Case No: A3/2000/0221;2000/5272;2000/5331;2000/5332;2000/6338
 
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL)
Mr Justice Timothy Walker
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 20 July 2000

B e f o r e :

LORD JUSTICE SCHIEMANN
LORD JUSTICE WALLER
and 
LADY JUSTICE HALE
- - - - - - - - - - - - - - - - - - - - -

	SAFA LTD		Appellant/
Claimant	
	- and -		
	
BANQUE DU CAIRE	
Respondent/
Defendant	

- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040,  Fax No:  0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

Mr J Bogle (instructed by Grunfeld Davis for the Appellant)

Mr R Slade (instructed by Norton Rose for the Respondent)
- - - - - - - - - - - - - - - - - - - - -

Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Waller:
Introduction

This is an appeal from a decision of Timothy Walker J given on 21st October 1999 by which he refused to give summary judgment in favour of the claimant who claimed as assignees of a beneficiary under two letters of credit.

The facts

Safa Limited (Safa) are the assignees of two letters of credit opened by Banque Du Caire (the Bank) on 3rd July 1998, but amended on 30th July and 3rd August.  The beneficiary of the letters of credit and the assignor was Paul Group International Insurance Brokers/T.L.Dallas (London) Limited (PGI) a Lloyds Insurance broker.  Under the letters of credit as amended the Bank undertook to pay in one case a sum not exceeding US$ 5,550,000, and in the other a sum not exceeding US$ 3,700,000 “available for payment against the presentation of Financial Insurance guarantee in the name of Banque Du Caire El Dokki branch to Barclays Bank PLC at 54 Lombard Street….by Merrion Reinsurance Company Ltd, this guarantee to be authenticated from [various bodies] and this financial insurance guarantee will be: deed of guarantee for non-payment of loan’s instalments with the following text:

Whereas, we acknowledged that [the Bank]…has agreed to grant its client Aboul Fotouh Establishment (the borrower) a loan amounting to [in the one case $30,000,000, and in the other $20,000,000] with the terms mutually agreed upon for which borrower issued cheques numbering 7 representing the instalments for payment on said loan …which said cheques are drawn and detailed in the enclosed schedule…which is deemed to be integral and complementary part of this deed….

"We, Merrion Reinsurance Company Ltd., (the guarantor). located at --  commercial registry no -- of the year        issued in the city of     hereby declare that our liability is absolute, unconditional and irrecoverable now or in the future for whatever reasons, to secure and guarantee, in our capacity as joint guarantor vis-a-vis Banque Du Caire, Branch Dokki (lender), all obligations of Aboul Fotouh Establishment (borrower) with the bank. and thus, in the one case $30,000,000, and in the other $20,000,000, and we hereby undertake to pay the lender bank any amount or amounts representing the value of any of the cheques for the instalment mentioned in the enclosed payment schedule in the event of non-payment by the borrower of the value of the cheque or cheques on their maturity dates for whatever reasons, and thus, immediately and upon first written request from the lender bank sent by fax confirmed by registered mail to our address as above mentioned, without consideration to any objection or dispute from the borrower or anybody whatsoever."							”
The letters of credit as amended [see C1 169 and 178] continued

“1.  The only document is the deed of guarantee…

2.  Payments will be made against receipt of the deed of guarantee….

3.  The total amount in [one case US$5,550,000, and the other US$3,700,000] paid as follows:- ten equal monthly payments of [in the one case $550,000, and the other $370,000] starting with receipt of the deed of guarantee for non-payment of loan’s instalments”.

It will be apparent, as the judge himself remarked, that these letters of credit are somewhat unusual on their face.  Nothing has been made by Mr Slade for the Bank of the fact that the sums due were to be paid in instalments which might be thought to be unusual, but other features which are unusual are that the letters of credit are undertaking to pay a sum to an insurance broker against the obtaining of financial guarantees of which the Bank itself was to be the beneficiary, in connection with a loan which the Bank was itself negotiating with its customer.  Even without looking at any surrounding documents the inference would appear to be that the Bank is promising to pay money for the obtaining of the financial guarantees.  Indeed it is not unimportant that the relationship between the beneficiary in this case and the Bank is clearly not covered simply by the terms of the letter of credit.  PGI were acting as brokers.  It is submitted by Safa that PGI were acting for the borrower (AFE), but the financial guarantee they were obtaining was in favour of the Bank, and that seems to me at least prima facie to demonstrate that they were acting as brokers for the Bank. 

