MONTROD LIMITED v (1) GRUNDKOTTER FLEISCHVERTRIEBS GMBH (2) STANDARD CHARTERED BANK [2001] EWCA Civ 1954

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION COMMERCIAL COURT

(His Honour Judge Raymond Jack QC)

[2001] EWCA Civ 1954

Case No Case No: A3/2000/3783/PTA; A3/2000/3789/QBCMA A3/2001/0125 PTA; A3/2001/0126 QBCMI

Venue Royal Courts of Justice, Strand,, London, WC2A 2LL

Between

MONTROD LIMITEDAppellant

(1) GRUNDKOTTER FLEISCHVERTRIEBS GMBH (2) STANDARD CHARTERED BANKRespondents

Before

Lord Justice Thorpe

Lord Justice Potter

Sir Martin Nourse

Nigel Jones QC and Ms Sara Benbow (instructed by Simmons Stein & Co, London, for the appellant)

Alain Choo-Choy Esq (instructed by Sherrards, Herts, for the first respondent)

Ali Malek QC and Michael Kay Esq (instructed by Lawrence Jones, London, for the second respondent)

Lord Justice Potter:

INTRODUCTION

[1]The various appeals and applications for permission to appeal before us arise from orders made by HHJ Raymond Jack QC (sitting as a Judge of the Commercial Court) on 28 November 2000 following his judgment in relation to the liability of the various parties arising from payment made by Standard Chartered Bank (“SCB”) in London pursuant to a documentary credit issued by SCB in favour of Grundkotter Fleischvertriebs GmbH (“GK”), a German company named as beneficiary, through the advice of its German bank, Commerzbank. That credit had been issued at the request of Fibi Bank (UK) PLC (“Fibi”) acting on the instructions of Montrod Limited (“Montrod”), the claimants in the action, who were named as applicants in the credit. The underlying contract was a contract of sale made between GK as sellers and Ballaris, a Russian entity of uncertain status, as buyers of a consignment of 400 mt of frozen pork sides sold cif Moscow. The credit called inter alia for the presentation of certificates of inspection signed by Montrod.

[2]There were before the court applications whereby(a) GK sought summary judgment under CPR Part 24 against Montrod on Montrod’s claim against GK for a declaration that no valid certificates of inspection had been issued by Montrod capable of satisfying the requirements of the letter of credit;

(b) SCB sought summary judgment under CPR Part 24 against Fibi in respect of its claim for reimbursement of monies paid to GK pursuant to the letter of credit;

(d) Montrod sought reconstitution of the action with SCB claiming against Fibi, Fibi claiming under CPR Part 20 against Montrod, and Montrod claiming against GK in the form of a new Part 20 claim against GK for reimbursement in the event of being found liable to Fibi. So far as the issues between SCB, Fibi and Montrod were concerned, it was agreed between the parties that the judge should not decide simply whether or not the defences put forward by Fibi and Montrod had any real prospect of success, but should give final judgment on the basis of the statements and documentary evidence before the court. So far as Montrod’s application to add a CPR Part 20 claim against GK was concerned, it was resisted by GK on the basis that Montrod’s claim as formulated in a draft statement of case before the court had no realistic prospect of success. However there was no agreement limiting the court in relation to its consideration of that issue to the evidence then available to the court.

[3]Montrod, a company carrying on a finance and investment business in England, was engaged through an intermediary to provide the necessary documentary credit which GK required if the matter was to proceed. The credit was payable by SCB ‘45 days sight’ on presentation by GK of various specified documents which included:

“Certificate of Inspection issued and signed by the credit applicant at his discretion on the goods quality and quantity in good order before shipment.”

[4]The credit was expressed to be subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publications 500 (“UCP 500”). In circumstances to which I will turn in more detail below, GK presented to SCB documents, including an inspection certificate apparently signed by Montrod, which on their face complied with the terms of the credit. SCB paid the credit in the face of an assertion by Montrod that the inspection certificate which GK presented had not been signed or authorised by Montrod and that the document was fraudulently created. The judge found that the inspection certificate had indeed been signed without the authority of Montrod but that GK was not fraudulent and was entitled to payment by SCB which was entitled to payment from Fibi, which was in turn entitled to reimbursement by Montrod. In the course of his judgment the judge rejected Montrod’s alternative argument that SCB was entitled to refuse payment on the grounds that, even if GK was not fraudulent, SCB and GK had prior to payment been made aware that the inspection certificate had not been signed or authorised by Montrod and as such was a ‘nullity’ and/or a non-conforming document.

[5]Montrod and Fibi appeal with the permission of the judge. Their appeals raise identical issues and Fibi has not appeared to present any separate argument. The finding of the judge that GK was innocent of any fraud has not been challenged and the success of the appeal depends upon the correctness of the ‘nullity’ argument, as to which there is no clear previous authority

[6]In relation to Montrod’s application for permission to add a CPR Part 20 Claim against GK, Montrod’s draft case raised various causes of action which were the subject of applications by GK for summary relief and/or to strike out. The judge’s decision on those matters, in respect of which he refused leave to appeal, has given rise to applications to this court for leave to appeal, to which I shall turn in due course. THE BACKGROUND FACTS

[7]GK had prior experience of export business but this was its first letter of credit transaction. It opened a new account with Commerzbank which it used as its advisor in connection with the credit. In the course of its communications with Ballaris when negotiating the contract of sale and the putting in place of the letter of credit, GK (who never had direct contact with Montrod) dealt with Ballaris in good faith on the basis that Ballaris could speak as to Montrod’s intentions so far as signature of the inspection certificate was concerned. GK were led to understand that Mr Wieler, an employee of GK, should sign the inspection certificates on behalf of Montrod and GK agreed that he would do so, receiving through the post a Montrod company stamp as proof of Montrod’s authorisation of GK. GK acted accordingly. The full circumstances in which that unusual situation came about, and the judge’s reasons for accepting that GK, who at all times acted on the advice of Commerzbank, were entirely innocent of fraud, appear in the report of the judge’s decision at [2001] 1 All ER (Comm) 368 at 377b-378f and 379b-d. As already indicated there is no appeal against those findings.

