The Privy Council has ruled on an appeal from the Mauritian Court of Appeal which granted an injunction to prevent a bank from paying out under a letter of credit.
In Alternative Power Solution Limited v Central Electricity Board  UKPC 31, the bank had issued a letter of credit setting out documents required to be presented to effect payment. In the event, the bank was provided with documents that complied with the letter of credit, but the goods had been wrongfully shipped before the required inspection, and the bank was aware of that. The courts in Mauritius took the view that there was a serious prima facie arguable case that there might be an attempt to defraud and, accordingly, it granted an injunction against the bank.
The appellant’s supplier argued that that test was too low, there was insufficient evidence to establish the fraud exception and the balance of convenience did not justify an injunction.
The Privy Council held that the test should be whether it was seriously arguable that, on the material available, the only realistic influence was 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 the fraud. Conclusions based on an analysis of the contractual position could not form a proper basis for the grant of an injunction against the bank.
Injunctions would be granted rarely, because it was almost never possible to establish the test for fraud, as opposed to merely the possibility of fraud, and the balance of convenience would almost always militate against the granting of an injunction.
It is clear and well established that a bank need not be concerned with the underlying contractual obligations, and it must consider documents “on their face” in order to determine whether or not it is obliged to pay under the letter of credit. Difficulties arise where the bank knows that what it sees on the face of the documents is inaccurate or untrue, but that would usually not be enough to give it the requisite knowledge of fraud, allowing it to refuse payment.
Paul Howcroft, Partner, Fladgate LLP