Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] Q.B. 159

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Banking—Guarantee—Performance bond—English suppliers' contract with Libyan customers—Letter of credit to be opened— English bank's guarantee to Libyan bank of suppliers' performance—Suppliers' counter-guarantee—No satisfactory letter of credit opened — Suppliers' repudiation of contract — Libyan bank's claim on bond—Whether English bank bound to honour bond

The plaintiffs, English suppliers, contracted with Libyan customers to erect greenhouses in Libya and agreed that a performance guarantee for 10 per cent, of the contract price should be issued by the defendant English bank and lodged with a Libyan bank. The contract, which was governed by Libyan law, provided that an irrevocable confirmed, or confirmable, letter of credit payable at the English bank was to be opened in favour of the plaintiffs. After the plaintiffs had given a counter-guarantee to the English bank, the latter on their own responsibility and on the plaintiffs' behalf gave a performance bond for £50,203 to the Libyan bank and confirmed that their guarantee was payable "on demand without proof or conditions." The Libyan bank then issued a guarantee bond for the plaintiffs for the same sum in favour of the Libyan customers. No letter of credit which complied with the terms of the contract was opened by the customers and the plaintiffs, after telling them that the guarantee given had no effect, accepted their conduct as a repudiation of the contract. At the customers' request the Libyan bank then claimed £50,203 under the guarantee from the English bank.
The plaintiffs obtained an interim injunction on their ex parte application to restrain the English bank from paying the Libyan bank. Kerr J. discharged the injunction.

On appeal by the plaintiffs: —

Held, that a performance bond stood on a similar footing to a letter of credit and a bank giving such a guarantee must honour it according to its terms unless it had notice of clear fraud; and, accordingly, since it was impossible to say that fraud on the part of either the Libyan customers or bank had been established, the appeal must be dismissed (post, pp. 171A-C, 172A, F-H, 174A-B, 175E-H).

R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [1978] Q.B. 146 approved.

Hamzeh Malas & Sons v. British Imex Industries Ltd. [1958] 2 Q.B. 127, C.A. applied.

Discount Records Ltd. v. Barclays Bank Ltd. [1975] 1 W.L.R. 315 considered.

Per curlam. Performance guarantees are virtually promis- sory notes payable on demand (post, pp. 170H—171A, 175D).

Decision of Kerr J. affirmed.

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The following cases are referred to in the judgments:

Bank Russo-Iran v. Gordon Woodroffe & Co. Ltd. (unreported), October 3, 1972.
Discount Records Ltd. v. Barclays Bank Ltd. [1975] 1 W.L.R. 315; [1975] 1 All E.R. 1071.
Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's Rep. 495, C.A.
Hamzeh Malas & Sons v. British lmex Industries Ltd. [1958] 2 Q.B. 127; [1958] 2 W.L.R. 100; [1958] 1 All E.R. 262, C.A.
Harbottle (R. D.) (Mercantile) Ltd. v. National Westminster Bank Ltd. [1978] Q.B. 146; [1977] 3 W.L.R. 752; [1977] 2 All E.R. 862.
Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and National Westminster Bank Ltd., June 23, 1977; Court of Appeal (Civil Division) Transcript No. 270 of 1977, C.A.
Mareva Compania Naviera S.A. v. International Bulkcarriers Ltd. [1975] 2 Lloyd's Rep. 509, C.A.
Siskina (Owners of cargo lately laden on board) v. Distos Compania Naviera S.A. [1977] 3 W.L.R. 532, Kerr J. and C.A.
Sztejn v. J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631.

The following additional cases were cited in argument:
American Cyanamid Co. v. Ethicon Ltd. [1975] A.C 396; [1975] 2 W.L.R. 316; [1975] 1 All E.R. 504, H.L.(E.).
British lmex Industries Ltd. v. Midland Bank Ltd. [1958] 1 Q.B. 542; [1958] 2 W.L.R. 103; [1958] 1 All E.R. 264.
Rickaby v. Lewis (1905) 22 T.L.R. 130.
Société Metallurgique d'Aubrives & Villerupt v. British Bank for Foreign Trade (1922) 11 Ll.L.Rep. 168.
Tate & Lyle Refineries Ltd. v. International Commodities Clearing House Ltd. [1975] 1 Lloyd's Rep. 477, C.A.
Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 1 Lloyd's Rep. 348, C.A.

INTERLOCUTORY APPEAL from Kerr J.
By writ of May 20, 1977, the plaintiffs, Edward Owen Engineering Ltd., claimed against the first defendant, Barclays Bank International Ltd., an injunction to restrain them from paying to the Umma Bank (joined as second defendant by amendment of June 14, 1977) or to the Executive Authority for Jabel el Akhdar el Marj (the " Executive Authority " subsequently joined as third defendant) the sum of £50,203 or any sum in respect of a performance bond or guarantee issued by the Umma Bank at the request of the first defendant on or about November 17, 1976, guaranteeing the plaintiffs' performance of an agreement made between them and the Executive Authority on or about November 9, 1976, or in respect of the first defendant's guarantee of such performance bond.