[8]Unknown to GK, Ballaris were not entitled to speak for Montrod as to the contents of the credit. The negotiations between Montrod and Ballaris were conducted entirely between Mr Hoory on behalf of Montrod and a Mr Bernard Choo of Frankfort Trade Credit Agencies of Singapore who (as apparent agent/intermediary for Ballaris) had approached Mr Hoory to provide the credit. Mr Hoory had no direct contact with either Ballaris or GK. The precise relationship and the contact of any communications between Mr Choo and Ballaris or GK remain to be determined. However, it was in fact the case (and it is not in dispute) that Montrod did not wish or intend to inspect the goods. So far as Mr Hoory was concerned, the requirement for presentation of a signed certificate was no more than a device, or ‘locking’ clause, intended to ensure that, by withholding its signature, Montrod could ensure that the credit would not be operable until it had been put in funds by Ballaris. That purpose was never disclosed to GK who were unaware of it and would never have agreed to the inclusion of such a term had it been so aware. GK duly despatched the goods by means of twenty lorry shipments to Moscow where they were delivered to Ballaris without any subsequent complaint. GK did so on the understanding that it was entitled to sign the inspection certificates for each truck load on behalf of Montrod and believing that, in any event, the goods were also to be inspected by an agency on arrival in Moscow. Having signed the certificates in those circumstances, GK duly presented twenty sets of documents under the credit to SCB in London, which accepted them as conforming with the credit. THE RELEVANT CHRONOLOGY

[9]In February 2000, Montrod requested Fibi to obtain a letter of credit to be issued by the London branch of SCB in respect of the price of the goods agreed to be sold by GK which was to be named as the beneficiary. On 17 February 2000 Fibi wrote to SCB forwarding Montrod’s request and stating that:

“[Fibi] shall reimburse you two working days after receipt of your tested Telex/Swift claim confirming that documents have been presented to yourselves strictly in accordance with the LC terms and are being forwarded to us”

[10]In fact, since the letter of credit was ‘45 days sight’, the notice period for reimbursement was considerably longer. However nothing turns upon that.

[11]Upon 21 February 2000 SCB issued the letter of credit in accordance with Fibi’s instructions, stating that Montrod was the applicant. SCB then requested Commerzbank to advise the letter of credit to GK, Commerzbank acknowledging receipt by Swift message on 24 February 2000.

[12]On 20 March 2000 two sets of documents were presented to SCB by Commerzbank and were followed by a further four sets on 22 March 2000. Between 23 and 27 March, SCB sent notification to Fibi that six sets of conforming documents had been received, together with the documents themselves. On 27 March 2000, Montrod informed Fibi that the certificates of inspection ‘are not issued by the applicant Montrod Ltd [and] no payment is to be executed ..’. Fibi in turn passed a Swift message to SCB, adding later that day that ‘Montrod Ltd has informed us that they have not issued any certificates of inspection and that the certificates of inspection presented are apparently forgeries’.

[13]On 28 March 2000, SCB contacted Fibi and confirmed that the documents complied on their face with the terms of the letter of credit. On the same day Fibi confirmed that SCB was obliged to pay against the documents at their maturity date. Thereafter, fourteen further sets of documents were presented to SCB by Commerzbank on 31 March 2000 (four sets) and 6 April 2000 (ten sets). They were accepted by SCB as conforming on their face to the terms of the letter of credit and were duly forwarded to Fibi who were informed that the documents had been checked and found in order, SCB requesting reimbursement on an appropriate date.

[14]By a Swift message of 29 March 2000 Fibi, in acknowledging the documents received to date, confirmed that the documents appeared on their face to be in strict conformity with the terms of the letter of credit and confirmed that they would remit to SCB the relevant amounts on the value dates shown. Fibi added however:

“However, as the applicants claim that certificates of origin presented were not issued by themselves, we have informed them that we shall require either instructions from the beneficiary’s bank, or a court order if payment is not to be effected. In the absence of either of these, we shall effect payments of all 6 drawings as stated above.”

[15]On 7 April 2000 Fibi acknowledged four sets of documents recently received and confirmed that payment would be made in due course without qualification.

[16]On 10 April 2000, SCB presented a further 10 sets of documents to Fibi, but Fibi was not prepared to confirm that payment would be made in due course.

[17]On 11 April 2000, solicitors for Montrod sent a fax letter to GK asserting that the signature attached to the certificate of inspection delivered to SCB was a forgery. They requested confirmation that GK would not seek payment failing which they would apply to the High Court for an injunction and, on the same date, commenced proceedings against GK, Fibi and SCB for an injunction until trial or further order to prevent them from paying according to the terms of the letter of credit, supported by an affidavit from Mr Hoory.

[18]On 13 April 2000, Fibi accepted the 10 sets of documents recently presented.

[19]Montrod’s application was heard inter partes before David Steel J, who dismissed it for reasons set out in his judgment dated 19 April 2000. He found that, upon the evidence then before him, Montrod fell ‘miserably short’ of establishing a case of fraud on the part of GK as seller/beneficiary, or of notice of such fraud on the part of SCB, while acknowledging the right of Montrod to renew the application before a Commercial Judge if and when further evidence became available.

[20]By the end of May a further witness statement by Mr Hoory had expanded on his allegations. On various dates between 4 May and 22 May 2000 inclusive, the maturity dates for payment in respect of the various sets of documents matured. At the end of May, witness statements for GK were served to the effect that GK had at all relevant times dealt with persons whom they believed to be acting on behalf of Ballaris as buyers, that they believed Montrod had been involved in the transaction by Ballaris in relation to the opening of the credit, and that Montrod had appropriate funds or security from Ballaris. They had been unaware that the requirement for a certificate inspection was intended to act as a ‘locking clause’ which was not an arrangement they would have accepted had they known of it. They believed that, as a result of communications between Ballaris and GK, one of GK’s employees could properly sign the inspection certificates. The consignments of pork had been despatched and delivered to the Russian buyers between 7 and 24 March 2000 and no complaints had been raised by the buyer. In respect of half the deliveries, GK had sold its right to payment under the credit to Commerzbank in accordance with the discount arrangement.

[21]On 7 June SCB made payment to Commerzbank of US$ 498,311.51 in the light of the failure of Montrod’s application before David Steel J and the absence of any renewed application upon the basis of such further evidence which had become available. In relation to that evidence, it was the evidence of Mr Thompson, SCB’s Operations manager, that he considered on any view it could not be said that it was clear and established fraud, having concluded that there was no evidence of any dishonesty on the part of GK and Commerzbank. THE NULLITY ISSUE

[22]Following his judgment, the judge made an order by which he(i) struck out Montrod’s Particulars of Claim in which Montrod sought a declaration against SCB and Fibi that no certificates of inspection had been issued and signed which were capable of satisfying the relevant condition in the letter of credit

(ii) gave judgment for SCB against Fibi for US$ 498311.51 plus interest (to date of judgment) of US$ 18196.92

(iii) gave judgment for Fibi against Montrod in the like sums. That result inevitably followed from his finding that there was no proof of fraud on the part of GK and that the so-called ‘nullity exception’ argued for by Montrod was not an exception recognised by English law as entitling a bank to refuse payment under a letter of credit in the face of documents conforming ‘on their face’ with those stipulated for under the terms of the credit. As already indicated, the judge’s finding of ‘no fraud’ on the part of GK is not challenged on this appeal; the sole issue before us in respect of paragraphs 1-3 of the judge’s order is whether or not he was correct in his understanding and application of the law so far as the nullity exception is concerned.