Indeed the relationship between PGI and the Bank was such that Mr Bogle, for Safa, in my view very properly felt constrained to accept that, if the Bank had paid money under the letter of credit to the brokers PGI, but the Bank had decided not to lend money to its customer, and had cancelled the guarantee from Merrion without Merrion ever having been on risk, the Bank would have had a claim against the broker for the return of the moneys.  Mr Bogle suggested that the broker might not have to return brokerage or any remuneration agreed to be paid to the broker for obtaining the financial guarantee, but without debating that issue, the very proper concession demonstrates the unusual nature of the relationship of the Bank and the beneficiary in this case, and demonstrates that that relationship, I emphasise again, is not simply governed by the terms of the letters of credit.

Background

The history of the matter appears to be as follows and I shall indicate where disputes lie.

As is already apparent, AFE were desirous of borrowing money from the Bank.  To obtain those loans they were prepared to offer by way of security, financial guarantees. PGI were insurance brokers who were to find insurers prepared to offer such guarantees.  Merrion were selected as those insurers.  PGI would not have recommended Merrion and PGI assert that they informed AFE that Merrion was not to be recommended.  They informed AFE, so it is alleged, that Merrion were not in the security list of Lloyds.  The Bank do not accept that AFE were told these things, indeed the Bank allege that they were informed by their customer Mr Fotouh that he had had excellent reports on Merrion from PGI.  [see para 39 of Mrs Sapur C2 490].  This may be in dispute but it is certainly not alleged by Safa that PGI ever told the Bank that it did not recommend Merrion.  It seems that references from bankers, solicitors and accountants were obtained by AFE and passed to the Bank, and the Bank made its own inquiries of Citibank, but it is not suggested that the Bank discovered the poor rating of Merrion.

AFE applied to the Bank for the opening of a first letter of credit (not the subject of these proceedings) naming Merrion as the issuer of an insurance policy and also at this stage naming Merrion as the beneficiary of the letter of credit.  At some stage PGI became the beneficiary. This letter of credit undertook to pay $1,950,000, $1,250,000 within five days of receiving the “complied documents”, and $350,000 on 1st July 1998, and $350,000 on 1st August 1998.  A financial guarantee was presented under the letter of credit and the Bank paid the sums due.  Unknown to the Bank, PGI had instructed Barclays Bank to discount the letter of credit, and required $1,053,000 to be paid to Merrion, $1,500 to be paid to Tower Risk Management (a subsidiary of Merrion), and $600,000 to a Mr M. Shakir Ahmed [C2-296].  There was a balance which presumably represented PGI’s brokerage. 

An instruction to distribute the proceeds of the two letters of credit the subject of these proceedings included an instruction to make payments to Mr Ahmed.  Before the judge the Bank’s case was that PGI were obtaining dishonestly more under the letters of credit than they required for the payment of premium to Merrion.  Indeed, part of their case by a statement put in very late before the judge was that PGI had represented to AFE that they were not even taking brokerage on the deal, and that PGI were dishonestly obtaining all moneys which were in excess of that which was required to pay premium.  Safa, having produced evidence that PGI were to be remunerated (see C3-648), the Bank have not pursued that point on appeal.  On the appeal Safa have sought to put in statements from representatives of PGI, Mr Towey and Mr Sterry.  They assert that the payments to Mr Ahmed were payments made on the instructions of AFE through agents of AFE.  As Mr Towey states “As far as I was concerned the surplus was not my property and neither that of PGI and I had to transfer it to wherever AFE wished.  Neither I or PGI were benefiting from this surplus.”[C3-544]

In June 1998 the arrangements were made for the issue of the further letters of credit the subject of this action.  Once again Merrion were named as the providers of the financial guarantees.  The credits were issued originally on 3rd July 1998, but amendments were made on 30th July and 3rd August.  There are certain features emphasised on behalf of Safa or the Bank.

First, Safa points to the fact that Mrs Sapur in her evidence for the Bank suggests that she “objected vehemently about the idea to secure financial guarantees by means of a letter of credit” and that Mr Fotouh (AFE) “dictated it to us”.[C2- 492] 

Second, AFE lodged as security for the two letters of credit the full amounts due to be paid under them following which on 3rd July 1998 the Bank approved the issue of the same.

Third, as Safa would emphasise, only thereafter was the premium agreed with Merrion.  There is no documentary evidence of precisely what premium was agreed or when, but in Mr Towey’s statement that was not before the judge he says that agreement was reached on 30th July 1998. [C3 –547].  That it should be said was prior to the second amendment.

