Once Again, No Injunction Restraining Payment Against Fraudulent Demand Under Demand Guarantee

Certain types of fraud by the beneficiary of a demand guarantee or letter of credit (Autonomous Payment Undertakings) of which there is very strong evidence may exempt a bank from its otherwise strict duty to pay against an apparently complying demand.

However, parties to Autonomous Payment Undertakings should be mindful that, even when presented with strong evidence of such fraud, the English courts will very rarely order a bank not to pay a beneficiary who has made an apparently complying demand. Among other factors, the courts are keen to avoid undermining the integrity of the banking system and the value of Autonomous Payment Undertakings as autonomous and irrevocable instruments.

A very limited exception

Applicants, in particular, should be realistic about the difficult odds of successfully getting an injunction to restrain a bank from paying against an apparently compliant, but allegedly fraudulent, call. This is because:

an injunction is a discretionary remedy and, generally, will only be granted if there is no other adequate alternative remedy (e.g. damages) to order the bank not to pay against a fraudulent demand; there is a very high standard of proof for fraud - it must be clear or obvious - and an applicant must make the bank sufficiently aware of the fraud; and crucially, establishing fraud is not enough: the balance of convenience - the harm to the beneficiary in preventing the bank from paying, weighed against the harm to the applicant in allowing the bank to pay - must justify restraining payment. This requires "extraordinary facts", which will vary from case to case. The recent case of Tetronics (International) Limited v. HSBC Bank Plc, BlueOak Arkansas LLC [2018] EWHC 201 (TCC) provides a lucid illustration of the "very considerable difficulty" facing any applicant seeking an injunction to prevent the bank from paying the beneficiary, even where the beneficiary's fraud is established.

The court found that the applicant (Tetronics) had met the rigorous pre-trial evidential test for the fraud exception. Even so, it held that the balance of convenience ultimately favoured permitting payment to the beneficiary.

Background

Tetronics provided services to BlueOak under a New York law supply contract. The contract was backed by a £3.8 million English law advance payment guarantee, with BlueOak as beneficiary (the Guarantee).

BlueOak made a call on the Guarantee but Tetronics sought to prevent the bank from paying out, alleging...