[23]The formulation of the so-called ‘nullity exception’ as advanced before the judge was as follows: If, by the time of full payment (or the time when a bank irrevocably commits itself to a third party who has taken in good faith, if earlier), the only reasonable inference is that one (or more) of the documents […] presented under the credit is not what it appears on its face to be, but is a nullity, then the bank is not obliged to make payment under the credit.

[24]Mr Jones QC, on behalf of Montrod, has acknowledged that, if the court regards that formulation as unnecessarily wide to do justice in the instant case, his purpose would be equally well served if there were inserted within the square brackets indicated in the quotation above the additional words ‘created by the beneficiary and’. Mr Jones submits that the broad issue of importance is whether a beneficiary should be entitled to insist upon payment under a letter of credit in circumstances where he has presented a document which, prior to payment, he knows is not a genuine document issued under the authority of the person purporting to make it. On the alternative formulation, the issue narrows to the question whether a beneficiary who is himself responsible for the (albeit bona fide) presentation of a false document should nevertheless be able to insist on payment once he is aware of its falsity and/or unauthorised nature. THE DECISION BELOW

[25]The judge rejected Montrod’s arguments. He held that there was no authority which supported the existence of such a nullity exception, apart from certain dicta of Lord Diplock in United City Merchants (Investments) Limited –v-Royal Bank of Canada

[1983] 1 AC 168

which he described as ‘very slender support’ for the proposition advanced. He also made clear that the ‘nullity exception’ was not supported by UCP 500, the terms of which were imported into the letter of credit. Finally he stated that it did not form part of English law, observing that:

“It is unsupported by authority. It provides a further complication where simplicity and clarity are needed. There are problems in defining when a document is a nullity. The exception could have unfortunate consequences in relation to rights of third parties.”

UCP 500

[26]Before turning to the submissions of the parties, it is convenient to set out the relevant provisions of UCP500 which, by their incorporation into the credit became binding upon all the parties.

[27]Article 3 (Credits v Contracts) spells out the principle of autonomy whereby a documentary credit operates independently of the underlying transaction. It provides:

“a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s), or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary. b. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank.”

[28]Article 4 (Documents v. Goods/Services/Performances) provides that the parties concerned deal with documents and not with goods services or other performances to which the documents may relate.

[29]Article 9 (Liability of Issuing and Confirming Banks) provides that:

“a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment to pay at sight: (ii) if the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit … b. A confirmation of an irrevocable Credit by another bank (the ‘Confirming Bank’) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment - to pay at sight; (ii) if the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit …”

[30]Article 13 (Standard for Examination of Documents) provides:

“a. Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit… b. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly … c. If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them”

[31]Article 14 (Discrepant Documents and Notice) provides by paragraph a that an Issuing Bank must reimburse any other bank which it has authorised to pay ‘against documents which appear on their face to be in compliance with the terms and conditions of the Credit’.

[32]Article 14b provides that:

“Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents.”

[33]Article 14c provides that:

“If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy (ies). This does not, however, extend the period mentioned in sub-Article 13b.”

[34]Article 14d provides that:

“i If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him. ii Such notice must state all discrepancies in respect of which the bank refuses the documents …”

[35]Article 14e provides that:

“If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this article …. [it] … shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.”

[36]Article 15 (Disclaimer on Effectiveness of Documents) provides that banks assume ‘no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document … or for the good faith or acts or omissions, solvency, performance or standing of .. any other person whomsoever’.

[37]The combination of the autonomy principle and the rule that the banks concerned deal in documents and not in goods (Articles 3 and 4), together with the issuing bank’s undertaking of payment if the stipulated documents presented conform with the terms of the credit (see Article 9) plainly entitled GK as beneficiary to obtain, and obliged SCB as issuing bank to make, payment against the documents presented, provided that they complied ‘on their face’ with the requirements of the credit (see Articles 13a. 14a. 14b and 14c). It has not been, and plainly could not be, argued on this appeal that the documents presented and, in particular, the inspection certificates were other than compliant on their face with the requirements of the credit. Leaving aside for a moment the exception of fraud on the part of the beneficiary (which the judge held not to exist) the liability of SCB to make payment under the UCP 500 terms is clear.

[38]Neither as a matter of general principle, nor under UCP 500, is an issuing bank obliged to question or investigate the genuineness of documents which appear on their face to be documents the nature and content of which comply with the requirements of the credit. So far as the common law is concerned, the position has been clearly stated in the House of Lords in Gian Singh & Co Ltd –v- Banque de L’Indochine

[1974] 1 WLR 1234

per Lord Diplock at 1238:

“The fact that a document presented by the beneficiary under a documentary credit, which otherwise conforms to the requirements of the credit, is in fact a forgery does not of itself, prevent the issuing bank from recovering from its customer money paid under the credit. The duty of the issuing bank, which it may perform either by itself, or by its agent, the notifying bank, is to examine documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. The express provision to this effect in Article 7 of the Uniform Customs and Practice for Documentary Credits does no more than re-state the duty of the bank at common law.”

[39]Article 7 referred to by Lord Diplock is now Article 13 of UCP 500. Not only is the necessity to examine the documents presented by the beneficiary limited to an examination of the documents alone (Article 14b) but, under Article 15, the bank assumes no liability or responsibility for the genuineness or legal effect of any such document. Finally, it is clear that there is a timetable laid down (a reasonable time not to exceed seven banking days following receipt of documents: see Article 13b and 14d) in which the issuing bank must examine the documents and indicate to the party submitting them whether it accepts or refuses them: see Article 14dii. If it does not refuse the documents within the seven days specified, then it is precluded from claiming that the documents are not in compliance with the terms and conditions of the credit (Article 14e). Thus, in this case, once the documents had been presented and accepted, or at any rate no intimation of rejection for discrepancy had been given within seven days of receipt, SCB were prima facie liable to pay under the credit on its maturity date. Accordingly, upon a straightforward application of the provisions of UCP 500, the liability of SCB as issuing bank to pay on maturity accrued seven days after presentation of the various sets of documents, well before the end of April 2000, such payments falling due on various dates in May 2000 (see paragraph 20 above).

