Singapore - High Court’s Decision Upheld That Bank’s Demand For Payment Under An Indemnity Clause Was Fraudulent In The Reckless Sense.

Legal News & Analysis - Asia Pacific - Singapore - Dispute Resolution - Banking & Finance

8 July, 2016

 

Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd [2016] SGCA 26 (Singapore, Court of Appeal, 21 April 2016)

 

In Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd, the Singapore Court of Appeal upheld a High Court ruling that a demand for payment made pursuant to an indemnity clause was fraudulent in the reckless sense. The Arab Banking Corp (“Arab Bank”) had issued a demand pursuant to an indemnity clause set out in a credit facility agreement (“CFA”) entered into between the Arab Bank and Boustead Singapore Ltd (“Boustead”). However, the High Court had injuncted the Arab Bank from receiving payment from Boustead, and further restrained the Arab Bank from making payment to another bank further up the banking chain, on the basis that the demand was made both fraudulently and unconscionably. Arab Bank appealed against the High Court decision. Arab Bank’s appeal to the Court of Appeal was dismissed with costs.

 

WongPartnership acted for the successful appellant, Boustead. This Update takes a look at the Court of Appeal decision.

 

Facts

 

Boustead had entered into a CFA with the Arab Bank. The CFA contained an indemnity clause under which Boustead agreed to pay the Arab Bank (upon receipt of a written demand by the Arab Bank) the sum specified in the demand. This indemnity had been given in support of a chain of on-demand payment obligations provided in support of, ultimately, the obligations of Boustead’s joint venture company (“JVC”) as contractor of a housing development to be constructed in Libya.

 

The obligations in the chain were as follows:

 

The JVC had an agreement with the Organisation for Development of Administrative Centres (“ODAC”) to construct a housing development in Libya.

The JVC was required to furnish a performance bond (“PB”) and an

advance-payment guarantee (“APG”) in favour of ODAC. 

 

  • A Libyan bank, the Bank of Commerce and Development (“C&D Bank”), issued the PB and the APG in favour of the ODAC. The PB and the APG were governed by the law of Libya.
  • Under the PB and the APG, the C&D Bank was required to make payment upon the presentation of a valid written demand in conformity with the requirements specified in the PB and the APG.
  • The payment obligations of the C&D Bank to the ODAC were secured by the provision of two counter guarantees (“CGs”) provided by the Arab Bank. The CGs were governed by English law.
  • Under the CGs, the Arab Bank was itself required to make payment to the C&D Bank upon the presentation by the C&D Bank of a written demand conforming to the requirements in the CGs.
  • Under the CFA, the Arab Bank was entitled to be indemnified by Boustead for any amounts it paid out under the CGs. The CFA was governed by Singapore law.

 

Pursuant to this chain of obligations, therefore, if the JVC were to breach its performance obligations under the construction contract with the ODAC, the ODAC would be entitled to call on the PB and APG. The C&D Bank could in turn call on the CGs provided by the Arab Bank, and the Arab Bank could call on the indemnity given by Boustead, which thus acted as the ultimate surety of the JVC’s obligations.

 

When civil war subsequently broke out in Libya, the JVC was forced to halt work. The ODAC then sent a letter on two occasions to the C&D Bank seeking to extend the validity term of the guarantees (the “ODAC Notices”). The C&D Bank then made formal written demands to the Arab Bank for payment on the CGs (the “CG Demands”). A demand for payment under the CGs had to have a supporting written statement specifying that the C&D Bank had received a demand for payment from the ODAC in accordance with the terms of the PB or the APG, as the case may be. The C&D Bank also sent similar letters to the Arab Bank containing similar requests in respect of the CGs.

 

Boustead took the view that the war amounted to an act of force majeure and the JVC was therefore relieved of its obligations to perform the construction contract. Notice of force majeure was accordingly given to the ODAC. Boustead successfully obtained an ex-parte injunction from the High Court to restrain Arab Bank from making payment to the C&D Bank.