On July 11, 1977, Kerr J. discharged an interim injunction granted by Boreham J. on June 14, 1977. The plaintiffs appealed on the grounds, inter alia, that the judge misdirected himself in finding (1) that he had no choice whatever in discharging the injunction and (2) that there were in- superable difficulties to his refusing to discharge the injunction. He ought to have found (3) that it was a case in which a court was entitled to interfere in the alleged obligations between banks and third parties; (4) that on the evidence before him (a) that the provision of an irrevocable letter

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of credit for the full contract price confirmed by a United Kingdom bank through and payable at the first defendant was a condition precedent to any contractual liability on the part of the plaintiffs under their agreement with the Executive Authority; (b) that the Executive Authority's failure to provide such a letter of credit was a repudiation of the agreement; (c) that in view of that breach of condition precedent the plaintiffs never became liable under the guarantee and the guarantee became of no effect; (d) alternatively that upon the plaintiff's acceptance of the Executive Authority's breach as a repudiation of the agreement the guarantee was discharged. (5) He misdirected himself in holding that the first defendant was obliged either under its agreement with the plaintiffs or its agreement with the second defendant to make payment to the second defendant and ought to have held that in any event in breach of agreement the purported guarantee dated November 23, 1976, had been made out in favour of the wrong person namely of Green Mountain Project and not Executive Authority for Jabel el Akhdar el Marj and in respect of the liability of Edward Owen and not of the plaintiffs; and that he was wrong in law in holding (6) that the first defendant was bound to pay under the purported guarantee upon the demand of the first defendant as opposed to the Executive Authority and that sufficient demand under the guarantee had been proved and (7) that it was in accordance with the agreement between the plaintiffs and the first defendant and/or the agreement between the first and second defendants that the payment should be made under the guarantee not upon demand by the Executive Authority but upon demand by the second defendant.
The facts are stated in the judgment of Lord Denning M.R. and Browne L.J.

Colin Ross-Munro Q.C. and Patrick Ground for the plaintiffs. On the evidence the plaintiffs were under no contractual liability to the Executive Authority until an irrevocable letter of credit for the contract price had been confirmed payable at Barclays International. This was never done. In practically every previous case there has been some sort of dispute; there is no scrap of evidence of any dispute as to any default here by the plaintiffs. The confirmed letter of credit was a precondition of any liability of the plaintiffs under the guarantee.
Irrevocable letters of credit are triggered off by the presentation of documents whereas banking guarantees are triggered off by default and if there is no default they should not operate. There must be a liability before the guarantee comes into effect. The word " guarantee " imports default.
Barclays International had knowledge of all the main facts. They were put on notice. Any demand by the Executive Authority on the Umma Bank was made in bad faith because the Authority knew that the plaintiffs were not in default and so no claim could be made under the guarantee.
As to the effect of failure to procure a letter of credit in accordance with the contract terms, see Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 1 Lloyd's Rep. 348. In Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's Rep. 495 the Court of Appeal granted an

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injunction to restrain the enforcement of a bank guarantee in order to prevent an irretrievable injustice. In general if there is a genuine dispute between buyer and seller the bank cannot be involved.
As to the circumstances in which a bank is entitled to refuse to pay on a letter of credit, see Société Metallurgique d'Aubrives & Villerupt v. British Bank for Foreign Trade (1922) 11 Ll.L.Rep. 168, 170; fraud. In Discount Records Ltd. v. Barclays Bank Ltd. [1975] 1 W.L.R. 315, 320, Megarry J. said that "a sufficiently grave cause" had to be shown in order to interfere by way of interlocutory injunction with bankers' irrevocable credits; Sztejn v. J. Henry Schroder Banking Cor- poration (1941) 31 N.Y.S. 2d 631 was distinguished. See also R. D. Har- bottle (Mercantile) Ltd. V. National Westminster Bank Ltd. [1977] 3 W.L.R. 752. In Rickaby V. Lewis (1905) 22 T.L.R. 130 the condition precedent of written notice requiring payment was never fulfilled and the defendant surely was not liable. An interlocutory injunction "until further order" restraining payments to the detriment of plaintiffs was made in Tate & Lyle Refineries Ltd. v. International Commodities Clearing House Ltd. [1975] 1 Lloyd's Rep. 477.
As to American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396, the plaintiffs have to show that there is a reasonable issue to be tried. They seek to serve the Umma Bank and to impugn the whole transaction; and seek declarations and injunctions. The balance of convenience is strongly in the plaintiffs' favour. Once the money is paid over by Barclays International, the plaintiffs are unlikely to recover it in Libya. An injunction would maintain the status quo. The judge misdirected himself as stated in grounds (1), (2), (5), (6) and (7) of the notice of appeal and ought not to have discharged the interim injunction.
Norman Tapp Q.C. and Peter Cresswell for the English bank. Barclays International are not in any material sense in contractual relations with the plaintiffs. The real engagement is between Barclays International and the Umma Bank. This case would make a new departure if an injunction were granted. It is important that the obligations of banks should be honoured. On the facts no fraud has been established. This case is not within the Mareva principle (Mareva Compania Naviera S.A. V. International Bulkcarriers Ltd. [1975] 2 Lloyd's Rep. 509).
Barclays International have obligations to their own customers but they also have their own international obligations. If a fraudulent claim had been made by the Libyan customers against the Umma Bank it would make no difference. It would have to be an extreme case for the bank to be able to say that it was not safe to pay: see Sztejn v. J. G Henry Schroder Banking Corporation, 31 N.Y.S. 2d 631.
This performance bond or guarantee is similar to a confirmed letter of credit, as to the effect of which, see Hamzeh Malas & Sons v. British Imex Industries Ltd. [1958] 2 Q.B. 127, 129, per Jenkins L.J. See also British Imex Industries Ltd. v. Midland Bank Ltd. [1958] 1 Q.B. 542.
"It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller...": see Shientag J. in the Sztejn case, 31 N.Y.S. 2d 631, 633.
In Bank Russo-Iran v. Gordon Woodroffe & Co. Ltd. (unreported),