[40]As already made clear, Montrod’s original allegation of fraud on the part of GK as beneficiary has not been pursued before us. There is no issue between the parties that, so far as the state of the authorities is concerned, no English court has yet held an issuing bank entitled to withhold payment under a letter of credit, against documents which on their face conform with the requirements of the credit, save on the ground of fraud of the beneficiary himself, or the person seeking payment. Nor is it in dispute that in England the fraud exception is part of the common law and that it is apt to apply despite the fact that UCP 500 makes no reference to, nor makes allowance for, such an exception. As was made clear by Lord Diplock in United City Merchant Bank (Investments) Limited –v- Royal Bank of Canada

[1983] 1 AC 168

“The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, ‘fraud unravels all’. The courts will not allow their process to be used by a dishonest person to carry out a fraud.”

[41]The rationale of the fraud exception was more recently considered by Rix J in C zarnikow-Rionda –v- Standard Bank

[1999] 2 Lloyds Rep 197

at 213. In that case in the course of his consideration of the claim for the grant of an injunction against an issuing bank and the prima facie need to find a substantive cause of action against the party enjoined, he put the basis of the fraud exception, at least as between the issuing bank and its customer, on the basis of an implied contractual term. He stated:

“The fact that the rationale of the fraud exception is the law's prohibition on the use of its process to carry out fraud (per Lord Diplock in United City Merchant (Investments) Ltd –v- Royal Bank of Canada) may appropriately be viewed as an authoritative expression of the source of law of the implied limitation on a bank’s mandate … if the source of the power to injunct were purely the law’s interest in preventing the beneficiary from benefiting from his own fraud, I do not see why there should be the added requirement that the fraud be patent to the bank.”

[42]Finally, it is not in dispute in respect of the fraud exception that:

“… it is nothing to the point that at the time of trial the beneficiary knows, and the bank knows, that the documents presented under the letter of credit were not truthful in a material respect. It is the time of presentation that is critical. ”

(emphasis added) see Group Josie Re –v- Walbrook Insurance Co Ltd

[1996] 1 WLR 1152

at 1161C per Staughton LJ.

[43]The argument for Montrod that, where fraud on the part of the beneficiary cannot be established, there should nonetheless be room for a nullity exception in the case of a document which is worthless in the sense that it is not genuine and has no commercial value, whether as a security for the goods or otherwise), involves an undoubted extension of the fraud exception as hitherto propounded in the English authorities. If the basis of a fraud exception is that the court will only intervene in breach of the autonomy principle for the purpose of preventing or discouraging the perpetration of fraud on the part of the beneficiary or other presenting party, it is a clear extension to hold that presentation of a document which is itself a nullity for reasons which are not known to the beneficiary or issuing bank at the time of presentation, are nonetheless to be similarly treated.

[44]The leading authority on the question is the United City Merchant case in which the court was concerned with a bill of lading which showed that shipment of the goods had been made on 15 December 1976, when it had in fact been made on 16 December, the last date for shipment provided by the credit being 15 December. That date had been inserted by an employee of the loading brokers to the carriers who acted fraudulently, knowing that the date inserted was false. Neither the sellers, nor their bankers (to whom they had assigned their interest under the credit), were aware of the fraud. Mocatta J found in favour of the seller’s assignees at first instance, having found no fraud on the part of the plaintiffs in the documents. Having considered, inter alia, the decision in Sztejn –v- J Henry Schroder Banking Corp 31 NYS 2nd 631 (1941) which authority is historically the foundation stone of English law in this regard (see Edward Owen Engineering Limited -v- Barclays Bank International Limited

[1978] QB 159

at 169) he observed:

“The case is, therefore, vitally different from the Sztejn –v Schroder case approved by the Court of Appeal in the recent Edward Owen –v- Barclays Bank case. Where there has been personal fraud or unscrupulous conduct by the seller presenting the documents under the letter of credit, it is right that a bank should be entitled to refuse payment against apparently conforming documents on the principle ex turpi causa non oritur actio . But here I have held that there was no fraud on the part of the plaintiffs, nor can I, as a matter of fact, find that they knew the date on the bills of lading to be false when they presented the documents.”

[45]In the House of Lords, the argument against the sellers was ‘that a confirming bank is not under any obligation legally enforceable against it by the seller/beneficiary of a documentary credit, to pay to him the sum stipulated in the credit against presentation of documents, if the documents presented, although conforming on their face with the terms of the credit, nevertheless contain some statement of material facts that is not accurate’. This argument was rejected by Lord Diplock. He resoundingly affirmed the autonomous nature of the contracts arising in connection with the letter of credit and their independence of any dispute in relation to the underlying contract as affecting the right of a seller/beneficiary to payment under the letter of credit on presentation of conforming documents and stated: “To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.” (183G)

[46]He went on to state the ‘ex turpi causa’ basis of the exception, as already quoted at paragraph 39 above and stated that acceptance of a proposition: “which does not call for knowledge on the part of the seller/beneficiary of the existence of any inaccuracy would embrace the fraud exception and render it superfluous.” (184D)

[47]For reasons which he subsequently elaborated, Lord Diplock stated: “to assent to it would, in my view, undermine the whole system of financing international trade by means of documentary credits.” (184D)

[48]Having referred to Article 9 of the Uniform Customs (now to be found in Article 15 of UCP 500) he observed: “It would be strange from the commercial point of view, although not theoretically impossible in law, if the contractual duty owed by confirming and issuing banks to the buyer to honour the credit on presentation of apparently conforming documents despite the fact that they contain inaccuracies or even are forged, were not matched by a corresponding contractual liability of the confirming bank to the seller/beneficiary (in the absence of course of any fraud on his part) to pay the sum stipulated in the credit upon presentation of apparently conforming documents.” (184H)

[49]Lord Diplock went on to deal with what he characterised as the ‘half-way house’ involved in the proposition accepted by the Court of Appeal which he said lay: “… not only half-way between the unqualified liability of the confirming bank to honour a documentary credit on presentation of documents which upon reasonably careful examination appear to conform to the terms and conditions of the credit, and what I have referred to as the fraud exception to this unqualified liability which is available to the confirming bank where the seller/beneficiary presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his own knowledge are untrue; but it also lies halfway between the fraud exception and the broad proposition favoured by the confirming bank with which I have hitherto been dealing. The half-way house is erected upon the narrower proposition that if any of the documents presented under the credit by the seller/beneficiary contain a material misrepresentation of fact that was false to the knowledge of the person who issued the document and intended by him to deceive persons into whose hands the document might come, the confirming bank is under no liability to honour the credit, even though, as in the instant case, the persons whom the issuer of the document intended to, and did, deceive included the seller/beneficiary himself … what rational ground can there be for drawing any distinction between apparently conforming documents that, unknown to the seller, in fact contain a statement of fact that is inaccurate where the inaccuracy was due to inadvertence by the maker of the document, and the like documents where the same inaccuracy had been inserted by the maker of the document with intent to deceive, amongst others, the seller/beneficiary himself?” (186H-187C)

