1. Bank of Montreal v. Mitchell, [1997] O.J. No. 602
Bank of Montreal v. Mitchell, [1997] O.J. No. 602
Ontario Judgments
Ontario Court of Justice
(General Division)
Farley J.
Heard: September
9-10, 1996.
Judgment:
February 19, 1997.
Court File Nos.
94-CU-55536, 94-CQ-54793, 94-CU-79067,
94-CU-51543 and
94-CQ-54773
Commercial List
File Nos. B151/96, B151/96A, B151/96B,
B151/96C and
B151/96D
[1997]
O.J. No. 602 | 143 D.L.R. (4th)
697 | 25 O.T.C. 344 | 69 A.C.W.S. (3d)
109
Between Bank of Montreal, plaintiff, and Charles B. Mitchell and
Donald E. Stringer, defendants And between Bank of Nova Scotia, plaintiff, and
Louis Joseph Ceroni, Sandra Ceroni, Ceroni Auxiliary Services Ltd., Henry E.
Drouin, Linda Drouin, Gary Elliott, Virginia Margaret Elliott, Exchange
Financial Services Inc., John W. Hanley, Rosane Hanley, Anthony Markowski,
Estate of Lynne Elizabeth Markowski, Giancarlo Mason, Carol Ann Mason, Murray
L. Nicholson, M.L. Nicholson Holdings Inc., George Pakozdi, Katherine Pakozdi,
Semaj Enterprises Ltd., Allan Toguri, Emilie Clare Toguri, John E. Valeriote
and Sherron Valeriote, defendants And between Canadian Imperial Bank of
Commerce, plaintiff, and Raymond Stanley Jerome Bednarz, Paul F. Black, Dr.
Frederick A. Bodnar, Dorothy Edith Bodnar, Peter A. Brazolot, Brazolot
Construction Limited, Nancy Elizabeth Cladwell, Dr. Robert Havelock Carroll,
Dr. Rudy Danus Chiarandini, Claudex Inc., Rucanus Holdings Limited, William
Emerson Davis, Dr. Claude Angus Doughty, Kimberly Phair Doughty, Bradley E.
Hart, Sheridan Montford, Sheridan Hart-Montford, Ruth E. Hart, Ruth E.
Hart-Stephens, Michael Quentin Head, Sandra Marian Head, Diana Ruth Hogarth,
Murray Edgar Hogarth, The Pioneer Group Inc., Edward H. Jones, Jr., Dr. Edward
John Ksiazek, June Ksiazek, Dr. Michael Morison, Judith Morison, Jay B. Moyer,
Marybeth Moyer, William H. Overell, Patricia I. Overell, Helen Jean Robinson, Robert
L. Robinson, Henri Rotsaert, Simone Rotsaert, Rotsaert Dental Laboratory
Limited, Ian Creswell Simpson, Ruth M. Simpson, Allan M.P. Smart, South Fairy
Lake Estates Limited, Ruth E. Stephens, Robert J. Tweedy, Useppa Holdings
Limited, W. Keith Walker, Freda Webster, Dr. Neil Webster, John Brian Webster
Graham William Wright, Gail Wright, William H. Young and 503199 Ontario
Limited, Diana Walker, Raymond George Bozek, Violet Bozek and Surge Stables
Inc., defendants And between Toronto-Dominion Bank, plaintiff, and William Ash,
Angela Ash, James Biggar, Susan Biggar, Eric Lane, Laura Lane, Michael O'Dwyer,
Eleanor O'Dwyer, David Peterson, Max Pickfield, Joan Pickfield, Paul Saunders,
Mary Martha Saunders, Charles Gambin, Yola Gambin, Mary Iacobelli and Agri
Holdings Limited, defendants And between Brian Timmis, plaintiff, and Toronto
Dominion Bank, defendants
(82 pp.)
Case Summary
Estoppel —
Estoppel by record (res judicata) — Res judicata as a bar to subsequent
proceedings — In civil proceedings — Estoppel in pais (by conduct).
This was an application by the Bank of Montreal and three other
banks for summary judgment. The defendants were individuals who entered into an
agreement with Lloyd's to participate as principals in its insurance syndicate.