Fourth, it is Safa’s case that a Mr Hamid and Mr Gamal were agents of AFE and that they knew what premium had been negotiated with Merrion being parties to that negotiation, that they knew thus that the sum payable under the letters of credit exceeded the premium due and indeed that it was they that gave instructions as for the distribution of the surplus to Mr Ahmed.  Mr Towey says in a statement not before the judge “Mr Hamid came to my offices on 30th July 1998, and requested that I instruct my bankers to transfer the surplus of the Second and Third letters of credit to Mr Ahmed’s account, as before.  Mr Hamid stated this was the minimum surplus and if I did not immediately instruct my bank to make the transfer then the proposed transaction would be cancelled immediately.  I recall that he stood over me while applying a great deal of pressure.”

Fifth, on 5th August 1998, the Bank refunded the funds covering the value of the letters of credit to AFE.  The judge was informed otherwise on the summary judgment application which is a matter about which Safa make serious complaint.  It seems that Mr Slade through inadvertence so informed the judge but Safa’s real complaint is that a representative of the Bank was present and should have known the truth.  The matter was of importance, Safa say, because it provides the reason why the Bank might seek to escape liability under the letters of credit in that following the return of the blocked funds they were no longer secured if they paid out.

The financial guarantee was presented to Barclays on 7th August 1998.  The Bank sought authority to pay “without responsibility on their part” [C2- 341.3], and received such authority but without the last quoted words [C2-345].  Mr Bogle made something of this point.  I do not find it of great relevance. 

It is the Bank’s case that at a meeting with Mr Fotouh on 17th August a decision was taken to reject the guarantees of Merrion.  What the Bank however did was to reject the documents at that stage on the basis that they were not properly authenticated. [C1-226].  That rejection was beyond the time allowed under Articles 13 and 14 of the UCP 500.

In Mr Towey’s statement (not before the judge) he says that towards the end of August he was informed by Mr Hamid that there might be a problem in relation to the Bank approving the loans to AFE as the Bank had some concerns in relation to Merrion.  Some investigation it seems went on to explore whether other insurers might be available, and investigations as to Merrion’s reinsurance also took place. [see on the latter the letter dated 24th August 1998 at C2-345.1]

Safa suggests that at this stage there were collusive arrangements made between AFE and the Bank to bring about cancellation of the letters of credit.  That allegation is based on the fact that AFE sent the Bank a draft of the letter it required from the Bank [C2-347] and which the Bank ultimately sent [C2-349] stating that the Bank rejected Merrion as “not financially well established…it is also incapable financially to support issue these types of guarantees.”  It does appear that the Bank and AFE were acting at this stage together to try and negative any liability there might be under the letters of credit, but it would also appear that the Bank did have concerns about the viability of Merrion.  It was this letter which AFE then sent to PGI under cover of its letter dated 14th September 1998 in these terms:- 

"To	:	Paul Group International
Att.	:	Paul Towey

Subject	:Insurance Policies Issued By Merrion Reinsurance Co. 		Ltd 

Dear Paul,

	Attached please find a copy of the letter received by us from Banque Du Caire indicating their refusal of the subject policies based on the high risk involved related to the financial stance of the issuing company.  This decision was based on thorough investigation conducted by the bank. 

Based on this, the bank would be returning the policies back to Barclays Bank and will be cancelling the letters of credit.  However, we are still interested to conduct business with you, and we have already sent the papers of “New England Co.” to the other banks we are dealing with, to explore the possibilities for Re-issuing new policies through this company, but to other banks and not Banque Du Caire.  We are awaiting their reply within 2 weeks. 

As for the old policy of $ 13,000,000, for which the premium has been paid, please note that we would like upon receipt of acceptance from the other banks, to transfer this policy, and the premium, to New England and just to change the beneficiary from Banque Du Caire to the other banks. 

Your Cooperation and understanding would be highly appreciated

Best Regards,

Hossam A. Fotouh
Chairman"

Thereafter occurred the following relevant events 

1.	On 2nd October 1998 PGI entered into a joint venture for the purchase of a vessel MV Brandall Viking, Mr Towey says on the basis that PGI would receive payment under the letters of credit.  The joint venture involved Safa and its beneficial owner Mr Naser Taher, and the collapse of the venture resulted in the assignments on which Safa brought these proceedings;

2.	On 8th October 1998 PGI represented the financial guarantee duly stamped and authenticated, and as the judge held fully in compliance with the terms of the letters of credit. On 16th October 1998 they were rejected on the basis of a note from the Bank “L/cs no longer existing and we closed our files”

3.	Negotiations for the issuing of a fourth letter of credit took place as between PGI and AFE and AFE and the Bank. In broad terms it is alleged that agreement was reached between PGI and AFE that the previous letters of credit would be cancelled; $2m would be paid under the fourth letter of credit subject to that cancellation and the presentation of an authenticated commitment letter in the terms of C2-371-1 as follows:-

"To	:	Al Fotouh Establishment
			10-11, 12 Zamalek Club 
			Giza, Egypt

Mr.	:	Hossam Aboul Fotouh

We hereby irrevocably undertake to supply an insurance policy against non-payment guarantees to a finance house of your choice within 8 weeks of receiving the following documents via a courier pouch. 

