Solo Industries UK Ltd v Canara Bank

The cash principle requires a bank to honour a compliant demand under a performance bond, save for established fraud known to the bank. It protects the autonomy of a valid banking instrument and ordinarily prevents underlying disputes, set-off, or an unproved allegation of a fraudulent demand from delaying payment.

That principle does not prevent the issuing bank from raising an ordinary contractual defence that the instrument itself was procured by fraud or misrepresentation and was validly avoided. A bank with a real prospect of establishing that defence is entitled to a trial under CPR Part 24. Similar-fact evidence is admissible in civil proceedings where it is logically probative, fair and properly notified.

Solo, the beneficiary of a performance bond issued by Canara Bank to secure an aluminium supply contract, sought summary judgment for sums claimed under the bond. Canara alleged that the underlying contract was a sham and that the bond had been induced by a fraudulent conspiracy and misrepresentations involving Solo.

HHJ Hallgarten QC, sitting in the Queen's Bench Division, refused summary judgment. He held that Canara needed only a real prospect of proving that it had validly avoided the bond. Solo appealed, contending that the cash principle applicable to performance bonds required Canara to establish fraud to a higher standard before it could resist payment. Solo also sought to challenge the factual assessment and an earlier security-for-costs order.

1. Appeal dismissed unanimously. Mance LJ gave the leading judgment, with which Sir Martin Nourse and Potter LJ agreed. The judge correctly refused summary judgment.

2. The court confirmed that performance bonds are ordinarily treated as cash. Under the principles in R.D. Harbottle (Mercantile) Ltd. v National Westminster Bank Ltd. [1978] 1 QB 146 and Edward Owen Engineering Ltd. v Barclays Bank International Ltd. [1978] 1 QB 159, a bank must honour a demand under a valid instrument unless fraud is established with the requisite clarity and knowledge. A mere real prospect that a demand was fraudulent will not normally justify withholding payment.

3. That rule concerns the autonomous obligation created by a valid instrument. It does not deprive an issuing bank of an ordinary defence that the bond itself was induced by fraudulent conspiracy or misrepresentation and has been validly avoided. The risks assumed by a bank under the cash principle presuppose the integrity and validity of the instrument. There was no principled basis for compelling payment while leaving the bank to establish invalidity only in subsequent proceedings.

4. The appropriate summary-judgment question was therefore whether Canara had a real prospect of successfully defending the claim by proving avoidance, under CPR 24.2(a)(ii). It did. The evidence concerning the alleged contract, the absence of satisfactory records of receipt and realisation of the aluminium, the related tin transaction, and the wider pattern of fraudulent trading justified a trial. In any event, the non-disclosure of potentially material records provided another compelling reason for trial under CPR 24.2(b).

5. The court also held that the related tin evidence was admissible. In civil proceedings, similar-fact evidence may be used where it is logically probative of the issue, provided its use is not oppressive or unfair and the other party has fair notice.

6. Permission to appeal on the factual issues was granted, but that appeal was dismissed after full argument. Permission to appeal the superseded security-for-costs order was refused.

• Court of Appeal (Civil Division)—by [2001] EWCA Civ 1041, dismissed Solo's appeal against refusal of summary judgment. It granted permission on the factual points but dismissed that appeal after hearing argument.
• Queen's Bench Division—HHJ Hallgarten QC, sitting as a judge of the High Court, refused Solo summary judgment on 21 July 2000. He held that Canara had a real prospect of establishing that it had validly avoided the bond.