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October 3, 1972, Browne J. said " if the documents are presented by the beneficiary... and are forged or fraudulent, the bank is entitled to refuse payment..." He expressed no view as to the effect of innocent misrepresentation. Megarry J. examined the basis of, and distinguished the Sztejn case, 31 N.Y.S. 2d 631, in Discount Records Ltd. v. Barclays Bank Ltd. [1975] 1 W.L.R. 315, 318-320. In R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [1978] Q.B. 146 there was an allegation of fraud and Kerr J. discharged ex parte interim injunctions restraining the defendant banks from making payment under guarantees. Roskill L.J. in Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and National Westminster Bank Ltd., June 23, 1977, Court of Appeal (Civil Division) Transcript No. 270 of 1977, pointed out that the plaintiffs were seeking "to interfere with the performance of contractual obligations to which they are not a party." That case is indistinguishable from the present case. [Reference was made to Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's Rep. 495 and Tate & Lyle Refineries Ltd. v. International Commodities Clearing House Ltd. [1975] 1 Lloyd's Rep. 477.]
The principle of Mareva Compania Naviera S.A. v. International Bulkcarriers S.A. [1975] 2 Lloyd's Rep. 509 which applies where money to which the plaintiff is entitled may go outside the jurisdiction so that he will not be able to get anything, does not apply here: see also Siskina (Owners of cargo lately laden on board) v. Distos Compania Naviera S.A. [1977] 3 W.L.R. 532, 548. The principle cannot apply here because the asset is not that of the wrongdoer. The present case is a long way from the Mareva principle which applies to securing the asset of a wrongdoer in this country.
There is a dispute here between the suppliers and customers over a contract governed by Libyan law. The position under Libyan law is not known. The performance bond given by the bank is a binding international obligation payable on demand. If an interim injunction were granted in a case of this sort it would affect the pattern of international trading. There is no reason why the bank should be involved in disputes between buyer and seller.
Ross-Munro Q.C. in reply. There is no suggestion by the Executive Authority here of any default by the plaintiffs; no suggestion of any bona fide dispute. That is what makes this case so different from all the other banking cases.
The evidence discloses a prima facie case of fraud. There was no default by the plaintiffs and both the Executive Authority and the Umma Bank knew that there had been no default. Yet payment under the performance bond was demanded.
The plaintiffs must satisfy the court "that there is a serious question to be tried": per Lord Diplock in American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396, 407. That is a low hurdle to be overcome on the facts of the present case.
There is a difference between a letter of credit and a bank guarantee where normally if there is no default there is no liability under the guarantee. Here there is established fraud or bad faith to the knowledge of the bank: see Société Metallurgique d'Aubrives & Villerupt v. British

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Bank for Foreign Trade, 11 Ll.L.Rep. 168, 170; the Bank Russo-lran case (unreported), October 3, 1972. It is a case where the court has jurisdiction to interfere: Hamzeh Malas & Sons v. British lmex Industries Ltd. [1958] 2 Q.B. 127, 129-130. The Sztejn case, 31 N.Y.S. 2d 631, shows that English and American law is very close. The plaintiffs ask that the position may be kept intact as in Tate & Lyle Refineries Ltd. v. International Commodities Clearing House Ltd. [1975] 1 Lloyd's Rep. 477. See also Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 1 B Lloyd's Rep. 348. Lord Denning M.R. in Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's Rep. 495, 497, said that in the case of a bank guarantee letter of credit "Circumstances may arise such as to warrant interference by injunction." This is just such an exceptional case where there is no dispute, no question of default and there is a prima facie case of fraud.

LORD DENNING M.R. This case concerns a new business transaction called a "performance guarantee" or "performance bond." In order to show the nature of the transaction, I will describe the documents in some detail.