1  -  Consolidated balance sheet for Aboul Fotouh Establishment Group 	        for 3 years.

2  -  Listing of Eng. Hossam shares in various companies.

3  -  Feasability study for Lagouna Taba.

4  -  Video for Al Fotouh major companies.

5  -  Eng. Hossam internet address.

The guarantees will be supplied by an “A” rated insurance company.

The total premium for the guarantees of $ 63m will be $ 9.25m.  We will issue a receipt for $2m as the deposit premium when received from Barclays Bank."

The fourth letter of credit was never in fact issued.  Its relevance, however, so far as Safa is concerned, is to seek to use it to undermine the Bank’s assertion that the second and third letters of credit had expired, and to demonstrate that as between the Bank and AFE it may now be that AFE is only liable for $2m because the Bank’s failure to issue that credit is what has exposed it to the difference between $2m and the sums due under the second and third letters of credit.

So far as the Bank is concerned it points to the fact that even the commitment letter to be supplied under the fourth letter of credit contemplates $9.25 as being premium with no suggestion that part payments are due to others.
.
 Discussion

The above history demonstrates even further just how integrated the letters of credit are with a transaction in which the Bank is itself intimately concerned.  The Bank has the role of possible lender.  It has the role of beneficiary under the financial guarantees which will secure that loan if made.  The premium for the guarantee will be paid by virtue of funds to be paid under the letters of credit.  It also seems to me clear, and I did not understand Mr Bogle to dispute this, that if the Bank had in fact made the loans envisaged by the words of the financial guarantee above quoted, and if the Bank had paid against the presentation of the financial guarantee to PGI the sums due, PGI would vis a vis the Bank have been under an obligation to pay premium to Merrion, and on the basis of Mr Towey of PGI’s statement a further obligation to the Bank’s customer to pay a certain sum to a Mr Ahmed because the money being received “was not PGI’s”.  All that PGI would have been entitled to retain was a sum in respect of their brokerage. 

It is now accepted that the Bank have not entered into any loan arrangement with its customer.  Merrion it seems has in fact been rejected by the Bank as an insurer.  It furthermore seems to me highly arguable that Merrion in the result never came on risk. The financial guarantee by its terms seems to me to contemplate the risk only arising once the Bank has entered into the loan arrangement contemplated.  It is also highly arguable that PGI would not be entitled to any brokerage, and highly arguable that whatever Mr Ahmed’s role was, no sum was due to him either.

Safa’s case is however that they are entitled to the whole of the proceeds under the letters of credit.  They submit that if either the Bank have claims to be repaid or if by chance contrary to the above Merrion or Mr Ahmed are due sums, then all such claims should be made hereafter following payment to them of the total proceeds. 

I admit from the outset that the concept of the Bank being forced by a summary judgment to pay Safa sums which PGI very arguably would have had no right to retain, is unattractive.  The question is whether, as Mr Bogle submits, the principles now well established in relation to letters of credit bring about that result.

CPR 24.2

“The court may give summary judgment against a defendant on the whole of claim if 
(a)	it considers that – 
(ii) that defendant has no real prospect of successfully defending the claim  …; and
(b)	there is no other reason why the case or issue should be disposed of at a trial..”

It will be noted that the word used is “may”. 

There is no reason to think that the previously established principles in relation to bills of exchange and of letters of credit or performance bonds were intended to be altered. Those principles in summary were that where bills of exchange were issued by reference to an underlying transaction:

(a) if the underlying transaction was as between parties who were not immediate parties to the bill those transactions are irrelevant;

(b) even if the underlying transactions were as between immediate parties a claim for unliquidated damages under a contract for the sale of goods did not afford a defence, nor was it available for a set-off or counterclaim, nor could it afford a ground for a stay of execution [see Nova Jersey Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 negativing Salmon LJ in Saga of Bond Street Ltd v Avalon Promotions Limited [1972] 2 QB 325 at 327]; 

(c) between immediate parties a partial failure of consideration might be relied upon as a pro tanto defence but only when the amount involved was ascertained and liquidated. [see Lord Wilberforce in Nova Jersey Knit 720 c-d].  

The basic rule, so far as letters of credits were concerned, was that they too must be treated like a bill of exchange.  Thus if the documents conformed and were in order, and the terms of the credit satisfied, the letter of credit was like a bill of exchange and ranked as cash.  Therefore, the English court did not, for example, impose a stay of execution because foreign buyers had obtained a foreign attachment order in relation to the underlying contract. [see Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233]. 