[50]Lord Diplock observed that the Court of Appeal had reached its halfway house by starting from the premise that a confirming bank could refuse to pay against a document that it knew to be forged even though the seller/beneficiary had no knowledge of that fact, and by reasoning from that premise that, if forgery by a third party relieved the confirming bank of liability to pay the seller/beneficiary, then fraud by a third party ought to have the same consequence. He went on to state:

“I would not wish to be taken as accepting that the premiss as to forged documents is correct, even where the fact that the document is forged deprives it of all legal effect and makes it a nullity, and so worthless to the confirming bank as security for its advances to the buyer. This is certainly not so under the Uniform Commercial Code as against a person who has taken a draft drawn under the credit in circumstances that would make him a holder in due course, and I see no reason why, and there is nothing in the Uniform Commercial Code to suggest that, a seller/beneficiary who is ignorant of the forgery should be in any worse position because he has not negotiated the draft before presentation. I would prefer to leave open the question of the rights of an innocent seller/beneficiary against the confirming bank when a document presented by him is a nullity because unknown to him it was forged by some third party; for that question does not arise in the instant case. The bill of lading with the wrong date of loading placed on it by the carrier’s agent was far from being a nullity. It was a valid transferable receipt for the goods giving the holder a right to claim them at their destination, Callao, and was evidence of the terms of the contract under which they were being carried.”

(emphasis added) (187G-188B)

[51]In addition to the passage emphasised in italics above, which Mr Jones relies on in support of Montrod’s argument, he cites also various dicta culled from the authorities. In particular he relies upon the observation of Ackner LJ in the United City Merchants case at

[1982] 1 QB 246

“A banker cannot be compelled to honour a credit unless all the conditions precedent have been performed, and he ought not to be under an obligation to accept or pay against documents which he knows to be wastepaper. To hold otherwise would be to deprive the banker of that security for his advances which is a cardinal feature of the process of financing carried out by means of the credit: see Gutteridge and Megrah, the Law of Bankers’ Commercial Credits , 6th ed (1979) p.142”

[52]Mr Jones has also referred us to the observation of Parker LJ in GKN Contractors Limited –v- Lloyds Bank PLC

(1985) 30 BLR 48

at 63:

“There can, however, clearly be cases where, albeit the ultimate beneficiary was not fraudulent, the bank itself may have been fraudulent. The claim presented by the ultimate beneficiary may have been presented in good faith and honesty albeit owing to some mistake [it] was an invalid claim. In such a case, if the invalidity of the claim was known to the bank which received it, it appears to me that, if that bank were to pass on the claim as a valid claim and demand payment, it would be guilty of fraud which would justify non-payment of the demand, notwithstanding that the demand on its face appeared to be valid.”

[53]Finally, in the recent unreported case of Consolidated Oil Limited –v- American Express Bank (C.A. 21 January 2000), a case in which the validity of a demand made under a performance guarantee was in issue on the basis that the Committee in whose name the demand was made was no longer in existence, Clarke LJ observed:

“In addition, it (the bank) could not properly pay if the only realistic inference on the material available was that M. Brou could not honestly have believed in the validity of the demand or that the Committee no longer existed, or that M Brou no longer had the authority of the Committee even if it did exist.”

[54]It is also to be noted that, immediately following the passage quoted, Clarke LJ added:

“However, as I have already indicated, the claimant cannot show that that is the only realistic inference. It is well settled in cases of this kind that a bank is under no duty to investigate whether there is fraud. To impose such a duty upon a bank in the position of the bank here would, as I see it, deal a serious blow to the ordinary processes of international banking and international commerce. In all the circumstances, I have reached the conclusion that the claimant has not established a sufficiently arguable case that the bank would be in breach of any duty owed to it if it were to pay.”

[55]In the context in which they were uttered, it does not seem to me that the dicta relied on in those cases other than the United City Merchants case, provide any assistance in relation to the argument placed before us. All arise in cases where the argument raised and considered related to the fraud exception; no nullity exception, as such, was under discussion. In the GKN case, Parker LJ was considering fraud by a bank rather than by a beneficiary and was envisaging the case of a demand made under a performance guarantee by a party whom the bank knew not to be the party named as the beneficiary entitled to make the demand. He was thus not considering the case of a document which, at the time it was tendered and accepted was, unknown to the bank, false or made without authority, but a case involving fraudulent conduct by the bank itself in accepting a claim known to be made by a person not entitled to make it and passing it on as a valid claim without disclosing the position to the bank’s principal. In the Consolidated Oil case, Clarke LJ was, in the passage relied on, dealing with a not dissimilar point going to the existence and entitlement of the named beneficiary at the time of making his demand and was in any event propounding an exception where the only realistic inference was one of fraud on the part of the beneficiary.

[56]I consider that the judge was correct in the decision to which he came. The fraud exception to the autonomy principle recognised in English law has hitherto been restricted to, and it is in my view desirable that it should remain based upon, the fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment under and in accordance with the terms of the letter of credit. It should not be avoided or extended by the argument that a document presented, which conforms on its face with the terms of the letter of the credit, is nonetheless of a character which disentitles the person making the demand to payment because it is fraudulent in itself , independently of the knowledge and bona fides of the demanding party. In my view, that is the clear import of Lord Diplock’s observations in Gian Singh and in the United City Merchants case, in which all their Lordships concurred. As I understand it, Lord Diplock was of the view that a seller/beneficiary who was ignorant of forgery by a third party of one of the documents presented, or of the fact that the document contained a representation false to the knowledge of the person who created it, should not be in a worse position than someone who has taken a draft drawn under a letter of credit in circumstances which rendered him a holder in due course. While he left open the position in relation to a forged document where the effect of the forgery was to render the document a ‘nullity’, there is nothing to suggest that he would have recognised any nullity exception as extending to a document which was not forged (i.e. fraudulently produced) but was signed by the creator in honest error as to his authority; nor do I consider that such an exception should be recognised.

[57]That being so, I do not consider that the fact that in this case it was the seller/beneficiary himself who created the document said to be a nullity, should of itself disentitle him to payment, assuming (as the judge found) that such creation was devoid of any fraudulent intent and was effected in the belief that GK enjoyed the authority of Montrod, as applicant for the credit, to sign and issue the certificate. Although the circumstances were highly unusual, they may nonetheless be regarded as no more than an illustration of the wide variety of circumstances in which documents come into existence in a commercial context which do not necessarily reflect the factual situation but which parties may nonetheless employ as a convenient means of progressing a particular transaction. If, in the circumstances of a multipartite transaction, a seller/beneficiary is indeed led to believe that he has authority to create and present a certificate of inspection for the purpose of triggering payment by letter of credit, I do not see why he should be regarded as any less entitled to payment in accordance with UCP 500 than in a case where he receives from a third party a document regular on its face which has, unknown to him, been created without authority.