The contract between suppliers and customers
First, I will describe the principal contract between suppliers and customers. The suppliers are Edward Owen Engineering Ltd., the plaintiffs, who carry on business at Alton in Hampshire. The customers are the Agricultural Development Council of Libya which is a state enterprise of the Libyan Arab Republic whose full title is the Executive Authority for Jabel el Akhdar el Marj (the "Executive Authority"); sometimes called the Green Mountain Project.
In November 1976 a contract was made by which the English suppliers agreed to supply and instal glasshouses for the Libyan customers. The glasshouses were to be very extensive. They were to cover two hectares (about five acres) and were to be equipped with a complete irrigation system. The materials were to be sent from England to Benghazi on c. and f. terms: and skilled erectors were to go out from England to p Libya to erect the glasshouses and instal the equipment. The total contract price was £502,030, payable in Libyan dinars. The shipment of the materials was to be by the end of April 1977, and erection was to be completed by the end of August 1977. Payment was to be made by the Libyan customers as follows: 20 per cent. payable in advance of delivery; 50 per cent. payable on the presentation of the shipping documents; 10 per cent. when the materials were on the site; 15 per cent. when there was a provisional handing over, and 5 per cent. on final handing over; thus making it the full 100 per cent. Those instalments were to be payable by an irrevocable confirmed letter of credit which was to be opened in favour of the English suppliers payable at Barclays Bank International Ltd. (the first defendant). There was an express clause which said:

"The contract is construed in accordance with Libyan law. Any dispute arising between the two parties shall be referred to the competent Libyan court..."

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The Libyan customers instructed the Umma Bank at Benghazi (the second defendant), which is a state bank of Libya, to open an irrevocable documentary credit in favour of the English suppliers for payment of those instalments. The letter of credit was sent by the Umma Bank in Libya to their London correspondents, who sent it on January 6, 1977, through Barclays Bank International Ltd. to the English suppliers. But it did not comply with the contract. It was not a confirmed letter of credit. It was not confirmed by a bank. This was made clear by the advice itself. The correspondents in London said:

"Although our principals make provision for us to add our confirmation to this credit kindly note that we are unable to effect such action in view of the payment terms which are subject to instruction from our principals, upon presentation of documents."

That was indeed the case. The letter of credit expressly provided that payment was only to be made when the Libyan customers authorised it. So the letter of credit was plainly not a confirmed letter of credit. 
As soon as the English suppliers got that notification, they made every effort to get the Libyan customers to amend the letter of credit so as to enable the contract to be fulfilled. They sent a long telex on January 18, 1977. They sent one of their staff, a Mr. Cowley, out to Libya to press the Libyan customers to make the required amendments to the letter of credit. But he was unable to get it amended. On his return, the English suppliers consulted their bankers, Barclays, and wrote a letter which was drawn up with the assistance of those bankers. It was dated March 29, 1977, by the English suppliers to the Libyan customers and is of much importance. It said:

"... The letter of credit is still not acceptable to us for three main reasons—(1) Our contract with you dated November 9, 1976, provided for the letter of credit to be confirmed. The advising bank in London refuses to confirm the letter of credit because of the way in which it is drawn up."

There follow two other reasons and then this significant paragraph: "Since the letter of credit is not operative, it obviously follows that our guarantee has no effect." That is a reference to the performance guarantee to which I will come shortly.
So there is the position. The English suppliers quite reasonably said:
"We cannot go on with any obligations under this contract because the letter of credit which would guarantee us payment has not come forward. We have not even got the 20 per cent, in advance."

It looked very much as if the Libyan customers were in default. They had not provided the stipulated letter of credit. That is why the contract went off.

The performance guarantee

Second, I will deal with the contract between the banks. This is where we come to the "performance guarantee" or "performance bond." That

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is a guarantee by a bank that the suppliers will perform their obligations under the contract. The Libyan customers, before any contract was concluded, stipulated that there should be a performance guarantee. It was to be a condition precedent to their entering into any contract at all. The English suppliers wrote this letter on November 4, 1976, to the Libyan customers:

"Upon agreement of the final contract sum and approval of a draft contract, we will arrange for a letter of guarantee to be issued by Barclays Bank International and lodged at the Umma Bank, Benghazi, for 10 per cent. of the total contract price and valid up to the final delivery date. On receipt of the letter of guarantee at the Umma Bank, Benghazi, we will sign the contract and the authority [the Libyan customers] will immediately open a letter of credit to our benefit for the full contract price."