The above principles applied so that summary judgment should be available to those claiming by virtue of bills of exchange and letters of credit because otherwise the principles are not effective.  The court, save in exceptional circumstances, gave judgment and left the counterclaim to be pursued, and did not stay execution in the meanwhile. [see Lord Denning MR in Brown Shipley & Co Ltd v Alicia Hosiery [1966] 1 LLR 668 at 669].

In the instant case the judge has held, and there is no appeal from his finding, that a conforming document was presented under these letters of credit, and that the Bank had no right to reject the document as such.  Furthermore, the Bank did not, at the time of presentation of the document, raise any other defence to payment which could justify non-payment. 

By the time of the summary judgment application however the Bank were raising various defences.  First, they sought to establish an arguable case that the demand made by PGI had in fact been fraudulent.  Second, they sought to allege that arguably PGI were in breach of duty in advising on the credit-worthiness of Merrion.  Third, they alleged that there was an arguable case that PGI had made representations as to the creditworthiness of Merrion to AFE knowing the representations would be passed on to the Bank, and that the Bank had relied on them in entering into the letter of credit transactions.  Fourth, they alleged that they had a strongly arguable case that the Bank had an entitlement to be repaid by PGI the liquidated sum represented by the sums payable under the letters of credit because Merrion never came on risk.

The judge ruled that no summary judgment should be entered, and Safa’s attack on that judgment is that the judge has failed to apply the long standing principles relating to letters of credit being treated as cash.

The above principles do have to be adapted to the new language of the CPR.  As indicated already the word is “may” give summary judgment where the defendant has no real prospect, and there is no other compelling reason.  It seems to me that so far as bills of exchange and letters of credit were concerned the authorities held that normally a defence of set-off was not available; it was only available between immediate parties in relation to liquidated sums.  Under the CPR that principle will continue to apply, in considering whether the defendant has any real prospect of defending the claim at trial.  Furthermore, in most circumstances that will leave the defendant making a counterclaim which will be disposed of at a trial, and the fact that a defendant may have that counterclaim will not normally produce a compelling reason for the issue that arises on the letter of credit or bill of exchange not to be resolved on the summary application.  It is only if the Bank can raise an actual defence with a real prospect of success as opposed to a counterclaim, and/or if it appears as it might in exceptional circumstances that there is a compelling reason why there should be a trial of the issue of liability on the letter of credit or bill of exchange that summary judgment should be refused. 

As regards a fraud defence when it is raised by the paying Bank, and where the Bank had no clear evidence of fraud as at the date of presentation of the documents, but wished to raise the same on an application for summary judgment, the matter was dealt with, so far as Order 14 under the previous rules was concerned, in Balfour Beatty Civil Engineering v Technical & General Guarantee, (Court of Appeal Transcript 14th October 1999).  That case was concerned with a performance bond and an allegation that the beneficiary had made a fraudulent demand, albeit it was common ground that on any view the surety had no evidence of the same as at the date of the demand. What was said on that occasion was as follows: 

"If at the Order 14 stage the Bank can show that the only proper inference is fraud it would be absurd to think that the Bank would have judgment entered against it.  It would not seem right to hold that since the Bank can recover from its customer, it is legitimate to give judgment in favour of the fraudster allowing recovery from the fraudster only at the suit of the customer. 

However, as it seems to me, whatever the context in which Edward Owen was decided, [Owen (Edward) Engineering Ltd v Barclays Bank International Ltd (C.A.) [1978] QB 159 was concerned with an application by the customer for an injunction to restrain the Bank from paying] it is authority for the proposition that the Bank or surety is only entitled to refuse to pay on a bond where it has clear evidence of fraud.  The liability of the surety or Bank cannot, as it seems to me, alter depending on the context.  How then can the absurdity be avoided? 

The answer, as it seems to me, is that on analysis if a Bank or surety has a clear case at the Order 14 stage which it did not have at the demand stage, that the demand was fraudulent, the Bank has a counterclaim against the fraudster which it is capable of establishing for the return of the money.  Just to expand on that theme a little.  It is clear that simply because after demand on a bond it turns out that no sum was due from the customer to his contractor, that does not lead to the Bank or surety having any remedy against the beneficiary of the bond.  The customer who of course must indemnify the Bank or surety may have a right as against the beneficiary under their contract but that is all.  If however the beneficiary has made a fraudulent representation to the Bank in order to obtain money under the bond, I cannot see why in addition to any remedy that the Bank’s customer may have (if the customer has been forced to indemnify the Bank), the Bank does not have its own remedy directly against the beneficiary.  That may be very important in the context of a case such as the present in which the customer of the surety or the Bank has gone into liquidation. 
Now, coming back to the Order 14 application, and seeing where the above analysis would lead.  A bond is treated as the equivalent of a bill of exchange or a letter of credit, so that it follows that normally a set-off or counterclaim will not be enough to prevent judgment being given.  That does not prevent the defendant continuing to pursue the counterclaim, and may in some rare cases lead to a stay of execution while that counterclaim is being fought out.  Of course if a defendant is in a position to bring its own Order 14 on a counterclaim, then if judgment were obtained one would simply cancel out the other. 

