The Mauritian Central Electricity Board was not entitled to an interlocutory injunction to prevent payment under a letter of credit, notwithstanding its allegations of fraud and the fraud exemption.

Background

Under the autonomy principle, an issuing bank must make payment under a letter of credit on receipt of compliant documents irrespective of any dispute which may have occurred in respect of the underlying transaction. Two exceptions are fraud and illegality.

Alternative Power Solutions Ltd (“APS”) entered into an agreement (the “Agreement”) following a bid process to supply 660,000 compact fluorescent lamps (“CFLs”) to the Mauritanian Central Electricity Board (“CEB”). The means of payment was by letter of credit (“LOC”) which was issued by Standard Bank (“SB”) in favour of APS. Inspection at the place of manufacture was required under the Agreement but there was no requirement for certificates of inspection or similar documentation to be presented to SB under the LOC. APS and CEB failed to come to any arrangement relating to delivery and inspection of the CFLs. With the expiry date of the LOC approaching, the Chinese manufacturers shipped the CFLs. APS tried to claim payment under the LOC. Whilst SB considered the documentation discrepant, SB made it clear that it would be prepared to pay against compliant documents. CEB sought an injunction to prevent SB releasing the payment. CEB alleged that APS’s bid mentioned that the CFLs would be manufactured by Philips or under licence by Philips in China. It further alleged that APS was throughout in breach of the tender documents because it had not allowed CEB to inspect and verify the 660,000 CFLs at the place of manufacture in China. It was also alleged that at an initial hearing one of APS’s representatives had stated that the goods would not be shipped until the inspection took place, when the goods were, in fact, in transit.

The court at first instance and the Mauritian Court of Appeal both ruled in favour of CEB as they felt that there was enough evidence to engage the fraud exemption.

Decision

The Privy Council recognised that the test for the fraud exemption cannot be quite the same as at a trial and that the test at the interlocutory stage can properly be described as whether it is seriously arguable that, on the material available, the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demands on the letter of credit and that the bank was aware of that fact.

The difficulty with CEB’s allegations was that they were allegations of breach of contract and thus matters for arbitration and irrelevant to the liability of SB under the LOC. In so far as the judges in the lower court relied upon them they erred in principle.

In all these circumstances, the Privy Council concluded that, whatever test is applied, neither the judge nor the Court of Appeal was entitled to reach the conclusion that the fraud exception was satisfied, in the case of either APS or SB.