The Gazette 1986

g a z e t t e

s e p t e m b e r 1986

The indemnity also provided that all matters arising out of it were to be construed and determined according to English law. Rafidain itself always required a counter indemnity from the bank at whose request it issued the performance bond. One of the standard terms of such counter indemnity provided: "in case of implementation, any claim or claims will be paid to us on first demand, despite of any contestation between principals and beneficiaries." The Iran-Iraq war caused the plaintiffs and Agromark difficulties in carrying out the contracts and disputes arose, including disagreements stemming from the performance bonds. On occasion, it was necessary to use ports of delivery other than those designated in the contracts. There had been delays, diversions and disruptions in the administration of the contracts at the Iraqi end. As a result, the plaintiffs claimed their billings under the contracts had not been properly considered by Agromark and they were owed substan- tial sums under the various contracts. Agromark insisted on the bonds being renewed over and over again, and asked the plaintiffs to transfer all the perfor- mance bonds relating to all the other contracts to one particular contract, the contract for the sale of one billion eggs. The plaintiffs refused. A few days later, on 3rd June, 1984, Agromark began to call them in. The plaintiffs took the view that the demands made on the performance bonds, other than those relating to the one billion eggs contract were manifestly fraudulent in that they related to contracts which were performed many years earlier and in respect of which no complaint had been made in the intervening years. They feared that, if their own accounts came to be debited as a result of these demands, they would have no hope of recovering the equivalent sums from Agromark or its bankers, Rafidain. Actions were commenced against a number of the Banks and Rafidain Bank and, upon interlocutory applications being made by the plaintiffs, injunctions were granted restraining the Defendants from paying on the bonds. The High Court discharged the injunctions granted against the Banks on the grounds that there was insufficient evidence of fraudulent demands by Agromark. Appeals were taken in both actions. The judgment of the Court of Appeal on the two appeals was delivered by Ackner L.J. on 17 July. The Court concentrated in giving its judgment on the second action. It was "common ground" that the courts could only interfere by way of injunction "in order to prevent the alleged breach of a legal duty owed by the defendant to the plaintiff or by way of ancillary relief required by a party to proceedings who asserts a cause of action against the other party". 28 Ackner L.J., therefore, considered three potential causes of action asserted by the plaintiffs, one of which was in negligence. 29 It was accepted by the respondents that Rafidain (and the Banks mutatis mutandis) would arguably be liable to the plaintiffs in negligence if they complied with a demand made by Agromark which, to the knowledge of the bank at the time of payment, was fraudulent. In the opinion of Ackner L.J.:

held further that if the circumstances were not such as to justify the grant of a Mareva injunction (it will be recalled that the judge below held that they were not) then the judge below erred in attempting to freeze the proceeds of the performance bond. Accordingly, he allowed the appeal. Although both Eveleigh and May L.J. agreed on the result, both allowing the appeal, there is a remarkable difference of opinion in their judgments concerning the. situation in which a dispute arose between the seller and the buyer out of the underlying contract and this dispute extended to the bond facility. Here, i.e., as between buyer and seller, Eveleigh L.J. was prepared to admit certain defences arising from the underlying contract, the avoidance of the underlying contract and a total failure of consideration, in addition to that of fraud. In such circumstances, in his view, the seller might be entitled to restrain the buyer from making use of the performance bond, i.e., from making a call upon it. May L.J. on the other hand simply applied the principle that the bond was equivalent to cash in hand and that, as a matter of law, the defendants were entitled to demand payment of the bond and that the bank was bound to pay. It is submitted that May L.J.'s judgment is more consistent with the authorities and is to be preferred to that of Eveleigh L.J. The English Court of Appeal gave judgment in two actions a few months later in United Trading Corpora- tion S.A. -v- Allied Arab Limited and Others; Murray Clayton and Others -v- Rafidain Bank and AnotherF The plaintiffs, three associated companies, applied for injunctions and other relief as a result of what they alleged to be fraudulent calling in of certain performance bonds. The plaintiffs carried on trade with Iraq by supplying foodstuffs to the Iraqi government controlled State Establishment for Agriculture Products Trading, Baghdad ("Agromark"). Their evidence was that since 1979 their trade with Agromark consisted of 19 contracts for the supply of eggs and other foodstuffs to a total value of about US$950 million up to the end of 1983. In most cases, the contracts were subject to standard performance bonds from an Iraqi state bank, Rafidain Bank. On receipt of the plaintiffs' perfor- mance bond Agromark would open an irrevocable letter of credit in favour of the plaintiffs with Rafidain and thus the sale could ordinarily proceed to completion. For the purpose of procuring the requisite performance bond, the plaintiffs did not themselves make the direct approach to Rafidain. They arranged through a number of banks (the "Banks"), to instruct Rafidain to issue the performance bond. In consideration of the Banks complying with this request, the plaintiffs would give them a written indemnity by which typically the plaintiffs agreed to indemnify the bank against all losses, etc., which it might incur by reason of giving such instructions and agreed that "any demand upon you by [Rafidain] for the payment of any sums of money in pursuance of your having instructed them as aforesaid shall be a sufficient authority to you for your making any such payment and it shall not be incumbent upon you to enquire whether any such amount is in fact due."

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