The Gazette 1986

GAZETTE

JULY/AUGUST 1986

revision of the delivery dates specified in the contract and in relation to which it was deposed by one of the directors of the plaintiffs that he was assured by the buyers that such revision would not result in penalties for delay in deliveries under the contract. Despite this, however, the sellers were notified by the Irish bank that the guarantee had been called in by the Algerian bank on the ground of delay and weight shortages in the shipments and the sellers claimed injunctive relief. Keane J. accepted the legal principles enunciated by Kerr J. in the Harbottle case and Lord Denning M.R. in the Edward Owen case, i.e., that the machinery of irrevocable obligations assumed by banks are regarded as collateral to the underlying contract between " t he merchants at either end of the banking chain" and that the only exception is when there is a clear fraud of which the bank has notice. He observed that it was very difficult to understand how the buyers could have bona fide sought to call in the guarantee on the grounds of delay. But he stated that that was "very f a r " from saying that the sellers had established a clear case of fraud which would entitle the Irish bank to repudiate its obligations under the guarantee. He issued the following warning: "It must be said . . . . that business firms who enter into contracts of this nature requiring the provision of unconditional guarantees by banks take the risk that they may have no remedy against their overseas customers other than an action in the foreign tribunal; and no remedy at all against the bank because of the unconditional nature of the guarantee." 15 Solicitors — how public ^

held that the defendant had been right to refuse to honour the plaintiffs' credit. This was the first reported occasion when an English court had held that a bank need not honour a letter of credit which appeared to be true on its face but which contained a false statement by a third party. If the judgment of the Court of Appeal had been allowed to stand, it would have introduced a new exception to the general rule that a bank must pay. However, the traditional principles were reasserted on appeal from the Court of Appeal. It was held by the House of Lords, reversing the decision of the Court of Appeal, that a fraud to which a beneficiary was not a party would not entitle a banker to refuse payment. The speech of Lord Diplock, with which the other Law Lords agreed, rejected the broad proposition that a confirming bank was not under any obligation, legally enforceable against it by the beneficiary of a documentary credit, to pay to him the sum stipulated in the credit against presentation of documents, if the documents presented, although conforming on their face with the terms of the credit, nevertheless contained some inaccurate statement of material fact. He also rejected a narrower proposition that, if any of the documents presented under the credit by the beneficiary contained a material representation of fact that was false to the knowledge of the person who issued the document and was intended by him to deceive persons into whose hands the document might come, the confirming bank was under no liability to honour the credit, even though, as in the instant case, the persons whom the issuer of the document intended to, and did, deceive included the beneficiary himself. Thus, the attempt to expand the fraud exception failed. And it may be argued by analogy that the fraud option may not be relied on to escape payment on a performance bond where the beneficiary is not party to the fraud. The Hibernia Meats case It was against this background that Keane J. enter- tained an application for an interlocutory injunction in Hibernia Meats Limited -v- Ministere de L 'Agriculture et de Revolution Agraire and Trinity Bank LimitedJ In September 1983, the plaintiffs, meat exporters, entered into a contract for the sale of meat to the first named defendant. The amount of meat which they agreed to supply was 1,500 tonnes and delivery was to be effected in Algeria in three shipments on specified dates. The contract required the plaintiffs to give a guarantee of "good execution" of the contract in a sum representing 5% of the total amount of the contract. This was done by means of a guarantee from an Algerian Bank in the required amount (US$118,500) in favour of the buyers. In order to obtain this guarantee, it was necessary for the sellers to procure the issuing by the second named defendants, an Irish bank, to the Algerian bank of the customary matching performance guarantee. The latter guarantee was expressed to be "payable on first written demand without further formality". The plaintiffs experienced difficulties in meeting the agreed delivery schedule. In the affidavits grounding their application to the High Court they referred to a

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