Boustead applied for a permanent injunction restraining the Arab Bank from making payment to the C&D Bank under the CGs. It also sought a declaration that it was discharged from all liabilities and obligations to the Arab Bank under the CFA insofar as they related to the CGs. The Arab Bank then made a demand under the CFA (the “FA Demand”) and subsequently commenced a suit against Boustead claiming the sums due, or alternatively, seeking a declaration that Boustead was liable to pay the Arab Bank on the sums demanded. It also sought the discharge of the second injunction restraining payment to the C&D Bank.

 

The High Court found that the ODAC Notices were clearly on their face not in conformity with the requirements specified in the PB and the APG for making a demand for payment. The High Court found that the CG Demands conformed on their face with the requirements in the CGs. However, the High Court held that the FA Demand made by Arab Bank, had been made fraudulently in the reckless sense and granted a permanent injunction restraining the Arab Bank from receiving payment from Boustead under the FA Demand and from making payment to C&D Bank under the CG Demands.

 

Court of Appeal

 

The Court of Appeal agreed with the High Court that the Arab Bank had acted fraudulently, in the reckless sense, in making the FA Demand. The Court noted that, in general, where demand guarantees are concerned, a guarantor bank is obliged to pay promptly upon a demand being made, as long as the demand falls within the terms of the guarantee. However, the fraud exception is meant to safeguard the account party from a dishonest call being made upon the guarantee by the beneficiary.

To prove fraud, the Court held that a false representation must be shown to have been made either knowingly; or without belief in its truth; or recklessly, indifferent to whether it is true or false. In the case of demand guarantees, the fraud exception should apply where:

 

  • The beneficiary’s demand is in fact invalid; and
  • The guarantor bank either knows the beneficiary’s demand is invalid, has no honest belief that the beneficiary’s demand is valid or is recklessly indifferent to this fact.

 

In the present case, the Court held that establishing that C&D Bank was acting fraudulently would not suffice for Boustead because if the Arab Bank was innocent of that fraud, then C&D Bank’s fraud would not disentitle Arab Bank from getting an indemnity against a liability it had innocently incurred. In order to successfully avoid liability to the Arab Bank, Boustead must show that C&D Bank’s demand was invalid (and not necessarily due to fraud) and that Arab Bank, in seeking to honour that invalid demand, was acting fraudulently (in any relevant sense of that term). 

 

The Court noted that it “would only be in truly exceptional circumstances” that the account party would be able to discharge the high standard of proof to establish fraud. On the evidence, the Arab Bank’s conduct in making the FA Demand brought it squarely and exceptionally within a situation where the beneficiary’s demand was invalid and the guarantor bank in demanding to be indemnified by the account party was itself acting fraudulently. The Court concluded that:

 

  • The CG Demands were invalid because C&D Bank made the CG Demands fraudulently in the reckless sense; and
  • The Arab Bank was recklessly indifferent as to whether it had an obligation to pay C&D Bank under the CGs when it made the FA Demand on Boustead.

 

The Court of Appeal reiterated that, in general, assuming that the relevant contract between the parties allows the guarantor bank to act on apparently conforming documents without having to concern itself with the validity or genuineness of the documents presented to it, it will be under no obligation to ask for all other documents that have been presented along the banking chain so as to satisfy itself that the demand is in fact valid. However, this was an exceptional case where the guarantor bank came into possession of such documents in circumstances where it would have been reckless for it not to have directed its mind to those documents. Had the Arab Bank given those documents due consideration, the Court held that it would have been impossible for it to hold any honest belief that C&D Bank was entitled to payment.

 

Our Comments/Analysis

 

This decision provides clarity on the underlying rationale for and the application of the fraud exception in the law of demand guarantees; that no distinction ought to be drawn between a situation when a beneficiary has made a fraudulent demand to the guarantor bank’s knowledge and one where the beneficiary may not be fraudulent but had issued an invalid demand and the guarantor bank is seeking to be indemnified nonetheless. 

 

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For further information, please contact:

 

TAN Chee MengSenior Counsel, Deputy Chairman,

WongParntership

cheemeng.tan@wongpartnership.com