The Gazette 1986

GAZETTE

JULY/AUGUST 1986

But a Mareva injunction may not be granted where the guarantee or letter of credit specifies a foreign country as a place of payment, since the assets or prospective assets are in no sense within the jurisdiction. This was so in the "Bhoja Trader" case, where on the facts of that case the guarantee which called for payment at the offices of Citibank in Piraeus, Greece, was given by the London branch of Bank de L'Indochine et de Suez. Donaldson L.J. did not think that the bank's obligation was to pay in London and transfer to Greece. He remarked that "[t]he obligation was solely to pay in Greece and the bank could achieve this result how it liked — by drawing on funds already in Greece, by transfer from a third country such as France, in which the bank is incorporated, or by transfer from Lo n d o n ." The Court of Appeal expressly did not decide what the position would have been if the money had been payable either within or without the jurisdiction at the beneficiary's option. 25 * / am indebted to my colleague, Mark de B/acam, Barrister-at-law, who read earlier drafts of this article and made valuable suggestions for its improvement. (Part 2 will appear in the next issue.) Hatsbury's Laws of England (4tli Edition) Vol. 41, para. 960; Crcsswell, Blair, Hill, Wood, Encyclopaedia of Banking Law para.'s (501)-(5I8); H.C. Gulleridgc and Mcgrali, The Law of Bankers' Commercial Credits (1984) pp. 7, 61-64. 67-71 and 185- 189; F.M. Vcniris, Bankers' Documentary Credits (2nd ed., 1983) pp. 132-139; Graham A. Penn, "Pcrlormancc bonds: arc bankers free from the underlying contract?" [1984] J.B.I.. 132: Editorial, "Performance Bonds and letters of credit" (1984] J.B.E. 106; Zouhair A. Kronfol, "The Syndication of Risk in Unconditional Bonds" [1983] J.B.L. 13; The Courts; Banking World, October 1984 p. 49; Graham Pcnn, "On demand bonds: the question of fraudulent demand" (1985) 6 Co. Law 83. 2. [1978] Q.B. 159. 3. High Court, unreported, 16 February, 1984. 4. Tradax -v- Irish Grain Board (1984] I.L.R.M. 471 per O'Higgins C.J. at 477. The then Chief Justice referred to the definition of documentary credits set out in para. 2133 of the 2nd edition of Benjamin's Sale of Goods (1981): "The definition of documentary credits which is currently accepted by the banking world is that of General Provision b of the Uniform Customs and Practice for Documentary Credits [prepared by the Interna- tional Chamber of Commerce], According to this definition a documentary credit is "any arrangement . . . whereby a bank (the issuing bank), acting at the request and in accordance with the instructions of a customer (the applicant for the credit), (i) is to make payment to or to the order of a third party (the beneficiary), or is to pay, accept or negotiate bills of exchange (drafts) drawn by the beneficiary, or (ii) authorises such payments to be made or such drafts to be paid, accepted or negotiated by another bank, against stipulated documents, provided that the terms and conditions of the credit are complied with". The other bank is sometimes called the "intermediary" or "correspondent" bank. 5. Edward Owen Engineering Limited -v- Barclays Bank Interna- tional Limited In. 2, supra, at 169 per Lord Denning M.R. 6. See the remarks of Eveleigh L.J. in Polton Homes Limited -v- Coleman Contractors Limited, The Times, February 28, 1984. 7. There are many variations in the forms of commercial credits, the principal distinctions being between revocable and irrevocable credits, and confirmed and unconfirmed credits. Under the Uniform Customs and Practice for Documentary Credits ("the Uniform Customs") an irrevocable credit consti- tutes a definite undertaking by the issuing bank that the credit will be made available if the seller complies with the stipulated Footnotes 1.

conditions. A revocable credit does not constitute a definite undertaking by tlie issuing bank and may be cancelled or modified without notice. The distinction between a confirmed and unconfirmed credit turns upon whether or not the inter- mediary bank accepts a direct obligation to the seller to honour the credit. In (he former event, the intermediary bank "confirms" the credit, i.e., undertakes (sometimes for an extra commission payable directly by the seller) to pay whether or not it is put in funds by the issuing bank; in the latter event the credit is unconfirmed; the intermediary bank merely informs the seller that the credit has been opened in his favour, and the seller will have no right of recourse against the bank in the event of its refusing to pay. 8. Similarly, a confirmed performance guarantee is one which confers rights on the buyer vis-a-vis the correspondent (i.e., the buyer's local bank). 9. Schniillhoff's Export Trade (7th ed., 1980) p.248. 10. [1978] 1 Lloyd's Rep. 161 at 165. 11. [1978]Q.B. 146. 14. [1983] A.C. 168. "The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear excep- tion of the maxim ex turpi causa non oritur actio or . . . "fraud unravels all". The courts will not allow their process to be used by a dishonest person to carry out a fraud." per Ford Diplock at 184. 15. A form of contingency insurance is available which will indemnify the seller for a substantial percentage (approx. 90%) of its ascertained net loss sustained in respect of its obligations under its counter-indemnity to its bank up to a specific limit in the event of unfair calling of the guarantee by the buyer (i.e., where the buyer is not entitled to call the guarantee). The insurance will normally be subject to the provisoes that the seller is not in material default of its obligation under its contract with the buyer and that the call is made in circumstances which are beyond the seller's reasonable control. 16. Per Kerr J., fn. 11, supra, at 155: "The plaintiffs then still face what seems to me to be an insuper- able difficulty. Tlicy arc seeking to prevent the bank from paying and debiting their account. It must then follow that if the bank pays and debits the plaintiffs' account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank's contract with the plaintiffs or a breach of it. If il is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract, which the plaintiffs' writs do not even allege and as to which they claim no declaratory relief, then the plaintiffs would have good claims for damages against the bank. In that event the injunc- tions would be inappropriate, because they interfere with the bank's obligations to the Egyptian banks, because they might cause greater damage to the bank than the plaintiffs could pay on their undertaking as to damages, and because the plaintiffs would then have an adequate remedy in damages. The balance of convenience would in that event be hopelessly weighted against the plaintiffs." 17. [1984] 1 All E.R. 351; [1984] 1 W.L.R. 392. 18. Although Donaldson M.R. was remarking about ex parte injunctions, it seems that his directive also applies in die case of applications on notice or, as was the position in the Bolivinter case itself, where an application is made ex parte and one or more of the defendants appear or are represented by counsel. 19. Donaldson M.R. did not attempt to elaborate the types of cor- roborative evidence which would need to be adduced. For further comment on this point, see the judgment of the Court of Appeal in the United Trading Corporation case. 20. See Potion Homes Ltd. -v- Coleman Contractors (Overseas) Ltd., per Eveleigh L.J., infra. 21. Cresswell, Blair, Hill, Wood, toe. cit. para. (512.9). 22. [1981] Com. L.R. 235, C.A. This case was referred to with apparent approval by the Court of Appeal in the United Trading Corporation case. 23. [1981] 2 Lloyd's Rep. 256 (Court of Appeal). 24. Per Donaldson L.J. at 258. 25. See Cresswell et at, toe. cit. para.s (512.11) - (512.12). 12. Fn. 2, supra at 171. 13. Fn. 2, supra, at 169.

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