Exceptional Circumstances Required To Prevent Bank From Paying Under Letter Of Credit

Alternative Power Solutions v. Central Electricity Board and Another [2014] UKPC 31

It is a fundamental principle underlying the operation of documentary credits that the obligations of the parties under the credit are independent of the terms of any underlying commercial transaction. Accordingly, any commercial disputes between the parties to the underlying transaction are irrelevant to the issuing bank's obligation to pay upon presentation of documents complying with the letter of credit. This obligation is subject only to narrow exceptions where there is fraud on the part of the beneficiary or illegality.

In a recent judgment, the Privy Council has considered the scope of the fraud exception and confirmed that an injunction restraining a bank from paying under a letter of credit on the basis of fraud will only be justified in extraordinary circumstances.

The background facts

This matter came before the Privy Council on appeal from the Court of Appeal of Mauritius. Alternative Power Solutions ("APS") contracted to supply a quantity of light bulbs to the Central Electricity Board ("the CEB"). The contract entitled the CEB to inspect the bulbs to confirm their conformity to the contract prior to shipment. The CEB also alleged that the parties had agreed that the bulbs were to be manufactured by, or under license by, Philips in China, although this was not accepted by APS.

Payment was to be made by way of an irrevocable letter of credit and the CEB duly procured the issue of a letter of credit ("the LC") by Standard Bank ("the Bank"). The LC provided for payment against the presentation of certain documents by APS. Significantly, the list of documents required did not include any certificate of inspection of the goods or written confirmation from the CEB that the goods could be released for shipment. The CEB requested an amendment to require presentation of these additional documents but this was not agreed by APS.

The goods were shipped without the CEB having had the opportunity to verify them and the CEB applied for an interlocutory injunction restraining the Bank from making payment in the event of a compliant presentation of documents by APS. Various allegations of fraudulent conduct were made against APS, including (i) that APS's tender for the contract required that the goods would be manufactured by or under license by Philips in China (which the Mauritian Court of Appeal subsequently held that APS never had any intention of complying...