So even before the contract was actually signed, the English suppliers agreed to arrange for a performance guarantee to be given for 10 per cent. of the contract price. The contract was signed on November 9, 1976, and the performance guarantee given on November 15, 1976. It was given in this way: the English suppliers instructed their bankers, Barclays Bank, to give the performance guarantee. Acting on those instructions, on November 15 Barclays Bank International in England sent a cable to the Umma Bank in Benghazi in these words:

"Upon our responsibility and on behalf of Edward Owen Engineering Ltd... please issue, in form required, performance bond in favour of Executive Authority for Jabel el Akhdar el Marj Libyan Arab Republic for pounds sterling 50,203... being 10 per cent. of total E contract value for supply of greenhouse equipment with drip-overhead irrigation system contract dater November 9,1969. Performance bond to be valid for claims on you until August 31, 1978, and is to be handed
to Mr. N. Cowley accredited representative of Edward Owen Engineering Ltd., who will contact you: we confirm that United Kingdom exchange control regulations satisfied and that our maximum liability is limited to the sum of pounds sterling 50,203... ."

On November 17, 1976, Barclays Bank International confirmed that cable by letter to the Umma Bank and added: "We look forward to receiving in due course two translated copies of the actual guarantee issued." (It was not in fact received until May 1977.)
The Umma Bank wanted, however, a further assurance before issuing the performance guarantee. On November 22, 1976, they sent a telex to Barclays Bank International containing this request: "Please confirm that you will pay total or part of said guarantee on first of our demand without any conditions or proof..." On the same day, November 22, Barclays Bank International replied to Umma Bank: " We confirm our guarantee ... payable on demand without proof or conditions."

So there it is. Barclays Bank International asked the Umma Bank (the state bank of Libya) to issue the guarantee, and Barclays Bank promised to pay it on first demand by Umma without any conditions or proof.

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On receiving that promise, the Umma Bank did issue a guarantee bond in favour of the Libyan customers. It was written in Arabic, but we have a translation of it. It is dated November 23, 1976, Benghazi. It is addressed by the Umma Bank to the Libyan customers under the name of the Green Mountain Project. It says:

"Considering the fact that the contract relating to this transaction calls for the issue of a bank guarantee, for an amount of £50,203 ... We, the undersigned, guarantee to you the firm 'Edward Owen' to the extent of the above mentioned amount and it is understood that the said amount will be paid on your first demand, which must reach us within the period of validity of the letter of guarantee. This guarantee is valid until August 31, 1978, after which its validity will expire and the letter of guarantee will have to be returned to this bank."

This is the performance guarantee. It was handed by the Umma Bank to Mr. Cowley in Libya. He was there as the representative of the English suppliers. He handed it to the Libyan customers. Thereupon the English suppliers had done everything necessary on their part to make the contract binding on the Libyan customers. It was then for the Libyan customers to arrange for the confirmed letter of credit for the price. But that they never did. On that account the English suppliers on March 29, 1977, wrote the letter (which I have read) saying that the guarantee had no effect. It is obvious, of course, that Barclays would only give their guarantee on getting a counter-guarantee from the English suppliers. It is on a printed form dated December 17, 1976, signed by Edward Owen Engineering Ltd. It reads as follows:

"In consideration of your procuring the giving by Barclays Bank International Ltd. of a ... guarantee in the terms of the copy ... attached hereto "—that is the one of November 15, 1976—" ... we ... agree to keep you indemnified ... and ... irrevocably authorise you to make any payments and comply with any demands which may be claimed or made under the said ... guarantee ... and agree that any payment which you shall make ... shall be binding upon ... us and shall be accepted by ... us as conclusive evidence that you were liable to make such payment or comply with such demand."

It appears therefore, that, if Barclays Bank International paid under the guarantee, the English suppliers were to indemnify them. 
So there was a string of guarantees. The English suppliers guaranteed Barclays Bank International, Barclays Bank International guaranteed the Umma Bank in Libya, and the Umma Bank guaranteed the Libyan buyers.

The claim on the performance guarantee
On the facts so far known, it appears that the English suppliers had not been in default at all. The only persons in default were the Libyan customers. They had not issued the confirmed letter of credit as they should have done. Yet the Libyan customers appear to have demanded payment from the Umma Bank on their guarantee. The Umma Bank

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then claimed on Barclays Bank International. They did so by their telex of May 16, 1977, by Umma Bank to Barclays Bank:

"... we would inform you that beneficiaries request liquidation the amount of said guarantee being STG pounds 50203 stop Please credit our Tripoli head office account with Midland Bank London ... We issued said guarantee under your full responsibility and your confirmation towards us dated November 22, 1976. Therefore any discussions concerning said guarantee must take place between the concerned parties and our bank not involved in the matter stop Awaiting your urgent tested cable confirmation regards."

On hearing of that demand, the English suppliers issued a writ in the High Court against Barclays Bank International. They obtained an interim injunction ex parte—to prevent Barclays Bank paying the Umma Bank. Barclays sent a telex telling Umma of the injunction. The Umma Bank replied on May 31:

"We are not in a position to comply with its contents. Subject matter must be settled between the concerned parties. We [were] astonished from your mentioned cable as we issued said guarantee according [to] your clear confirmation that you will pay total or part of said amount ... without any conditions or proof if requested ... Please authorise us urgently ... regret we hold you responsible for any consequences resulting from non-execution. Regards."