If the above is the correct analysis, it seems to me to lead to a sensible solution which fits with Edward Owen but also produces a just result.  The questions to be asked are:- 

	1.  When the demand was made did the surety or the Bank have clear evidence from which the only inference to be drawn is fraud?  If the answer is no then prima facie the beneficiary is entitled to judgment.

	2.  What, on the information now available, is the strength of the surety’s case that the demand was fraudulent?  

	(a)  If the evidence is now clear, then no judgment will be given in favour of the beneficiary because of the fact that the surety would be entitled to a judgment for the equivalent sum. 

	(b)  If the evidence is powerful but not quite sufficient to enable Order 14 judgment to be entered in favour of the surety on the basis that the demand was fraudulent, then either judgment would be entered with a stay of execution or probably no judgment would be entered at all until what is in effect the counterclaim had been fought out. 

	(c)  If the evidence is less powerful, judgment will be entered in favour of the beneficiary, and the surety will be left either to pursue his remedy against the customer or pursue a claim or counterclaim for reimbursement if so advised."

Mr Slade was anxious about the use of the words “set-off and counterclaim” in the fourth paragraph of the passage quoted above.  He would I think suggest that a claim by a Bank that it is being sued on what it alleges is a fraudulent demand is something that the Bank can raise by way of defence or set-off and not simply by counterclaim.  He would thus submit that an arguable case that a fraudulent demand has been made with a real prospect of success would entitle the Bank to resist an application for summary judgment.  I accept that.  I also think that the difference between “the powerful evidence” that the court had in mind when considering the Order 14 position and the “real prospect of success”, the language of the new rules, is not very different, and I would accept that where the Bank can raise a set-off as a defence the question whether it has a “real prospect of success” is the appropriate test.

HSBC v Kloeckner [1989] 2 LLR 323 is also of relevance in the context of this case..
In HSBC the position was that the Bank had issued a letter of credit in relation to transactions in which the Bank was also involved.  The Bank was making a claim for $8m in relation to those transactions against the beneficiary.  Part of the argument before Hirst J by the beneficiary was that the letter of credit was as good as cash and thus the Bank had no right to set-off its claims under the related transactions.  Hirst J said this at 330:- 

"The present situation is quite different; it is only on the rarest occasions, as Mr Havelock-Allan recognised, that a separate dispute will arise between the bank and the beneficiary, since from the beneficiary’s point of view the choice of paying bank is fortuitous, and it is only in the rarest cases that there will be any antecedent banking connection between them that could give rise to such a dispute.  Moreover, if a beneficiary wished to avoid the nomination of a particular bank as paying bank he would, as Mr Havelock-Allan recognised, be in a position to do so before completion of the underlying contract, though I accept that it is unlikely that he would always be alert to the risk.  Consequently the same policy reasons do not apply to the present problem and give no justification for a similar restriction. 

There is thus nothing in the Edward Owen line of authorities which compels me to adopt the conclusion sought by Mr Havelock-Allan.  I should add that the statement in Lord Denning’s judgment in the Power Curber case that “no set-off or counterclaim is allowed to detract from (the letter of credit)”, must be interpreted as meaning a set-off or counterclaim by the buyer against the seller and not one by the bank against the seller, the latter situation not being under consideration in that case. 

There are two striking features of the present case.  First, the standby letter of credit was opened for the specific purpose of financing the liabilities on the dry cargo transactions, so that it would seem very unjust if the bank were precluded from enforcing a set-off in relation to the present claims which arise directly out of selfsame transactions.  Secondly, this is a liquidated set-off, and it would seem to me anomalous that such a set-off should be unavailable in letters of credit cases, but available against bills of exchange which, as the judgments quoted above show, are closely analogous in that a bill of exchange is also virtually equivalent to cash. 

Had it been necessary to decide the point I should have been prepared to hold that there is no principle equivalent to that laid down in the Edward Owen line of cases that debars a bank setting off against a beneficiary under a bill of exchange a claim by the bank themselves against that beneficiary.  Given the additional circumstances present here, namely, that the bank’s claim is liquidated and relates to the very banking transactions which gave rise to the letter of credit itself, the case in favour of a right of set-off seems to me overwhelming."

