Loomcraft Fabrics CC v Nedbank Ltd and Another

• Jurisdiction: South Africa
• Judge: Corbett CJ, Hefer JA, Nestadt JA, Harms JA, Scott AJA
• Judgment Date: 17 November 1995
• Citation: 1996 (1) SA 812 (A)
• Docket Number: 70/94
• Hearing Date: 15 September 1995
• Counsel: A Subel for the appellant. No appearance for the first respondent. A P Landman for the second respondent (the heads of argument having been drawn partly by K I Foulkes-Jones and partly by A P Landman).
• Court: Appellate Division

Scott AJA:

On or about 20 February 1992, the appellant entered into an agreement of sale with the second respondent for the purchase of a quantity of voile fabric. The appellant carries on business in South H Africa as a distributor of fabric. The second respondent, to which I shall refer as 'Perfel', is a textile manufacturing company of Portugal. The purchase price of US $149 971,25 f o b was to be paid by way of a letter of credit. Pursuant to the agreement the appellant instructed the first respondent ('Nedbank') to open an irrevocable letter of credit in I favour of Perfel. The credit was transmitted by Nedbank to Perfel's bank in Lisbon which served as an advising bank only. The credit made provision for deferred payment, ie 90 days after the date of the bills of lading, and for two bills, out of a set of three, to be included in the documents which had to be presented as a precondition of payment. The latest date for shipment of the goods was stated in the credit to be 20 April 1992. The expiry date was 30 April 1992. Perfel indicated, J however, that it would be unable to

Scott AJA

A manufacture the fabric in time and by agreement the credit was amended by extending the expiry date from 30 April to 18 May 1992 and the latest date of shipment from 20 April 1992 to 8 May 1992. The goods arrived in Durban on 18 June 1992 and were presumably received by the appellant in Johannesburg shortly thereafter. The date of their arrival was later than B the appellant had expected. The appellant was also not satisfied with their quality.

On 4 August 1992, the appellant launched an application as a matter of urgency in the Witwatersrand Local Division for an interdict restraining Nedbank from making payment in terms of the credit together with other C ancillary relief. It alleged that the bills of lading presented to Nedbank for payment contained a fraudulent misrepresentation as to the date of shipment. I shall refer in more detail to the allegations of fraud later in this judgment. The application was opposed by Perfel but, pending finalisation of the matter, certain interim relief was granted to the appellant. Nedbank took up the attitude that it would honour the D credit unless restrained from doing so by an order of court. In due course Perfel filed opposing papers together with a counter-application in which it sought an order directing Nedbank to make payment in terms of the letter of credit. After hearing argument, Leveson J on 30 December 1992 dismissed the main application and set aside the interim relief granted on 4 August 1992. The appellant was further ordered to pay the costs of E Perfel as well as those of Nedbank which had appeared to protect its interests. The present appeal is against the judgment of Leveson J, including the order as to costs. Subsequent to the noting of the appeal the appellant petitioned this Court for leave in terms of s 22 of the Supreme Court Act 59 of 1959 to have further evidence received in the form F of an affidavit or, alternatively, to have the matter remitted to the Court a quo for further hearing. Before dealing with the petition I shall consider the merits of the appeal on the basis of the papers that were before the Court a quo.

The system of irrevocable documentary credits is widely used for G international trade both in this country and abroad. Its essential feature is the establishment of a contractual obligation on the part of a bank to pay the beneficiary under the credit (the seller) which is wholly independent of the underlying contract of sale between the buyer and the seller and which assures the seller of payment of the purchase price H before he parts with the goods forming the subject-matter of the sale. The unique value of a documentary credit, therefore, is that whatever disputes may subsequently arise between the issuing bank's customer (the buyer) and the beneficiary under the credit (the seller) in relation to the performance or, for that matter, even the existence of the underlying contract, by issuing or confirming the credit, the bank undertakes to pay the beneficiary provided only that the conditions specified in the credit I are met. The liability of the bank to the beneficiary to honour the credit arises upon presentment to the bank of the documents specified in the credit, including typically a set of bills of lading, which on their face conform strictly to the requirements of the credit. In the event of the documents specified in the credit being so presented, the bank will J escape liability only upon proof of fraud on the part of the beneficiary.

