Lloyd's Maritime and Commercial Law Quarterly
LETTERS OF CREDIT AND THE FRAUD EXCEPTION—THE THRESHOLD TEST FOR INJUNCTIVE RELIEF
Gerard McMeel*
Alternative Power Solution Ltd v Central Electricity Board
Every student of banking law knows Kerr J’s talismanic phrase that irrevocable payment undertakings are “the life-blood of international commerce”.1 The right to payment under documentary credits and performance bonds is treated as tantamount to cash, and is readily enforceable by means of summary judgment.2 The autonomous nature of such undertakings is near-absolute.3 English law recognises a tightly drawn principal exception where fraud involving the beneficiary can be established.4 The fraud exception appears to have both substantive and adjectival elements. Substantively the test requires: (1) fraud to which the beneficiary is party or privy at the date of the presentation or demand for payment; and (2) that the bank is aware of the fraud at that date.5 The standard of proof to establish the fraud exception has recently been revisited by the Privy Council in Alternative Power Solution Ltd v Central Electricity Board,6 which has restated the test for injunctive relief in stringent terms.
Determinations on the fraud exception typically take place at interlocutory hearings, either involving a claim for an interim injunction either by the applicant or one of the banks, or a claim for summary judgment by the beneficiary against the bank on its right to payment. That yields two questions. First, what standard of proof must the applicant meet? Secondly, what evidence will be required in support?
1. R D Harbottle (Mercantile) Ltd v National Westminster Bank [1976] QB 146, 155–156; and cited with approval by inter alia in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, 169 (Lord Denning MR); Power Curber Int Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, 1243 (Griffiths LJ); and Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31, [34].
2. Power Curber Int Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, 1241 (Lord Denning MR); Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800, [31] (Mance LJ).
3. Uniform Customs and Practice for Documentary Credits (UCP 600; 1 July 2007), Arts 4 and 5 (credits).
4. A separate “nullity” exception was rejected in Montrod Ltd v Grundkotter Fleischvertriebs [2001] EWCA Civ 1954; [2002] 1 WLR 1975. For criticism of that decision see, inter alia, M Bridge, “Documents and Contractual Congruence in International Trade”, in S Worthington (ed.), Commercial Law and Commercial Practice (Hart, Oxford, 2003), 213, 235–238. In contrast, a nullity exception has been recognised in Singapore: Beam Technology (Mfg) Pte Ltd v Standard Chartered Bank [2003] 1 SLR 597; noted Chin and Wong [2004] LMCLQ 14. For discussion of a nascent illegality exception, see N Enonchong, “The autonomy principle of letters of credit: an illegality exception?” [2006] LMCLQ 404.
5. A test definitively established by United City Merchants (Investment) Ltd v Royal Bank of Canada, The American Accord [1983] 1 AC 168, which built on the New York case of Sztejn v Henry J Schroder Banking Corp (1941) 31 NYS 2d 631 and an English Court of Appeal case on performance bonds, Edward Owen Engineering v Barclays Bank International [1978] QB 189. For criticism of the rule that the bank must pay against documents which are apparently conforming, but not genuine, see R Goode, “Abstract Payment Undertakings”, in P Cane and J Stapleton (eds), Essays for Patrick Atiyah (OUP, Oxford, 1991), 209, 228–233.
6. [2014] UKPC 31 (PC: Lords Mance, Clarke, Sumption, Hodge and Toulson; on appeal from the Supreme Court of Mauritius).
20