Mr Slade also referred us to Clovertogs Ltd v Jean Scenes Ltd [Court of Appeal Transcript 5 March 1982].  The claim was on a cheque.  The Court of Appeal gave conditional leave to defend on the basis that there was a triable issue as to whether the cheques had been delivered on the basis of a misrepresentation.  In the notes in the 1999 Annual Practice to which Mr Slade very properly drew our attention, it is said that the case is of dubious authority being out of line with other cases on bills of exchange.  Since the misrepresentation seemed to relate as much to the underlying transaction as to the issuing of the bill, it seems to me the note is right.  However, if there was a misrepresentation by a beneficiary made directly to induce the opening of a letter of credit in that beneficiary’s favour, and there was a real prospect of such being established at the trial, it would seem to me that a court would be entitled not to give summary judgment.

Gathering the threads from the above authorities and adapting them to the circumstances of this case, my view is as follows:

1.	The principle that letters of credit must be treated as cash is an important one, and must be maintained.

2.	It is however unusual for a Bank which has opened a letter of credit to be involved in the related transaction to the extent this bank was.

3.	When a Bank is involved in the related transaction it may be unjust for that Bank to be forced to pay on a summary judgment where it has a real prospect of succeeding by reference to a claim on the underlying transaction, and particularly if that claim is a liquidated claim, the court should not give summary judgment either because a set-off has a reasonable prospect of success or because there is a compelling reason to have a trial of the letter of credit issue. 

4.	If a Bank can establish a claim with a real prospect of success, either that the demand was fraudulent even if it had no clear evidence of fraud at the time of demand, or that there was a misrepresentation by the beneficiary directed at persuading the bank to enter into the letter of credit, it may also be unjust to enter summary judgment against the Bank either because the Bank has a reasonable prospect of succeeding in a defence of set-off or because there is a compelling reason for a trial of the letter of credit issue.

The evidence

We had before us a great deal of material that was not before the judge.  Safa sought to put in two statements from Mr Towey dated 9th December 1999 and 1st February 2000, one from Mr Sterry dated 1st January 2000 (both of PGI), and a statement from Mr Naser Taher dated 4th February 2000.  The Bank objected to the new material but was content that we should read it and put in eight witness statements of their own in response.  They desired to put in a ninth statement but there was objection on the ground of privilege, and thus the full statement was not put before us but Mr Slade told us that what he wanted to establish from it was that Mr Towey had said that his statements had been drafted for him by lawyers for Safa.

Safa wanted to put in some further four witness statements including a further statement from Mr Towey, all dated very shortly before the date that this appeal came on for hearing.  At the hearing Mr Bogle did not persist with his application to put in this last group of statements albeit in some parts of his submissions he referred to one or two matters that he said were covered by them.  If those statements had been allowed in the Bank was itself going to seek to put in further evidence including a handwriting expert to challenge the authenticity of the signature of Mr Towey.  Mr Slade accepted that if the application to put in those last statements was not pursued he would not be pursuing his application to put in the evidence of the handwriting expert.

Even at the last minute of the hearing before the Court of Appeal an attempt was made by Safa to put in a further statement referring to newspaper reports and conversations which attempted to impugn certain of the Bank’s employees, Mrs Sapur and Mr Abdel Salam, and suggested that Mr Fotouh had been accused of corruption. 

This is a very unusual case.  In former days if a defendant had summary judgment entered against it, it was not uncommon for the Court of Appeal to allow fresh evidence to be produced, in case that should demonstrate that an arguable defence was available.  It was always unusual to allow a plaintiff to put in evidence to attempt to reverse a decision granting leave to defend.  But Safa are clearly concerned that if this matter goes to trial it may be beyond them to put up security for costs ordered by the Commercial Court.  Their case is that in the letter of credit context, they were entitled to summary judgment and that justice may be denied if they cannot establish that the judge was faced with an inaccurate picture in the court below. 

The difficulty for them is first, that a decision would seem to have been taken to proceed with the summary judgment application and not request an adjournment, and prima facie having chosen that course the Court of Appeal will be reluctant to allow a party to go back on that choice; see Krakauer v Kratz [1954] 1 WLR 278.  Second, and this may have had something to do with the decision taken at that time, the more material which is put in on a summary application and the more areas of dispute that arise the more likely it is that the court will find that a trial is the appropriate place to resolve matters.

In this instance some pragmatism, as it seems to me, is called for.  The application to put in the evidence dated shortly before the hearing is not pursued, and it should not therefore be admitted.  If it had been pursued its very lateness would have been a good ground for rejecting it, particularly as some dispute would have then emerged as to authenticity of the signature of Mr Towey which this court could not conceivably have resolved.  The evidence sought to be put in right at the conclusion of the hearing should also not be admitted.  Apart from the fact it was hearsay upon hearsay and the Bank had no opportunity to deal with the same, it did not go to the critical issues on this appeal.  