The participant, who was known as a "Name", agreed to be liable
without limitation for any obligation of the syndicate and to have a letter of
credit issued by a bank to partially secure that liability. Some of these
Lloyd's syndicates suffered enormous losses and the Names faced substantial
financial liability. The Names claimed that their losses were due to fraudulent
acts committed by Lloyd's and advised the Banks not to honour the letters of
credit if a claim was made by Lloyd's. Lloyd's commenced an action in England
against the Banks for non-payment under the letters of credits. The Banks did
not raise the defence of fraud as the basis of their refusal, which would have
justified their refusal not to make the payments. They made repeated requests
of the Names to join in the English action and take action against Lloyd's
based on the alleged fraud. However, the Names refused and the Banks were found
liable to honour Lloyd's calls on their letters of credit. The Banks then
commenced this action against the Names and claimed indemnification on the
amounts paid on the letters of credit. The Names claimed that since the Banks
did not raise the fraud defence in the English action they lost their right of
reimbursement under their reimbursement and indemnity agreements with the
Names.
HELD: Application allowed.
The Banks were
awarded summary judgment against the Names. The Names were estopped by their
conduct in the English action from raising their defence in this action. While
the Banks did not provide the proper defence and were subject to criticism for
such, the Names were well aware of the Banks' position but did not nothing to
preserve the fraud defence, despite frequent entreaties by the Banks that they
take responsibility for their own fight. Res judicata also prevented the Names
from raising their defence in this action.
Statutes, Regulations and Rules Cited:
Ontario Rules of Civil Procedure, Rule 20.
Counsel
R.B. Smith and P. Manderville, for the moving party Banks. A.J.
Lenczner, Q.C. and G.A. Smith, for the respondent Lloyd's Names and Guarantors
thereof.
FARLEY
J.
Nature of This Summary Judgment Motion and Background
1Counsel indicated to me after the hearing that there would
be an exchange of information between them which might facilitate a
consideration of partial or overall resolution after such information was
received and reviewed. On December 16, 1996 I was advised by counsel that while
resolution discussions continue, it would be appropriate to have my
determination on the issue argued before me. This issue was whether the moving
party banks ("Banks") were entitled to a Rule 20 summary judgment in
the form of a dismissal of the pleadings defence claimed by the respondent
names ("Names") and respondent guarantors of such Names that the
Banks had lost their reimbursement rights under their reimbursement and
indemnity agreement with the Names. This defence was asserted as a result of
the Banks failing to plead fraud against the Corporation of Lloyd's
("Lloyd's") in defence of the English lawsuits ("English
Actions") brought against the Banks by Lloyd's for payment on the Letters
of Credit ("LC") in favour of Lloyd's and issued by the Banks at the
request of the Names. This partial summary judgment procedure was proposed by
the parties and confirmed by Blair J. as a stream 1 defence common to all
names; stream 2 defence issues were proposed to be argued hereafter.
2The Banks submitted that the Names were precluded from
raising this defence for four reasons:
(a)
the
English Actions ought to have been fought by the Names since the fraud they
claimed was an act of Lloyd's against the Names and not against the Banks;
(b)
the
principle of indemnification required the indemnifier (Names) to defend the
English actions on behalf of the indemnified person (Banks) or be estopped from
denying a judgment against the indemnified person;
(c)
estoppel
by conduct of the Names; or
(d)
res
judicata.
3The payment obligations of a Bank (issuer) under a letter of
credit in favour of Lloyds (beneficiary) is a matter of English law; the
reimbursement and indemnity obligations of a Name (issuer's customer) to a Bank
is a matter of Ontario law. To the extent that the opinions of English counsel
as to English law are relevant to this reimbursement case and they differ, then
they would have to be tested in Ontario, which they have not been.
4The Banks submitted on the undisputed facts that the Names
have, due to their own actions (or inaction), no right to complain that (i) the
English Actions were not properly defended by the Banks or (ii) that Lloyd's
was not entitled to recover judgment for payment of the LC in the English
Actions and thus there is no genuine issue for trial as to this defence by the
Names. In a summary judgment motion, the respondents are required to put their
best foot forward, both as to the facts and as to the law on which they rely.