So there it is. The long and short of it is that although prima facie the Libyan customers were in default in not providing the letter of credit, nevertheless they appear to have claimed against the Umma Bank on the performance bond issued by them; in turn the Umma Bank claimed upon Barclays Bank: who claimed upon the English suppliers.
A little later Barclays applied to discharge the injunction. After hearing argument Kerr J. held that these performance bonds must be honoured as between the banks; and that the relations between the English suppliers and the Libyan customers were no concern of the banks. He held that Barclays Bank International ought to pay the Umma Bank and leave the English suppliers to claim damages against the Libyan customers, presumably in the courts of Libya, because the contract contained a clause giving exclusive jurisdiction to the courts of Libya.
The English suppliers appeal to this court. They ask us to restore the injunction. They say that there is no practical remedy for them in the Libyan courts. The Libyan customers are a department of the Libyan state: the Umma Bank is a state bank. It would be in practice impossible to obtain a visa for the purpose of bringing a claim against the Libyan customers and the Umma Bank.
So the English suppliers ask us to order that Barclays Bank should not pay this amount to the Umma Bank. They wish to join the Umma Bank and the Libyan customers as defendants to the action: for by so doing all the matters can be resolved here as to whether or not the Libyan customers should be paid this amount.

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The law as to performance bonds
A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was clearly stated in Hamzeh Malas & Sons v. British Imex Industries Ltd. [1958] 2 Q.B. 127. Jenkins L.J., giving the judgment of this court, said, at p. 129:

"... it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with the established practice."

To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. The most illuminating case is of Sztejn V. J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631 which was heard in the New York Court of Appeals. After citing many cases Shientag J. said, at p. 633:
"It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade."

He said, at p. 634, that in that particular case it was different because:
"on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller."

That case shows that there is this exception to the strict rule: the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment.
I would in this regard quote the words of Browne J. in an unreported case when he was sitting at first instance. It is Bank Russo-Iran v. Gordon, Woodroffe & Co. Ltd. (unreported), October 3, 1972. He said:
"In my judgment, if the documents are presented by the beneficiary himself, and are forged or fraudulent, the bank is entitled to refuse

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payment if it finds out before payment, and is entitled to recover the money as paid under a mistake of fact if it finds out after payment."

But as Kerr J. said in this present case:
"In cases of obvious fraud to the knowledge of the banks, the courts may prevent banks from fulfilling their obligation to third parties."

Such is the law as to a confirmed letter of credit. How does it stand with regard to a performance bond or a performance guarantee? Seeing that it is a guarantee of performance—that is, a guarantee that the supplier will perform his contracted obligations—one would expect that it would be enforced in such a case as this: suppose the English supplier had been paid for the goods and had delivered them, but that the Libyan customer then discovered that they were defective and not up to contract or that they had been delayed. The Libyan customer could then claim damages for the breach. But instead of coming to England to sue for the breach, his remedy would be to claim payment under the guarantee—of the 10 per cent. or the 5 per cent. of the price—as liquidated damage, so to speak. He claims payment from the Umma Bank. The Umma Bank pay him "on first request." They claim on Barclays Bank International. Then Barclays pay " on first demand without proof or conditions." And Barclays claim against the English suppliers, the payment being " conclusive evidence."

It is obvious that that course of action can be followed, not only when there are substantial breaches of contract, but also when the breaches are insubstantial or trivial, in which case they bear the colour of a penalty rather than liquidated damages: or even when the breaches are merely allegations by the customer without any proof at all: or even when the breaches are non-existent. The performance guarantee then bears the colour of a discount on the price of 10 per cent. or 5 per cent., or as the case may be. The customer can always enforce payment by making a claim on the guarantee and it will then be passed down the line to the English supplier. This possibility is so real that the English supplier, if he is wise, will take it into account when quoting his price for the contract.

Take the case one stage further. The English supplier is not in default at all. He has not shipped the goods because he has not been paid. The Libyan customer has not provided the confirmed letter of credit. It is still open to the Libyan customer to make some allegation of default against the English supplier—as for instance not doing the preliminary work or not being ready and willing—and on that allegation to claim payment under the performance guarantee. On that request being made, payment will be made by the banks down the line: and be made by them " on demand without proof or conditions."

So, as one takes instance after instance, these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to

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pay: and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.

All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.

Such has been the course of decision in all the cases there have been this year in our courts here in England. First of all, there was R. D. Harbottle (Mercantile) Ltd. V. National Westminster Bank Ltd. [1978] Q.B. 146 before Kerr J. The judge considered the position in principle. I would like to adopt a passage from his judgment, p. 761E-G.

"It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration.... The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged."

Since that time there has been before Donaldson J. and afterwards in this court Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and National Westminster Bank Ltd., June 23, 1977; Court of Appeal (Civil Division) Transcript No. 270. In that case Roskill L.J. spoke to the same effect. He said:

"Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has risen."

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So there it is: Barclays Bank International has given its guarantee— I might almost say its promise to pay—to Umma Bank on demand without proof or conditions. They gave that promise, the demand was made. The bank must honour it. This court cannot interfere with the obligations of the bank.

