. The first was that the demand was based on delays byT T I in performing the underlying contract whereas the parties had agreed on new (extended) deadlines. However, the court found that there was no contractual varia­ tion of the original dates. Therefore H3G’s reliance on the original dates was not unjustified and so could not be castigated as conduct lacking in good faith. T T I also alleged that H3G was seeking to use the bond for an ulterior purpose, namely, to draw attention away from the fact that it wanted a premature let-out from the underlying contract for extraneous com­ mercial or other purposes. That claim was also rejected because the court found that these assertions were ‘mere speculation without any factual basis’.11 Thus, although the court accepted that, in principle, lack of good faith was a ground on which a beneficiary could be restrained from demanding or receiving payment under a letter of credit or demand guaran­ tee, in the particular circumstances of the T T I case, the injunction was refused because of insufficient evidence to support the allegation of lack of good faith.

B. Nature of the exception

7.09 The lack of good faith exception recognized in the T T I case is similar to the unconscionable conduct exception developed by the courts in Singapore.12 In the T T I case the court made reference to two of the leading Singapore cases on the unconscionable conduct exception, observing that a Singapore court will restrain a beneficiary from calling on the bond where the beneficiary has acted ‘so unfairly or with conduct that is so reprehensible or lacking in good faith that a court of conscience would either restrain or refuse to assist the party in question’.13 In one Singapore case,14 mentioned by the court in the T T I case, a demand for payment under a bond had been made by the beneficiary, the main contractor, merely to put pressure on the account party, the sub-contractor, to agree terms favourable to the main contractor on which the sub-contractor would return to site to undertake further work. The Singapore court granted an injunction restraining the beneficiary from demanding payment under the bond, describing the beneficiary’s conduct in demanding payment in the circum­ stances as ‘utterly lacking in good faith’. In the T T I case the court expressed the view that if a similarly clear-cut case were to come before an English court, it would also grant restraining relief.

10Ibid., at [34].

11Ibid., at [96].

12See discussion at paras 7.50 to 7.51 below.

13[2003] EWHC 762 (Comm); [2003] 1 All ER (Comm) 914 at 35.

14Samwoh Asphalt Premix PTE Ltd v. Sum Cheong Piling PTE Ltd [2002] BLR 459.

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II. Status o f the Exception Under English Law

One of the difficulties with an unconscionable conduct exception is how to limit its scope. 7.10

It is a problem that has been experienced by courts in other Commonwealth jurisdictions where an unconscionable conduct exception has been recognized.15 In the T T I case it was said that the lack of good faith needed to found a restraining injunction must be ‘significant’. However, no explanation was given as to what will amount to significant lack of good faith. This will depend on the circumstances of each case. Nevertheless, by way of guidance, the court gave examples of conduct which will amount to a breach of faith for purposes of restraining relief. These include:

[1] a failure by the beneficiary to provide an essential element of the underlying contract on which the bond depends; [21misuse by the beneficiary of the guarantee by failing to act in accordance with the purpose for which it was given; [3] a total failure of consideration in the underlying contract; [4] a threatened call by the beneficiary for unconscionable or ulterior motive; [5] or a lack of an honest or bona fide belief by the beneficiary that the circumstances, such as poor performance, against which a performance bond had been provided, actually

beneficiary makes a demand for payment on the ground that the account party has commit­ ted a breach of the underlying contract, a genuine dispute between the parties as to whether or not there has been a breach of contract does not amount to a lack of good faith. The same should apply in a case where the account party accepts that there has been a breach but alleges that the amount demanded by the beneficiary under the bond is excessive by reference to the amount of the damages to which the beneficiary is entitled under the underlying contract. In such a case, if there is a genuine dispute between the parties as to the amount of damages

15 In the case ofAustralia, see paras 7.43 to 7.49 and in the case of Singapore, see paras 7.52 to 7.53.

16[2003] EWHC 762 (TCC); [2003] 1 All ER (Comm) 914 at [46(3)]. Numbers in square brackets added.

17(1984) 28 BLR 19, 28-29.

18SamwohAsphaltPremix PTE Ltd v. Sum CheongPiling PTE Ltd[2QQ2\ BLR 459.

19See paras 5.39 to 5.41.

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