1. Introduction
In an application for an interim injunction banks and banking instruments enjoy special status. That is so even where the court is satisfied that an allegation of fraud is sufficiently made out, and that the bank has knowledge of the fraud.
In the recent case of Tetronics International Limited v HSBC Plc [2018] EWHC 201 (TCC), the High Court considered the interplay between the ‘autonomy principle’, the ‘fraud exception’ and injunctive relief.
Under the autonomy principle a bank is not concerned with disputes between the parties. Nor is not charged with the investigation of such disputes. If a bank is required to honour obligations under a banking instrument, then insofar as the requirements of the banking instrument (in this case a bond) have been complied with, the bank is entitled to honour those obligations notwithstanding an underlying dispute between the parties. The one exception to the autonomy principle is where the bank has knowledge of a fraud affecting the proposed transaction - the ‘fraud exception’.
The courts will only allow injunctive relief under the fraud exception where:
“…it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of the fraud and as to the bank’s knowledge.”
2. The Facts
The Tetronics Case concerned a bond issued by HSBC (H) in favour of Blue Oak (B) at the request of Tetronics International (T). T sought interim relief preventing H from honouring a call on the bond made by B. T alleged that the call on the bond was fraudulent and made H aware of the same. It was further asserted by T that the effect of injunctive relief not continuing would result in the immediate insolvency of T, who would have to reimburse H for the payment to B.
In this case the application for interim relief was made directly against the bank (H) (as opposed to the other party to the transaction (B)).
Interim relief was initially granted. When the case came back before the court the question for the court was whether the injunctive relief directly restraining the bank from honouring its obligations under the bond should be allowed to continue.
The test applied by the court included the principles laid down in the American Cyanamid Case and the fraud exception. The Court found that:
(1) T had a seriously arguable case of fraud against B (i.e. on the material available the only realistic inference was that B had no honest belief in the validity of the call on the bond);
(2) H had the requisite knowledge (i.e. the ‘fraud exception’ applied and on the evidence, H was aware of the fraud);
(3) The balance of convenience did not favour the continuation of an injunction restraining H (initial evidence that the alleged catastrophic financial implications for T if the injunction were to be lifted, was undermined by contradictory evidence later produced).
It is of note that the balance of convenience test was considered on two separate occasions in the Tetronics Case. Firstly, on 31st January 2018, when the court concluded that the necessary “extraordinary facts” were evidenced and the injunctive relief against H was allowed to continue. Thereafter, on 19th March 2018 where on the application of B new evidence was allowed which contradicted the previous evidence of T as to its financial ability to withstand the lifting of the injunction.
As a result, the injunction initially imposed against H was lifted, so that payment could be made to B notwithstanding the apparent fraud.
3. Analysis
The public policy reasons for the autonomy principle, and stringent tests required to surmount that principle, are well rehearsed. The purpose of such banking instruments is to facilitate trade. A party can be completely satisfied owing to the autonomous nature of the instrument and the reputation of the bank that payment will be received.
To allow the erosion of the autonomy principle would be to erode the institutions upon which UK Plc has been allowed to thrive as a centre for international trade.
The reasons why there are so few reported cases of injunctions being granted or permitted to continue under the fraud exception are:
(1) It is almost never possible to establish the test for fraud (as opposed to the mere possibility of fraud); and
(2) The balance of convenience test for injunctive relief is almost always going to militate against such relief being granted.
In the Tetronics Case, the difficulties of a party seeking to injunct a bank are laid bare. Not only was the case for fraud sufficiently made out, but the evidence of the bank’s knowledge was frankly indisputable. However, in order to satisfy the balance of convenience test when relief is sought against the bank (as opposed to the beneficiary) it is said that “extraordinary facts” are required.
Having cleared the hurdle presented by the fraud test, the intrepid applicant is tasked with finding a means of breaching a virtually impregnable ‘balance of convenience’ wall.
4. Conclusion
An applicant seeking injunctive relief in relation to such banking instruments would do well to consider making the application against the other contracting party (here beneficiary) as opposed to the bank.
The position of the courts is clear, such “...disputes, are at one particular level between the parties to those contracts. Banking instruments are of a different character entirely.”
Isolated cases such as Kvaerner John Brown Ltd v Midland Bank [1998] CLC 446, where relief has been granted, are likely to maintain their status as atypical.
By Kumarlo Menns, Solicitor
Contact: E: kumarlo.menns@montpelier-solicitors.com
T: +44 (0)207 199 3611
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