This case is altogether different from Mareva Compania Naviera S.A. v. International Bulkcarriers Ltd. [1975] 2 Lloyd's Rep. 509 and the Siskina (Owners of cargo lately laden on board) v. Distos Compania B Naviera S.A. [1977] 3 W.L.R. 532. In those cases we stopped money in this country from being paid out to a debtor who was likely to take his assets away from England so as to avoid paying his debts. It is also different from the other cases which were cited to us, such as Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's Rep. 495. This is a new case on a performance bond or guarantee which must be decided on the principle applicable to it. I think Kerr J. was quite right in discharging the injunction. The bank must honour its bond.

Seeing that the bank must pay—and will probably come down on the English suppliers on their counter-guarantee—it follows that the only remedy of the English suppliers is to sue the Libyan customers for damages. The contract contains a clause giving exclusive jurisdiction to the courts of Libya. But we are told that it is not practicable for the English suppliers to invoke the jurisdiction of the Libyan courts. So the English suppliers wish to join the Libyan customers as defendants to this action and to get leave to serve them out of the jurisdiction. We will be ready to consider that application when it is made. But meanwhile the injunction against the bank must be discharged.
I would therefore dismiss this appeal.

BROWNE L.J. I agree that this appeal should be dismissed for the reasons given by Lord Denning M.R. Kerr J. in Harbottle (Mercantile) Ltd. V. National Westminster Bank Ltd. [1978] Q.B. 146 and this court in the Howe Richardson case, June 23, 1977; Court of Appeal (Civil Division) Transcript No. 270 treated a bank's position under a guarantee or performance bond of the type given by Barclays Bank to the Umma Bank as being very similar to the position of a bank which has opened a confirmed irrevocable credit, and I have no doubt that this is right.

As Lord Denning M.R. has said, it is well-established that in the case of a confirmed irrevocable credit in respect of a contract for the sale of goods the confirming bank is not in any way concerned with disputes between the buyers and the sellers under the contract of sale which underlies the credit. But I agree also that it is established that there is at any rate one exception to this rule. Lord Denning M.R. has already referred to the New York case of Sztejn v. J. Henry Schroder Banking Corporation, 31 N.Y.S. 2d 631, and has quoted what I said in Bank Russo-Iran v. Gordon Woodroffe & Co. Ltd. (unreported), October 3, 1972. That exception is that where the documents under the JJ credit are presented by the beneficiary himself and the bank knows when the documents are presented that they are forged or fraudulent, the bank is entitled to refuse payment.

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But it is certainly not enough to allege fraud; it must be "established," and in such circumstances I should say very clearly established. In Discount Records Ltd. v. Barclays Bank Ltd. [1975] 1 W.L.R. 315 this was one of the grounds on which Megarry J. distinguished the New York case of Sztejn v. J. Henry Schroder Banking Corporation, 31 N.Y.S. 2d. 631. Kerr J. drew the same distinction in the Harbottle case, [1978] Q.B. 146 where fraud was alleged but not established.

Mr. Ross-Munro's "basic submission" (as he described it) was that there had been in this case no default on the part of the plaintiffs nor even any suggestion of default; both the Executive Authority (the buyer in Libya) and the Umma Bank knew that there had been no default by the plaintiffs, and there could not therefore have been any honest demand by the Executive Authority on the Umma Bank or by the Umma Bank on Barclays Bank. Further, Barclays Bank were fully informed; they knew there had been no default by the plaintiffs and so knew that Umma Bank's demand on them was fraudulent.

Like Kerr J., I am prepared to assume (a) that the plaintiffs are right in saying that the Executive Authority failed to comply with their contractual obligation as to the letter of credit; and (b) that as a result the plaintiffs were entitled to treat the contract as repudiated by the Executive Authority and to cancel it, as they may have done by their letter of March 29, 1977, and as they did by their solicitor's letter of May 23, 1977. But, in my view, even if these assumptions are right, this does not come anywhere near establishing fraud on the part of the Executive Authority or the Umma Bank.

Further, the correctness of these assumptions may well be disputed by the Executive Authority. We have no evidence about what may have been agreed between Mr. Cowley, on behalf of the plaintiffs, and the Executive Authority, either when he apparently handed over to them in November 1976 the performance bond issued by the Umma Bank or when he visited Libya again in February 1977. There may be a dispute as to the exact nature of the contractual obligation in respect of the letter of credit. The special conditions of contract of November 4, 1975, do provide under clause 5 for the opening of a confirmed letter of credit, but clause 3 of the contract of November 9 refers to the letter of credit being confirmable at the buyers' request. There may be some dispute about how far the special conditions were incorporated in the final contract. There is reference in paragraph 1 of the contract to the specification between the two parties as being an integral part of the contract, but Mr. Tapp points out that it may be disputed whether or not that special condition about a confirmed credit formed part of the specification.