The Banks asserted that as a matter of law the Names lost the right to raise
those objections when they repeatedly declined to take any steps in the English
courts to either intervene and plead their own case of fraud against Lloyd's in
the English Actions or, alternatively, to seek an English injunction
restraining Lloyd's from recovering payment on the LC. The Names' position is
that the Banks were required to plead fraud against Lloyd's in the English
Actions once the Banks had refused to pay the call by Lloyd's on the LC based
upon the Banks in essence accepting the view (and supporting documentation) of
the Names that there was clear and obvious fraud by Lloyd's vis-a-vis the
Names. The Names had joined Lloyd's as members knowing that they were required
to provide Lloyd's with a personal covenant, unlimited in amount, to pay their
respective share of any losses which might be suffered by the syndicates they
invested in. As a partial supplement to and of the personal covenant, the Names
were required to arrange an LC from an authorized bank to partially secure
their potential liability for losses suffered by their syndicates. Some of
these Lloyd's syndicates suffered enormous losses and the Names were greatly
exposed to financial disaster. I have no doubt that this unfortunate situation
has led to great stress for most, if not all, of the Names as many could lose
an overwhelming portion of their life savings or possibly be completely wiped
out. The Names have vigorously asserted that their loss exposure was caused or
compounded by a fraud inflicted upon them by Lloyd's in its dealings with or
relationship with various of its syndicates.
5The Banks have submitted that they are entitled to be
reimbursed and indemnified by the names for the monies which the Banks were
required to pay out to Lloyd's as a result of the call on the LC (which
liability was confirmed in the English actions as a result of a decision of
Saville J. in the unreported case of The Society of Lloyd's v. Canadian
Imperial Bank of Commerce et al., of July 20, 1993, Queen's Bench Division,
Commercial Court, 1993 Folio Nos. 112-116). Under ordinary circumstances this
would be an "automatic situation"; i.e. the Banks would pay the call
by Lloyd's under the agreement of the LC between the issuer (Bank) and
beneficiary (Lloyd's) and the separate reimbursement and indemnification
agreement between the account party being the requesting party to issue LC
being the issuer's customer (Name) and the issuer who has responded to that
request (Bank). The initial or underlying agreement was between Lloyd's and the
Name whereby Lloyd's agreed to allow the name to participate as a principal in
an insurance syndicate of Lloyd's and the Name agreed to be liable without
limitation for any obligation of the syndicate and importantly for the aspect
of this motion to have an LC issued by a bank or other financial institution
(here one of the Banks) to partially secure that liability. These three
contracts are separate and autonomous transactions: see Bank of Nova Scotia v.
Angelica-Whitewear Ltd. et al. (1987), 36 D.L.R. (4th) 161 (S.C.C.) at p.
166-7; Dunlop Construction Products Inc. (Receiver of) v. Flavelle Holdings
Inc. (1996), 31 O.R. (3d) 58 (C.A.); and Westpac Banking Corp. v. Duke Group
Ltd. (1994), 20 O.R. (3d) 515 (Gen. Div.) at pp. 522-3 as to the autonomy of
letters of credit. In Angelica-Whitewear Le Dain J. for the Court stated at pp.
166-7:
The fundamental principle governing documentary letters of credit
and the characteristic which gives them their international commercial utility
and efficacy is that the obligation of the issuing bank to honour a draft on a
credit when it is accompanied by documents which appear on their face to be in
accordance with the terms and conditions of the credit is independent of the
performance of the underlying contract for which the credit was issued.
Disputes between the parties to the underlying contract concerning its
performance cannot as a general rule justify a refusal by an issuing bank to
honour a draft which is accompanied by apparently conforming documents. This
principle is referred to as the autonomy of documentary credits. It is
reflected in general provision c. of the Uniform Customs (1962), which states:
Credits, by their nature, are separate transactions from the sales
or other contracts on which they may be based and banks are in no way concerned
with or bound by such contracts.
