Jurisdiction - Singapore
Reports and Analysis
Singapore – Standard Of Proof For Fraud Exception To Bank’s Obligation To Pay Under Letter Of Credit.

4 November, 2014

 

Under English law, the well-established autonomy principle requires the paying bank to pay under a letter of credit only if the documents presented to it conform to the formal requirements of the letter of credit, regardless of any underlying dispute between the transacting parties. The rationale for the autonomy principle is to ensure the smooth flow of international trade; hence the English courts have departed from the autonomy principle only where the beneficiary commits fraud (“the fraud exception”). 


In Alternative Power Solution Limited v. Central Electricity Board and another [2014] UKPC 31, the Privy Council considered the standard of proof required to invoke the fraud exception in an interlocutory application for an injunction restraining a bank from paying under a letter of credit. 


Facts 


Under a contract (“the Contract”) for the supply of compact florescent lamps by the Appellant, Alternative Power Solution Limited (“APS”), to the First Respondent, Central Electricity Board (“CEB”), CEB had the right to inspect the lamps before shipment to confirm their conformity to the Contract specifications. 


An irrevocable transferable letter of credit (“LOC”) was issued by the Second Respondent, Standard Bank (“the Bank”), in favour of APS as the means of payment under the Contract. Subsequently, APS rejected CEB’s request to the Bank for the LOC to be amended to require APS to submit additional documents, namely a certificate of inspection and a written confirmation by CEB that the lamps could be released for shipment. 


Meanwhile, arrangements between the parties for CEB’s inspection of the lamps were unsuccessful and CEB applied in Mauritius for an injunction restraining the Bank from paying under the LOC. At the hearing, where CEB, the Bank and APS were all represented, APS undertook to the Mauritian Court that no shipment would be effected before inspection. CEB withdrew its application after the Bank informed that it would not pay until the shipment was effected.

 

However, apparently without APS’ knowledge, the lamps had in fact been shipped two days before the hearing of CEB’s application. CEB then made a number of allegations against APS and added that APS would be in breach of contract if it was found during the inspection that, contrary to APS’ prior undertaking which allegedly formed part of the Contract, the lamps had not been manufactured by Philips or at a factory licensed by Philips. 


Shortly after, APS caused to be presented certain documents to the Bank under the LOC, but the Bank discovered a number of discrepancies with these documents. A few weeks later, what were said to be conforming documents were presented to the Bank on behalf of APS. It was not suggested that any of these documents presented were forged or contained, to APS’ knowledge, any material express misrepresentation or implied misrepresentation. 


Subsequently, CEB sought and obtained an ex parte interim order from the Mauritian Court restraining the Bank from paying APS under the LOC as well as an order requiring APS and the Bank to show cause why the interim order should not be made interlocutory. CEB alleged that APS had acted fraudulently in that: (a) APS was not supplying the goods as agreed, i.e. the lamps would be manufactured by Philips or under licence by Philips in China; (b) APS had breached the Contract by not allowing or authorizing inspection of the lamps before shipment; and (c) APS had breached the Contract and its undertaking given to the Mauritian Court that no shipment would be effected before inspection, when the lamps had in fact already been shipped. 


APS’ defence was, inter alia, that it had made attempts to arrange for CEB to inspect the goods. APS also denied knowing that the goods had already been shipped before it gave the undertaking to the Mauritian Court. 


Throughout the dispute, the Bank took the stance that if compliant documents were presented, it would pay under the LOC. 


Decision 


Mauritian Courts


The judge at first instance granted the interlocutory injunction, holding that the Bank was aware that APS had not complied with the terms and conditions of the Contract, namely that CEB had to inspect the lamps before shipment. The judge held that the fraud exception applied as CEB had raised “a serious prima facie arguable case that there might be an attempt to defraud it”, and that the balance of convenience weighed heavily in favour of CEB as APS was not entitled to claim under the LOC arising out of its own alleged fraudulent conduct. The Mauritian Court of Appeal affirmed the judge’s decision. 


Privy Council


The Privy Council, however, allowed APS’ appeal as it found that there was insufficient evidence of fraud to establish the fraud exception and, in any event, a balance of convenience did not justify an interlocutory injunction. 


On the standard of proof to establish the fraud exception at the interlocutory stage, the Privy Council held that the correct test was that stated by Ackner LJ in United Trading Corp SA v. Allied Arab Bank Ltd [1985] 2 Lloyds’ Rep 554, namely “whether it is seriously arguable that, on the material available”, “the only realistic inference is (a) the beneficiary could not honestly have believed in the validity of its demands under the letter of credit and (b) the bank was aware of the fraud.”

 

The Privy Council observed that the expression “seriously arguable” was a “significantly more stringent test” than the test adopted by the judge at first instance and was necessary to ensure that “[t]he defence of established fraud known to the bank … must be capable of being established with clarity at the interlocutory stage”. This observation was consistent with the comment in an earlier English decision that clear evidence of the bank’s knowledge of the fraud is required because “irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged”. 


On the facts, the Privy Council found that there was insufficient evidence of fraud by APS. Even assuming that APS had acted fraudulently, there was no evidence of the Bank’s knowledge as such, given that the Bank had not agreed to any relevant variation of the LOC. Also, the Privy Council held that two of the three allegations relied on by CBE as evidence of APS’ fraud were allegations of breach of contract, which were irrelevant to the liability of the Bank under the LOC. 


In addition, the Privy Council held that the Bank’s knowledge of the parties’ agreement that no shipment would be effected before inspection did not indicate a possible basis upon which the fraud exception could apply. Although the Mauritian Courts had placed considerable weight on the representations made in court by APS (which the Bank was aware of) that no shipment would be effected before inspection (when shipment had in fact occurred), the Privy Council found that it was most unlikely that APS knew at the material time that the lamps had already been shipped. Moreover, the LOC did not require APS to ship the lamps. 


In discharging the interlocutory injunction, the Privy Council found that there were no facts which would overcome the difficulty that the balance of convenience in fraud exception cases will invariably weigh in favour of the bank. 


Comment 


The Privy Council’s decision indicates that notwithstanding the fraud exception, it is virtually impossible to restrain a paying bank from paying under a letter of credit if conforming documents are submitted to it. In reality, the applicability of the fraud exception is extremely limited. As noted by the Singapore Court of Appeal in JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47, “[i]nterfering with payment under a letter of credit is tantamount to interfering with the primary obligation of the obligor to make payment under its contract with the beneficiary”. 


Thus, the high standard of proof required in establishing the fraud exception – the “seriously arguable” test coupled with the “the only realistic inference” yardstick -preserves the primacy of the autonomy principle in letter of credit transactions, and therefore the “life-blood of international commerce”. The Privy Council’s decision, although not binding on the Singapore courts, may be taken into account should a similar issue regarding the standard of proof for the fraud exception be raised in Singapore in future.

 

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For further information, please contact:

 

Conrad Campos, Partner, RHTLaw Taylor Wessing
[email protected]


Lee Wei Qi, RHTLaw Taylor Wessing
[email protected]

 

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