The contract between the plaintiffs and the Executive Authority provides, as Lord Denning M.R. has said, under clause 10:

"The contract is construed in accordance with the Libyan Law. Any dispute arising between the two parties shall be referred to the competent Libyan court...."

The performance bond is presumably also governed by Libyan law. We

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do not know what the position in Libyan law may be between the plaintiffs and the Executive Authority or between the Executive Authority and the Umma Bank. It seems to me therefore that we cannot exclude the possibility that there may be a genuine dispute between the plaintiffs and the Executive Authority as to matters arising under the underlying contract.

I find it quite impossible to say that fraud on the part of the Executive Authority or the Umma Bank has been established, still less that Barclays Bank had knowledge of it. I agree with what Kerr J. said in his judgment in this case. He said:

"I am not saying that in such cases"—that is, cases where parties have entered into confirmed letters of credit—" the courts would not again assume jurisdiction. Indeed, as was said in some of the authorities, in cases of obvious fraud to the knowledge of banks, the courts may preclude banks from fulfilling their obligations to third parties. But in the present case there is simply a contractual dispute between the plaintiffs and their customers in Libya, in which the rights and wrongs are not clear, though as mentioned above I assume that the rights are on the side of the plaintiffs. They will unfortunately have to pursue those rights against the buyers as best they can."

In the Howe Richardson case, June 23, 1977; Court of Appeal (Civil Division) Transcript No. 270, Roskill L.J. said in the passage, part of which Lord Denning M.R. has already quoted but of which I would like to quote more:

"The bank, in principle, is in a position not identical with but very similar to the position of a bank which has opened a confirmed irrevocable letter of credit. Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen."

The "event" in the present case was the demand by the Umma Bank on Barclays Bank. Barclays Bank had agreed to pay without conditions
or proof. They are not concerned with the dispute between the plaintiffs and the Executive Authority under the underlying contract. Accordingly, as I have said, I agree that the appeal must be dismissed.

GEOFFREY LANE L. J. The law applicable in these circumstances is conveniently set out, as Lord Denning M.R. and Browne L.J. have indicated, by Roskill L. J. in the recent decision in Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and National Westminster Bank Ltd.,

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June 23, 1977; Court of Appeal (Civil Division) Transcript No. 270. The passage already cited by my breathren is followed by these words of Roskill L.J.:

"The bank takes the view that that time has come and that it is compelled to pay; in my view it would be quite wrong for the court to interfere with Polimex's apparent right under this guarantee to seek payment from the bank, because to do so would involve putting upon the bank an obligation to inquire whether or not there had been timeous performance of the sellers' obligations under the sale contract."

In the present case Mr. Ross-Munro submits that, since this document between the two banks is expressed to be a guarantee, the bank is under no liability to pay prima facie unless, first of all, there is a principal debtor and, secondly, some default by the principal debtor in his obligations under his contract with the seller. Since, he submits, no such default on the part of the sellers is suggested, the guarantee does not come into effect. The answer to that appears to me to be this. Although this agreement is expressed to be a guarantee, it is not in truth such a contract. It has much more of the characteristics of a promissory note than the characteristics of a guarantee. One has to read the wording of the two telexes which set up the agreement in order to appreciate the full force of it. By telex dated November 22, 1976, the Libyans say this to Barclays Bank International in London: "Please confirm that you will pay total or part of said guarantee on first of our demand without any conditions or proof." That is replied to on the same date by Barclays Bank in these terms: "We confirm our guarantee RDG1566 payable on demand without proof or conditions."
The only circumstances which would justify the bank not complying with a demand made under that agreement would be those which would exonerate them under similar circumstances if they had entered into a letter of credit, and that is this, if it had been clear and obvious to the bank that the buyers had been guilty of fraud. Mr. Ross-Munro, p conceding that that is the situation, endeavours to show that indeed fraud is clear and obvious here, that the bank knew about it, and accordingly he is entitled to succeed.

The way he seeks to establish fraud is this. He points to the undoubted fact that the buyers in Libya have failed to reply to any of the requests for a proper confirmed letter of credit according, Mr. Ross-Munro submits, to the terms of the contract and, moreover, have failed to produce any suggestion of any default or breach of contract on the part of the sellers in England which would possibly justify a demand that the performance guarantee be implemented.

I disagree that that amounts to any proof or evidence of fraud. It may be suspicious, it may indicate the possibility of sharp practice, but there is nothing in those facts remotely approaching true evidence of fraud or anything which makes fraud obvious or clear to the bank. Thus there is nothing, it seems to me, which casts any doubt upon the bank's prima facie obligation to fulfil its duty under the two tests which I have set out.

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It may be harsh in the result, but the sellers must have been aware of the dangers involved or, if they were not, they should have been aware of them, and either they should have declined to accept the terms of the performance bond or else they should have allowed for the possibility of the present situation arising by making some adjustment in the price.

I agree that the appeal should be dismissed.

Appeal dismissed.

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Solicitors: Louch, Belcher & Co., Newbury; Durrant Piesse.