[58]In my view there are sound policy reasons for not extending the law by creation of a general nullity exception. Most documentary credits issued in the United Kingdom incorporate the UCP by reference. Various revisions of the UCP have been widely adopted in the USA and by United Kingdom and Commonwealth banks. They are intended to embody international banking practice and to create certainty in an area of law where the need for precision and certainty are paramount. The creation of a general nullity exception, the formulation of which does not seem to me susceptible of precision, involves making undesirable inroads into the principles of autonomy and negotiability universally recognised in relation to letter of credit transactions. In the context of the fraud exception, the courts have made clear how difficult it is to invoke the exception and have been at pains to point out that banks deal in documents and questions of apparent conformity. In that context they have made clear that it is not for a bank to make its own enquiries about allegations of fraud brought to its notice; if a party wishes to establish that a demand is fraudulent it must place before the bank evidence of clear and obvious fraud (see Edward Owen –v- Barclays Bank International Ltd

[1978] QB 159

c.f. Turkiye Is Bankasi A.S. –v- Bank of China

[1996] 2 Lloyd’s Rep 611

per Waller J at 617). If a general nullity exception were to be introduced as part of English law it would place banks in a further dilemma as to the necessity to investigate facts which they are not competent to do and from which UCP 500 is plainly concerned to exempt them. Further such an exception would be likely to act unfairly upon beneficiaries participating in a chain of contracts in cases where their good faith is not in question. Such a development would thus undermine the system of financing international trade by means of documentary credits.

[59]I have concluded that there is and should be no general nullity exception based upon the concept of a document being fraudulent in itself or devoid of commercial value. I would only add, with reference to Lord Diplock’s reservation, that I would not seek to exclude the possibility that, in an individual case, the conduct of a beneficiary in connection with the creation and/or presentation of a document forged by a third party might, though itself not amounting to fraud, be of such character as not to deserve the protection available to a holder in due course. In this connection, I note the reference by Mocatta J in the United City Merchants case to ‘personal fraud’ or ‘unscrupulous conduct’ on the part of the seller presenting documents for payment, a remark upon which Lord Diplock made no adverse comment when approving the original judgment on the documentary credit point. In this connection, we have had brought to our attention the decision of the High Court of Singapore in Lambias (Importers and Exporters) Co PTE Limited –v- Hong Kong & Shanghai Banking Corporation

(1993) 2 SLR 751

, in which the defendant bank rejected documents tendered under a letter of credit which included a quality and weight inspection certificate required to be countersigned by a named individual. The court held that the certificate contained discrepancies which entitled the bank to refuse the documents tendered and went on to find that the inspection certificate was in any event a nullity in that, not only did it fail to state the particulars of the goods and their quality and weight, but that, having been issued by the beneficiary instead of the applicant, it had been countersigned by an impostor. Having considered the observations, and in particular the reservation, of Lord Diplock in the United City Merchants case and the particular facts before the court in relation to the plaintiffs, who had themselves introduced the countersignatory to the bank as the person named, the court observed:

“The law cannot condone actions which, although not amounting to fraud per se, are of such recklessness and haste that the documents produced as a result are clearly not in conformity with the requirements of the credit. The plaintiffs in the present case are not guilty of fraud, but they were unknowingly responsible for having aided in the perpetration of the fraud. In such a case, where the fraud was discovered even before all other documents were tendered, I think it is right and proper that the plaintiffs should not be permitted to claim under the letter of credit.”

[60]While such a finding was not necessary to the outcome of the case, it fell within the reservation of Lord Diplock in the United City Merchants case and has certain attractions. However, it is not necessary for us to decide in this case whether it is correct. This is a case where the judge found neither recklessness, haste, nor blame in the conduct of GK. Furthermore, in the Lambias case the bank rejected the documents as non-compliant, whereas in this case SCB accepted the documents as compliant, having raised Montrod’s observations and reservations with Fibi before it did so. Fibi in turn accepted the documents when sent to them, making clear to Montrod that payment would be made unless a court order to prevent it were obtained.

[61]In those circumstances, I consider that GK were entitled to payment and I would affirm the decision of the judge. Consequently, I would dismiss the appeal of Fibi in respect of the claim of SCB for reimbursement of the sum of US$ 498,311.51 paid to Commerzbank and the appeal of Montrod against the judgment obtained by Fibi for indemnity against the claim of SCB. MONTROD’S NEW CLAIMS AGAINST GK

[62]By the judge’s decision that Fibi was obliged to reimburse SCB and that Montrod must pay Fibi, the proposed reconstitution of the action with SCB as claimant against Fibi, Fibi claiming in turn against Montrod, was rendered unnecessary. However, that left outstanding Montrod’s application to make new claims against GK to recover what it had paid to Fibi. The judge therefore treated Montrod’s application to file a claim against GK under CPR Part 20 as an application for permission to amend its existing claim for a declaration against GK to include new claims as set out in a draft amended statement of case. Permission was opposed by GK on the grounds that the proposed claims had no real prospect of success.

[63]The claims sought to be made in the draft case were various and some fell by the wayside as a result of the judge’s decision in relation to the nullity exception. However, the pleas relevant to this appeal were the following: (1) A claim in negligence to the effect that:

“By its agreement to the terms of the letter of credit Grundkotter assumed a duty to Montrod to exercise reasonable skill and care in the presentation to SCB of documents intended to induce a payment thereunder.”

This claim has been referred to as the primary claim in negligence. (2) A further claim in negligence that:

“16. …. Alternatively, by its assumption of the right and responsibility to issue and sign the certificates of inspection purportedly on behalf of Montrod and thereafter to present the same to SCB without qualification, Grundkotter assumed a duty to take reasonable care to ensure that it had Montrod’s instructions so to do and that the documents so issued, signed and presented were valid. 17. Grundkotter failed to take reasonable or any care to ensure that it had such instructions prior to the issue, signature and presentation of each certificate of inspection to SCB. In the premiss it was in breach of the said duty of care on each such occasion.”