6In Westpac I observed as follows at pp. 522-3, pp. 531-2:
The LC does not incorporate or depend upon the other contracts. No
party is privy to the contractual arrangements in all contracts: see Urquhart
Lindsay & Co. v. Eastern Bank Ltd., [1922] 1 K.B. 318 at pp. 322-23, [1921]
All E.R. Rep. 340 (Comm.Ct.), where Rowlatt J. said:
In my view the defendants committed a breach of their contract
with the plaintiffs when they refused to pay the amount of the invoices as
presented. Mr. Stewart Bevan contended that the letter of credit must be taken
to incorporate the contract between the plaintiffs and their buyers; and that
according to the true meaning of that contract the amount of any increase
claimed in respect of an alleged advance in manufacturing costs was not to be
included in any invoice to be presented under the letter of credit, but was to
be the subject of subsequent independent adjustment. The answer to this is that
the defendants undertook to pay the amount of invoices for machinery without
qualification, the basis of this form of banking facility being that the buyer
is taken for the purposes of all questions between himself and his banker or
between his banker and the seller to be content to accept the invoices of the
seller as correct. It seems to me that so far from the letter of credit being
qualified by the contract of sale, the latter must accommodate itself to the
letter of credit. The buyer having authorized his banker to undertake to pay
the amount of the invoice as presented, it follows that any adjustment must be
made by way of refund by the seller, and not be way of retention by the buyer.
See also Davis O'Brien Lumber Co. v. Bank of Montreal, [1951] 3
D.L.R. 536 at p. 558, 28 M.P.R. 22 (N.B.C.A.). It is unquestionable that a
basic tenet of letter of credit law is that letters of credit are autonomous to
and independent of the underlying transaction to which they relate: see Malas
v. British Imex Industries Ltd., [1958] 2 Q.B. 127 at p. 129, [1958] 1 All E.R.
262 (C.A.), where Jenkins L.J. stated:
We have been referred to a number of authorities, and it seems to
be plain enough that the opening of a confirmed letter of credit constitutes a
bargain between the banker and vendor of the goods, which imposes upon the
banker an absolute obligation to pay, irrespective of any dispute there may be
between the parties as to whether the goods are up to contract or not. An
elaborate commercial system has been built up on the footing that bankers'
confirmed credits are of that character, and, in my judgment, it would be wrong
for this court in the present case to interfere with that established practice.
See also Edward Owen Engineering Ltd. v. Barclays Bank
International Ltd., [1978] 1 All E.R. 976, [1978] Q.B. 159 (C.A.).
It is well-established that a letter of credit is an independent
obligation. The issuer bank agrees to pay to the beneficiary upon the
satisfaction of the conditions contained in the letter of credit itself (e.g.,
the presentation of the appropriate documents). This rule is quite necessary to
preserve the efficiency of the letter of credit as an instrument for the
financing of trade. That is, it is clear that the conventions of letters of
credit must be strictly adhered to and interpreted for the overall policy
reason of maintaining this quite valuable facility on an overall basis: see the
Uniform Customs and Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No. 400 ("UCP"). ...
(pp. 522-3)
...
It would appear that letters of credit issuing institutions would
be well advised to specify reimbursement: see Lord Diplock at pp. 1044-45 of
United City Merchants (Investments Ltd. v. Royal Bank of Canada, [1982] 2
W.L.R. 1039, [1982] 2 All E.R. 720 (H.L.):
So the point falls to be decided by reference to first principles
as to the legal nature of the contractual obligations assumed by the various
parties to a transaction consisting of an international sale of goods to be
financed by means of a confirmed irrevocable documentary credit. It is trite
law that there are four autonomous though interconnected contractual
relationships involved. (1) The underlying contract for the sale of goods, to
which the only parties are the buyer and the seller; (2) the contract between
the buyer and the issuing bank under which the latter agrees to issue the
credit and either itself or through a confirming bank to notify the credit to
the seller and to make payments to or to the order of the seller (or to pay,
accept or negotiate bills of exchange drawn by the seller) against presentation
of stipulated documents; and the buyer agrees to reimburse the issuing bank for
payments made under the credit. For such reimbursement the stipulated
documents, if they include a document of title such as a bill of lading,
constitute a security available to the issuing bank; (3) if payment is to be
made through a confirming bank the contract between the issuing bank and the
confirming bank authorising and requiring the latter to make such payments and
to remit the stipulated documents to the issuing bank when they are received,
the issuing bank in turn agreeing to reimburse the confirming bank for payments
made under the credit; (4) the contract between the confirming bank and the
seller under which the confirming bank undertakes to pay to the seller (or to accept
or negotiate without recourse to drawer bills of exchange drawn by him) up to
the amount of the credit against presentation of the stipulated documents.
