Alternative Power Solution Limited v Central Electricity Board and another

The independent nature of an irrevocable letter of credit requires an issuing bank to honour conforming documents despite disputes under the underlying sale contract. The fraud exception is narrow. At interlocutory stage, it must be clearly established that the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demand and that the bank knew of the fraud. A serious issue, a good arguable case, or contractual breach is insufficient. A variation of the credit requires the bank’s agreement. Even where fraud is alleged, the balance of convenience will almost always oppose an injunction; extraordinary facts are needed.

Alternative Power Solution Limited v Central Electricity Board and another concerned a contract for the supply of lamps, with payment to be made by an irrevocable letter of credit issued by Standard Bank. The CEB sought to restrain payment after the goods were shipped without the inspection it said the contract required, alleging contractual breach and fraud known to the bank.

The Commercial Division of the Supreme Court of Mauritius continued an interim injunction on 18 February 2011. The Supreme Court sitting as a Court of Appeal dismissed APS’s appeal on 14 August 2012. The appeal to the Board concerned the correct interlocutory fraud test, the evidence of fraud and the balance of convenience.

Appeal allowed. The injunction restraining Standard Bank from paying APS under the letter of credit could not be maintained.

1. Applicable threshold. The ordinary interlocutory test in American Cyanamid Co v Ethicon Ltd [1975] AC 396 does not govern applications invoking the fraud exception to an independent letter of credit. The Board adopted a stringent test, drawing on United Trading Corp SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554, Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 and Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800. It had to be clearly established that the only realistic inference was that APS could not honestly have believed in the validity of its demand and that Standard Bank knew of the fraud.
2. Evidence. The documents presented contained no forgery or material express or implied misrepresentation. Shipment from China followed by transhipment through Singapore was permitted by the credit. The consignor’s identity was not a stated requirement. Alleged breaches concerning inspection, manufacture, licensing and undertakings given in court were contractual matters for arbitration and could not, without fraud known to the bank, justify an injunction.
3. Bank’s independence. Under UCP 600 article 4a, the credit was separate from the underlying contract. Under article 10a, any amendment required the agreement of the issuing bank, the confirming bank if any, and the beneficiary. No evidence showed that Standard Bank had agreed to vary the credit or knew that APS was acting fraudulently.
4. Balance of convenience. The balance will almost always oppose an injunction against payment under an independent credit. Only extraordinary facts could overcome the difficulty identified in RD Harbottle (Mercantile) Ltd v National Westminster Bank [1978] QB 146 and considered in Czarnikow-Rionda. The cross-undertaking in damages and unsupported allegations that the bulbs were counterfeit did not suffice.

The Board allowed the appeal. Its provisional view was that the CEB should pay the costs of APS and Standard Bank before the Board and in the courts below, subject to further submissions.

1. Supreme Court of Mauritius, Commercial Division: Continued and made interlocutory an injunction restraining Standard Bank from paying under the letter of credit on 18 February 2011.
2. Supreme Court of Mauritius sitting as a Court of Appeal: Dismissed APS’s appeal on 14 August 2012.
3. Privy Council: Granted leave to appeal and allowed the appeal.