Privy Council clarifies the circumstances in which a bank can be stopped from paying under a Letter of Credit: Alternative Power Solution Limited ("APS") v Central Electricity Board ("CEB") and Another [2014] UKPC 31 - DAC Beachcroft

Privy Council clarifies the circumstances in which a bank can be stopped from paying under a Letter of Credit: Alternative Power Solution Limited ("APS") v Central Electricity Board ("CEB") and Another [2014] UKPC 31's Tags

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Privy Council clarifies the circumstances in which a bank can be stopped from paying under a Letter of Credit: Alternative Power Solution Limited ("APS") v Central Electricity Board ("CEB") and Another [2014] UKPC 31

Published 23 octubre 2014

Basis of Appeal

The appeal by APS arises out of orders made by the Commercial Division of the Supreme Court in Mauritius and its Court of Appeal which granted, and continued, an interim injunction against the Second Respondent, Standard Bank ("SB") preventing SB from debiting CEB's account and making payment to APS under a Letter of Credit on the basis of the fraud exception. APS therefore appealed to the Privy Council against the orders made by the Mauritian courts.

Background

In 2010 APS contracted to supply a quantity of light bulbs to CEB. The contract, which contained an arbitration clause, provided that the goods were to be inspected at the manufacturing facility in China and payment under the contract was to be made by an irrevocable letter of credit.

As provided in the contract, a Letter of Credit was therefore issued by SB and notified to APS on 27 September 2010. It was stated to be "Irrevocable Transferable" and the applicable rules were "UCP Latest Version". The date of expiry of the Letter of Credit was Port Louis, Mauritius on 30 December 2010 and it set out the documents which it required to be produced to facilitate payment.

However, the goods were shipped by APS before CEB had an opportunity to inspect them and in addition, an issue arose about the change of the identity of the manufacturer which was suggested by CEB to be fraudulent. SB sought to make payment under the Letter of Credit on the basis that the obligations of the parties under the Letter of Credit were independent to the underlying contractual agreement and notwithstanding the assertion of fraud, it had been provided with the required documents enabling it to comply with the terms of the Letter of Credit. Notably, the documents to be produced pursuant to the Letter of Credit did not include any certificate of inspection of the goods or written confirmation from CEB that the goods could be released for shipment. CEB had subsequently requested an amendment to the requisite documents but this was not agreed by APS.

CEB therefore made an application to the court for an injunction restraining SB from making payment under the fraud exception i.e. that there is fraud on the part of the beneficiary or illegality and asserted that SB knew of the fraud as it had been copied in on communications between the parties . CEB further claimed that it had not been open to SB to pay on an irrevocable letter of credit as it was aware that there was an issue relating to the verification of the goods and that it had raised a seriously arguable prima facie case that there might have been an attempt to defraud.

Decision

The Privy Council reviewed the scope of the fraud exception, and considered:

  • What is the correct test to establish the fraud exception; and
  • Was there sufficient evidence of fraud in this case to establish the exception; and
  • Did the balance of convenience justify an interlocutory injunction. 

 

It concluded that a different test should be applied at an interlocutory stage to that at trial but the applicant must establish that the only realistic inference to be drawn was that:

  • The beneficiary could not have honestly believed in the validity of its demands under the letter of credit; and
  • The bank on who the letter of credit was drawn was aware of that fact.

 

On the facts of the case, the Privy Council held that there was no evidence upon which a fraud exception could apply, whatever the test might be, as allegations of breach of contract were irrelevant to the liability of SB under the Letter of Credit. Further, on the issue of the balance of convenience, this will almost always militate against the grant of an injunction. They therefore concluded that there were only extraordinary circumstances in which a bank could be restrained from making payment under a Letter of Credit on the basis of fraud.

Comment

The above decision demonstrates the need to ensure that any and all documents a buyer requires before a seller is able to receive payment are accurately listed in the Letter of Credit. Although any omissions can be corrected at a later date with the agreement of the other party, if the other side does not agree, as was the position in this case, then the prospects of stopping the payment being made under a Letter of Credit are remote.

Pippa Ellis, Director
+44 (0)20 7894 6252
pellis@dacbeachcroft.com

Authors

Pippa Ellis

Pippa Ellis

London - Walbrook

+44 (0)20 7894 6252

Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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