(emphasis added in Westpac) (pp. 531-2)
Fraud Exception
7However, the question of fraud raises an exception to the
"narrow vision" or "blinkered approach" to the agreements
involved in a letter of credit situation. This was touched on in
Angelica-Whitewear at pp. 167-8, pp. 168-9, p. 176, pp. 177-8, pp. 180-1:
The general rule with respect to fraud is that a bank is not
responsible for payment against forged or false documents which appear on their
face to be regular, as indicated in art. 9 of the Uniform Customs (1962), which
provides in part:
Banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the
documents ...
The same principles are embodied in the 1974 and 1983 revisions of
the Uniform Customs and Practice for Documentary Credits.
An exception to the general rule that an issuing bank is obliged
to honour a draft under a documentary credit when the tendered documents appear
on their face to be regular and in conformity with the terms and conditions of
the credit has been recognized for the case of fraud by the beneficiary of the
credit which has been sufficiently brought to the knowledge of the bank before
payment of the draft or demonstrated to a court called on by the customer of
the bank to issue an interlocutory injunction to restrain the bank from
honouring the draft. The scope and availability in practice of the fraud
exception to the autonomy of documentary credits have turned on several
questions, of which the most important would appear to be the following: (a)
the kinds of fraud that should be recognized as falling within the fraud
exception, or more specifically, whether the exception should be confined to
cases of forged or false documents or whether it should extend to fraud in the
underlying transaction; (b) the related question of the proof or demonstration
of fraud that should be required to relieve an issuing bank of its obligation
to honour a draft or to warrant the issue of an interlocutory injunction to
enjoin it from doing so: (c) whether the fraud exception should be opposable to
a holder in due course of a draft, that is, one who took the draft for value
and without notice of the fraud, and (d) whether the fraud exception should be
confined to fraud by the beneficiary of a credit, or whether it should include
fraud by a third party which affects the letter of credit transaction but of
which the beneficiary of the credit is innocent. Differences of view or
emphasis with respect to these issues, particularly the kind of fraud and proof
required, reflect the tension between the two principal policy considerations:
the importance to international commerce of maintaining the principle of the
autonomy of documentary credits and the limited role of an issuing bank in the
application of that principle; and the importance of discouraging or
suppressing fraud in letter of credit transactions. The potential scope of the
fraud exception must not be a means of creating serious uncertainty and lack of
confidence in the operation of letter of credit transactions; at the same time
the application of the principle of autonomy must not serve to encourage or
facilitate fraud in such transactions. The relative emphasis on the one or
other of these two considerations tends to explain what have been characterized
as the strict and more liberal approaches to the availability of the fraud
exception, each of which has had its judicial and academic adherents. (pp.
167-8)
...
... Most of the cases have involved an application for a preliminary
or interlocutory injunction to restrain an issuing bank from paying under a
letter of credit or guarantee. Few, if any, have had to address the precise
issue raised by this appeal: what the customer or applicant for the credit must
show, where there has not been an application for injunction, to justify a
conclusion that an issuing bank was not obliged to pay a draft under a letter
of credit because of its prior knowledge of fraud by the beneficiary, and that
its payment of the draft was, therefore, an improper or unauthorized one for
which the customer was not obliged to reimburse the bank. (pp. 168-9)
...
In my opinion, the fraud exception to the autonomy of documentary
letters of credit should not be confined to cases of fraud in the tendered
documents but should include fraud in the underlying transaction of such a
character as to make the demand for payment under the credit a fraudulent one.
The Sztejn and Cambridge Sporting Goods cases, to which reference has been
made, illustrate the difficulty of distinguishing in some cases between a case
of false documents and a case of fraudulent shipment covered by documents which
accurately describe the goods called for. (p. 176)
...