This has been referred to as the narrower negligence claim. (3) A claim for breach of fiduciary duty pleaded as follows:

“18. Further or in the alternative, by holding itself out to third parties, in particular SCB, as Montrod’s agent for the purposes of issuing and signing the certificates of inspection, Grundkotter assumed a fiduciary duty to Montrod to act only in accordance with Montrod’s instructions to do so, alternatively to take reasonable care to ensure that it was acting only in accordance with such instructions. No such instructions were given by Montrod or by an authorised agent of Montrod. Grundkotter failed to take reasonable care to ensure that relevant instructions had been given to it by Montrod. In the premises, Grundkotter’s issue, signature and presentation to SCB of each certificate of inspection was a breach of the said fiduciary duty”

The primary claim in negligence

The judge rejected the alleged duty of care in the following terms:

“It cannot be argued that the beneficiary to a credit owes a duty to the applicant with regard to the documents which he presents. If the documents accord with the credit, the beneficiary is entitled to be paid. If they do not, they will be rejected unless the applicant agrees to waive the discrepancy. If the documents accord with the credit but there is nonetheless a breach of the underlying contract, which breach arises in connection with the documents, the buyer has a right of action against the seller/beneficiary arising from their contract. If the buyer is not the applicant, when the documents came through he will have had to reimburse the applicant just as he will have had to reimburse the issuing bank if he had been the applicant. The beneficiary does not owe a duty of care to the issuing bank. In the present case Montrod simply stands in the chain as a finance house. Its position is the same as that of Fibi bank save that Fibi Bank is one further up the chain. Grundkotter owed no duty of care to Standard Chartered in the presentation of documents. Nor did it owe such a duty to Fibi Bank or to Montrod.”

[65]Montrod seek permission to appeal against that decision.

[66]In my view the judge was right to refuse Montrod permission to advance the primary claim in negligence. The only fact pleaded in support of the duty of care was GK’s ‘agreement to the terms of a letter of credit’, the duty of care being expressed as a duty relating to all of the documents required to be produced by GK to SCB in order to obtain payment under the letter of credit. Montrod did not plead any express assumption of responsibility or duty, its case was simply based on an implied assumption of responsibility, arising by reason of GK’s agreement to the terms of the credit. So far as GK was concerned, the letter of credit (albeit issued on Montrod’s application) was procured by Ballaris pursuant to its obligation to pay GK under the supply contract by this form of payment. GK agreed to its terms as part of Ballaris’ performance of its payment obligation. GK’s acceptance of that performance did not imply or give rise to any assumption of responsibility by GK vis-à-vis Montrod. In seeking to ensure that documents presented to the issuing bank comply with the terms of the letter of credit, a beneficiary is pursuing his own commercial interests. He seeks to present compliant documents in order himself to be paid in the context of a transaction in which the commercial interests of the issuing bank and other parties involved in connection with the letter of credit are dealt with in the manner provided for under UCP 500, subject to the provisions of which they are aware that the transactions will be conducted and the commercial risk distributed.

[67]Montrod’s arguments before us have not been based upon a Hedley Byrne type assumption of duty or responsibility as pleaded (see Henderson –v- Merrett Syndicates Limited

[1995] 2 AC 145

per Lord Goff at 178E-181F) but upon foresight, proximity and the ‘fair, just and reasonable’ test in Caparo Industries PLC –v- Dickman

[1990] 2 AC 605

. In relation to that test, it has been submitted that it is both proper and appropriate to impose a duty of care on a beneficiary in respect of the presentation of documents intended to induce payment under a letter of credit in circumstances where the credit applicant (not being the buyer) has no alternative contractual relationship with the beneficiary through which any injustice can be addressed. However, that ignores the fact that the applicant for a credit who is not the buyer may normally be expected to have secured his position, and to be reliant upon a remedy against his buyer in respect of any of his liabilities arising from the letter of credit transaction. Further, on the assumption that Montrod did not confer, or authorise those who purported to confer, authority upon GK to sign the inspection certificates, it follows that those individuals were engaged in a conspiracy to defraud in respect of which Montrod could, if it saw fit, pursue legal remedies. The fact that it may not be practicable or financially expedient to pursue those remedies does not point to a lacuna in the law to be filled by implying a duty of care in a situation in which no responsibility was assumed by GK.

[68]The real issue is which of two innocent parties should bear the risk of the fraud of a third party in a case of this kind. It is not the function of the law of negligence to provide a general remedy for the recovery of purely economic losses resulting from such a fraud. In any given situation, the remedy will only exist if the ingredients of a voluntary assumption of responsibility of the relevant type can be established: see Hamble Fisheries Limited –v- L. Gardner and Sons Limited

[1999] 2 Lloyd’s Rep 1

at 8 (paras 3 and 4 of the judgment of Mummery LJ). In my view the mere fact that GK agreed to the terms of the letter of credit is insufficient material from which to imply any such assumption of responsibility. I would therefore affirm the judge’s decision in that respect. The narrower negligence claim

[69]In relation to the narrower negligence claim based on GK’s ‘assumption of the right and responsibility to issue and sign the certificates of inspection’, the judge granted Montrod permission to amend its claim in order to advance that case at trial. He stated his reasons as follows:

“I approach the novel and unusual situation in the present case by considering first the position of a party who is the agent of another in the sense that he regularly receives instructions from him and acts for him. It is not difficult to foresee circumstances in which such an agent should as part of a performance of his duty to his principal check or clarify his instructions. The checking of instructions where the circumstances call for it is one of the ordinary incidents of an agency situation. If the agent failed to do so, then he may be liable in damages if as a result his principal suffers damage. If the party is not an agent in the sense I have mentioned, but believes that he had authority to act for a principal which he does not in fact have, it seems to me arguable with the real chance of success that it would come under a similar duty. So, on this application, so far as the existence of a duty in this form is concerned, I am in Montrod’s favour.”

[70]GK asserts the judge’s conclusion was wrong for the following reasons.(1) He was wrong to start with, or treat as analogous, the position of an agent who regularly acts for a particular principal. The duty of such agent to check his instructions arises from a real and pre-existing agency, and then only if the instructions are ambiguous. In the case of clear ‘ad hoc’ and first time instructions as in this case, there was no duty or occasion to check further. From GK’s point of view the instructions were not ambiguous. On GK’s state of knowledge the signature on the certificate was simply a written confirmation and assurance of the quality of the goods, GK having no knowledge of the ‘blocking’ purpose underlying Montrod’s stipulation in respect of such certificates.

(2) Montrod’s claim for negligence must be categorised either as performance of a negligent service by GK or the making of a negligent statement. It is not put on the latter basis and, as to the former, GK were not negligent in that they properly fulfilled the only task of which they were aware, i.e. to certify the quality of the goods, being ignorant of any need to check whether Montrod had been placed in funds.

(3) Causation cannot be established. SCB did not pay because GK had failed to check whether it had Montrod’s authority. The real cause of the loss was that Montrod had failed to obtain cash cover from Ballaris, which contingency was not foreseeable by GK. Thus GK’s failure to check merely provided the occasion for Montrod’s loss but did not cause it.