Scott AJA

A This 'established exception' to the bank's liability was formulated by Lord Diplock in United City Merchants (Investments) Ltd and Others v Royal Bank of Canada and Others [1982] 2 All ER 720 (HL) at 725g as follows:

' . . . (W)here the seller, for the purpose of drawing on the credit, B fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his (the seller's) knowledge are untrue.'

The autonomous nature of the obligation owed by the bank (whether the issuing bank or, if there is one, the confirming bank) to the beneficiary C under a credit has been stressed by courts both in South Africa and overseas. (As to the former, see, for example, Phillips and Another v Standard Bank of South Africa Ltd and Others 1985 (3) SA 301 (W); Ex parte Sapan Trading (Pty) Ltd 1995 (1) SA 218 (W) at 224I-225G.) An interdict restraining a bank from paying in terms of a credit will accordingly not D be granted at the instance of the buyer (the bank's customer) save in the most exceptional cases. The approach of the Courts with regard to such an interdict was stated by Kerr J in R D Harbottle (Mercantile) Ltd and Another v National Westminster Bank Ltd and Others [1977] 2 All ER 862 (QB) at 870b-d to be as follows:

'It is only in exceptional cases that the courts will interfere with the E machinery of irrevocable obligations assumed by banks. They are the lifeblood 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 as available to them or stipulated in the contracts. The courts are not F 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.'

G This statement of principle was expressly approved by Browne LJ in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 (CA) at 983. The importance of allowing banks to honour their obligations under irrevocable credits without judicial interference has been H repeatedly stressed in subsequent cases. In Intraco Ltd v Notis Shipping Corporation (The Bhoja Trader) [1981] 2 Lloyd's Rep 256 (CA) Donaldson LJ, after upholding the refusal of the Court below to interfere with the seller's right to call upon a bank to make payment under its guarantee where fraud was not involved, observed at 257:

'Irrevocable letters of credit and bank guarantees given in circumstances I such as that they are the equivalent of an irrevocable letter of credit have been said to be the lifeblood of commerce. Thrombosis will occur if, unless fraud is involved, the Courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being the equivalent of cash in hand.'

Lord Denning MR in Power Curber International Ltd v National Bank of J Kuwait SAK [1981] 3 All ER 607 (CA) at 613b sounded a similar warning:

Scott AJA

A 'No foreign seller would supply goods to that country on letters of credit because he could no longer be confident of being paid. No trader would accept a letter of credit issued by a bank of that country if it might be ordered by its courts not to pay.'

In Bolivinter Oil SA v Chase Manhattan Bank, Commercial Bank of Syria and B General Company of Homs Refinery [1984] 1 Lloyd's Rep 251 (CA)([1984] 1 All ER 351 - Note) at 257 Donaldson MR pointed out that the granting of an interdict against a bank at the instance of a dissatisfied customer served to undermine not only the value of irrevocable credits but also the reputation of the bank:

C 'If, save in the most exceptional cases, he (the bank's customer) is to be allowed to derogate from the bank's personal and irrevocable undertaking, given be it again noted at his request, by obtaining an injunction restraining the bank from honouring that undertaking, he will undermine what is the bank's greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, D if this happens at all frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined.'

(See also Deutsche Rückversicherung AG v Walbrook Insurance Co Ltd and Others; Group Josi Re (formerly known as Group Josi Reassurance SA) v Walbrook Insurance Co Ltd and Others [1994] 4 All ER 181 (QB) at 194-5 and E the authorities there cited.)

Nonetheless, it is now well established that a Court will grant an interdict restraining a bank from paying the beneficiary under a credit in the event of it being established that the beneficiary was a party to fraud in relation to the documents presented to the bank for payment. F For, as was observed by Lord Diplock in the...