As regards the other material, there might have been strong grounds for rejecting it in the light of the stance taken by Safa in the court below, but it was read, as was the Bank’s material in response, and both counsel in their addresses found considerable difficulty in making submissions without reference to it, Mr Bogle sometimes referring to what Mr Slade’s clients had put in in response and Mr Slade sometimes wishing to refer to the material put in by Safa.  It would not make practical sense to refuse to admit that evidence now.

Assignee point

One of Mr Bogle’s points was that Safa were an assignee without notice of the defences which might be raised as against PGI.  He was referred to Banco Santander S.A. v Banque Paribas [Court of Appeal Transcript dated 25th February 2000]  He rightly did not pursue the point thereafter.  The position is as recorded as common ground before the judge that Safa can be in no better position than PGI the assignor.

Defences

I have formed the conclusion, even taking account of the material that was not before the judge, and taking account of the important principles that apply in the context of claims under letters of credit, that the Bank has established that this is not a case where Safa should have summary judgment.  My starting point for so thinking is already foreshadowed in what I have said above.  The history seems to me to demonstrate first that no loans have ever been entered into, and that very arguably Merrion never came on risk, that PGI were not entitled to any brokerage, and that whoever Mr Ahmed was he was not entitled to any payment and thus that even if payment was due under the letters of credit, the Bank were entitled to immediate reimbursement by PGI.  That claim would be for a liquidated sum, and the connection between the Bank obliged to pay under the letter of credit and its relationship with PGI its broker for the purpose of placing the financial insurance was such, that a set-off would be allowed if the claim were established.

As to the other defences it seems to me that I should say a little because if they were unarguable they should be disposed of at the summary stage.  I should not however say too much if there is to be a trial.  

So far as the fraud defence is concerned, if the Bank’s allegations are right, the complaint is not simply that an improper demand is being made on a Bank under a letter of credit but that the Bank in this case was being deceived into believing that what it was agreeing to pay under the letter of credit was premium to Merrion (from which it is now accepted by the Bank brokerage would be deducted), whereas in fact it was agreeing to pay that premium plus a payment to Mr Ahmed. 

On the material before the court it seems to me that there is a real prospect of the Bank establishing that PGI was leading the Bank to think that the letters of credit were to pay the premium (less brokerage).  The role of Mr Ahmed is unexplained at present but there is also material before the court which indicates that Mr Ahmed may well be connected to PGI and thus the recipient of a payment on their behalf to which they were not entitled.  The inter-connection of the letter of credit with the Bank’s role as lender and beneficiary of such policy as PGI were meant to be negotiating on its behalf would make it unjust if the Bank were not entitled to set up their claim for fraud against PGI which again would be for the liquidated sum otherwise due under the letters of credit as a set-off.

The claim for breach of duty, and the claim for misrepresentation are also arguable. PGI, through Mr Sterry, assert that they were brokers for their client AFE, but this overlooks the fact that the beneficiary under the policy was the Bank.  It seems to me arguable that PGI had a duty not to place the insurance with an Insurer that they themselves would not recommend, without the fully informed consent of the insured. The consent of AFE would arguably not be enough.  It is not suggested that PGI obtained the consent of the Bank.

As regards misrepresentation there is material on which a court could find that PGI represented to AFE that they had excellent reports on Merrion and that it was intended that those representations were to be passed on to the Bank for the beneficiaries under the insurance proposed.  Again, in the context of the inter-relationship between the Bank and PGI, it would be unjust for the Bank not to be able to raise its claim by way of set-off.  Its claim would include a claim to the return of the premium.

Conclusion

 I would dismiss Safa’s appeal.

Lady Justice Hale:  I agree

Lord Justice Schiemann:  I agree that the general principles established in relation to bills of exchange and letters of credit should continue to guide the practice of the courts in relation to applications for summary judgment.  The purpose of those principles is to facilitate normal trade and commerce. 

However, as appears from my Lord’s judgment, the facts of the present case are most unusual and it is clear that we are not here dealing with a normal commercial transaction.  I am not persuaded that refusing summary judgment in the present case runs the risk of creating some adverse effect on normal commercial transactions.  The facts cry out for further investigation and it would not be just to give summary judgment against the Bank. 

For the reasons given by my Lord, I also would dismiss this appeal. 

Order:  Appellant to pay £30,000 on account to respondents; detailed assessment; leave to appeal refused.

(Order does not form part of the approved judgment.)