(4) For the same reasons that it would not be fair, just or reasonable to impose the wider duty of care, it would be wrong to impose the narrower duty, given that GK acted honestly at all times in agreeing to sign for Montrod and in presenting the documents under the letter of credit. It was not party to any information which might lead it to suspect the underlying purpose of Montrod, either from the buyer’s or on the face of the documents. Thus, however it is put, the negligence claim has no prospect of success.

[71]The above submissions have considerable force and may well lead to success at trial. However, they ignore the fact that the only material so far before the court consists of the untested statements of the various witnesses, in particular those for GK, who will plainly be the subject of probing examination as to their experience, competence and state of knowledge as to letter of credit transactions, and what precisely they were told by the buyers or their representatives.

[72]As to GK’s first submission, it is no part of GK’s case that Ballaris had any apparent authority to act or speak for Montrod, let alone to give instructions that GK should check the goods and exercise Montrod’s stated discretion to issue and sign the certificates in respect of which GK assumed authority. Thus, vis-à-vis Montrod, GK acted in the role of self-appointed agents. That being so it is well arguable that, in carrying out the role and exercising the authority they had assumed, they owed Montrod duties analogous to those of an agent. Whether or not it was helpful for the judge to consider the position where there was a pre-existing agency, it does not seem to me possible to say that, in the circumstances of the case as they may emerge at trial, Montrod has no prospect of successfully establishing that, before shipping and/or exercising the role of agent in relation to the certificates of quality, GK should have checked the fact that, and the circumstances in which, they should exercise such authority, in the light of the (somewhat ambiguous) provision that Montrod had a discretion in respect of the issue and signature of the certificates.

[73]As to GK’s second submission, the negligence complained of is GK’s breach of the duty as purported agent to check and clarify its authority and/or the extent of its instructions in the circumstances of doubt and ambiguity which, on Montrod’s case, existed (in respect of which it is noteworthy that GK in part sought advice from Commerzbank); Montrod does not allege negligence in the course of rendering a specific service. Honesty is not relevant to the question of negligence in that respect.

[74]As to GK’s third submission, it seems to me at least arguable that it was foreseeable that Montrod would not exercise its discretion to sign and issue a certificate unless it was in funds, or at least adequately secured, vis-à-vis Ballaris and that the damage was therefore not too remote.

[75]As to GK’s fourth submission, depending upon the position as it emerges at trial, I do not consider that it can at this stage be decided that it would not be fair, just and reasonable to impose liability on GK for breach of duty in a situation in which (ex hypothesi) by its own incompetence it created a document without authority and thereby procured a payment to which it was entitled at the expense of the person in whose name the document was executed. The question in respect of the narrower duty is not whether, simply by agreeing to the letter of credit transaction, GK assumed a duty, but whether, by agreeing to an unusual procedure in respect of certification at the request of the buyer without enquiry as to whether the procedure requested engaged the authority and consent of the applicant for credit, GK both assumed and failed to discharge its responsibility vis-a-vis the applicant. Short of agreement between the parties, it does not seem to me that that issue can or should be disposed of without a trial. I therefore would refuse GK’s application for leave to appeal in this respect. FIDUCIARY DUTY

The judge rejected Montrod’s pleaded claim for breach of fiduciary duty in the following terms:

“If this claim is intended to give the same remedy as the claim in negligence then it adds nothing. In Bristol & West Building Society –v- Mothew [1998] Ch 1 at 16 Millet LJ stated: ‘The expression ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences different from those consequent upon the breach of other duties.’ In Henderson –v- Merett Syndicates Limited [1995] 2 AC 145 at 205 Lord Browne-Wilkinson stated: ‘The liability of a fiduciary for the negligent transaction of his duty is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others.’ Mr Jones referred to Phipps –v- Boardman [1965] Ch D 992 (Court of Appeal) [1967] AC 46 (House of Lords). But I do not think that the principles considered there have any application to the present circumstances.”

[77]Thus it is apparent that the judge dismissed the claim for breach of fiduciary duty on the basis that it added nothing to the claim in negligence.

[78]Before turning to the question of whether that was an appropriate course, it seems to me clear that where someone puts himself in the position of a self-appointed agent in relation to the affairs and interests of another he is liable to be regarded as a fiduciary in respect of the exercise of his powers in the name of that other. That seems to me inherent in the judgments of the Court of Appeal in Phipps –v- Boardman

[1965] 1 Ch 992

at 1017F-1018E per Lord Denning MR and at 1030 DF per Pearson LJ; see also English –v- Dedham Vale Properties Limited

[1978] 1 WLR 93

. Montrod argues that this is such a case. Reliance is placed on GK’s purported exercise of Montrod’s discretion, its representation to SCB that its signature was that of Montrod in order to demand money from a bank which ultimately Montrod was liable to reimburse, and its continued demand for payment even when it knew and accepted that it had submitted false certificates; all are said to be breaches of duty of a fiduciary nature. While the judge held that GK were not guilty of fraud, it seems to me that those are arguments which are in principle open to Montrod in the circumstances of this case and, since the application was made at an early stage in the proceedings and did not raise matters which would not require to be investigated in any event in relation to the narrower claim in negligence, it is difficult to see why amendment was not permitted. In the event the judge rejected the plea on the basis that it would add nothing to the remedy sought in negligence.

[79]We have received lengthy submissions from Mr Choo-Choy for GK as to why the judge was correct to take that view. He has argued that, since there is no claim for a secret profit (the matter of principle concerned in Phipps –v- Boardman and English –v Dedham Vale ) nothing useful can be added to the case via the fiduciary duty route. Nonetheless, Montrod seeks to claim not only damages for common law negligence in the amount of the sum which it is liable to pay Fibi, but also lays claim to the sum paid by, or at the direction of, SCB to GK as a sum held in trust for Montrod for which GK is liable to account. It is at least arguable that recovery on the basis of breach of fiduciary duty will lead to a more beneficial interest rate. In my view, the only vice of this amendment is that if, in truth, it adds nothing to the plea in negligence, argument upon the point of principle will lead to a relatively short increase in court time and (it may be) an increase in costs. I do not think that the former consideration is sufficient to outweigh the opportunity for Montrod to air its case fully and the latter may be compensated for within the order for costs made at trial, should the court think it appropriate to do so.

[80]I would therefore grant Montrod’s application for permission to appeal, allow the appeal and permit the amendment sought to be made together with any appropriate adjustment to the claim for relief. Sir Martin Nourse:

[81]I agree with the judgment of Lord Justice Potter and with the orders proposed by him. Lord Justice Thorpe:

[82]I agree.

Order

application allowed.