On the issue raised by this appeal, I would draw a distinction between
what must be shown on an application for an interlocutory injunction to
restrain payment under a letter of credit on the ground of fraud by the
beneficiary of the credit and what must be shown, in a case such as this one,
to establish that a draft was improperly paid by the issuing bank after notice
of alleged fraud by the beneficiary. A strong prima facie case of fraud would
appear to be a sufficient test on an application for an interlocutory
injunction. Where, however, no such application was made and the issuing bank
has had to exercise its own judgment as to whether or not to honour a draft,
the test in my opinion should be the one laid down in Edward Owen Engineering -
whether fraud was so established to the knowledge of the issuing bank before payment
of the draft as to make the fraud clear or obvious to the bank. The
justification for this distinction, in my view, is the difficulty of the
position of the issuing bank, in so far as fraud is concerned, by comparison
with that of a court on an application for an interlocutory injunction. In view
of the strict obligation of the issuing bank to honour a draft that is
accompanied by apparently conforming documents, the fact that the decision as
to whether or not to pay must as a general rule be made fairly promptly, and
the difficulty in many cases of forming an opinion, on which one would hazard a
lawsuit, as to whether there has been fraud by the beneficiary of the credit,
it would in my view be unfair and unreasonable to require anything less of the customer
in the way of demonstration of an alleged fraud. (p. 177-8)
...
... It is important to bear in mind that an issuing bank
does not, as a general
rule, have a duty to satisfy
itself by independent
inquiry that there has not been
fraud by the beneficiary of
a credit when it is presented
with documents that appear
on their fact to be regular.
It is only when fraud
appears on the face of the
documents or when fraud has
been brought to its attention
by its customer or some
other interested party that it
must decide whether fraud
has been so established as to
require it to refuse
payment (pp. 180-1) [emphasis added]
It is clear from the emphasized portions of Angelica-Whitewear
that the test of it being clear and obvious to the bank is a rather high one,
implicitly I would think higher than a court being satisfied of there being a
strong prima facie case of fraud. Clearly a financial institution should not
reach its conclusion merely as an accommodation to its customer.
8Blair J. in Royal Bank of Canada v. Darlington et al.,
[1995] O.J. No. 1044, (unreported decision released April 19, 1995, Ontario
Court (General Division), Commercial List No. B312/93, B311/93, B58/94,
B310/93, B73/94, B128/94) dealt with a case where other financial institutions
("Other Banks") were called on by Lloyd's to pay the call by Lloyd's
on the letters of credit the Other Banks had issued at the request of other
Canadian names ("Other Names"). Blair J. stated at p. 5:
The [Other] Banks who are Applicants in these proceedings were not
persuaded that clear or obvious fraud on the part of the Society and Council of
Lloyd's had been established on the documentation and materials provided to
them. They honoured the Letters of Credit, and paid. They now seek re-imbursement
from the Names,
The obligation to reimburse the Banks, if found, and the attendant
unlimited liability which attaches to being a Lloyd's "Name", will
create considerable hardship for the Respondents. There is little doubt on the
evidence that these calls, and the liabilities which have been incurred as a
result of the inordinate losses sustained in the Lloyd's market in recent years
have wreaked havoc on the lives and fortunes of these Names, and others who
find themselves in similar positions. Many are in danger of losing their homes,
or worse, are on the verge of bankruptcy.
However the Other Banks in that case were not satisfied that what
the Other Names had presented them was evidence of clear and obvious fraud on
the part of Lloyd's, with the result that they did not honour the call by
Lloyd's, although it appears that the Banks in this case got the equivalent
information as the Other Banks did as to Lloyd's alleged fraud. Blair J.
concluded that the Other Banks had acted appropriately in coming to their
conclusion that there was no clear and obvious fraud. Apparently since that
time, all calls by Lloyd's on letters of credit have been honoured by Canadian
issuers.
9The parties in the subject litigation on both sides have
kept their cards very close to their vests. It is not altogether clear why the
Banks chose to dishonour - but then subsequently in litigation in England when
Lloyd's sued them for failure to pay on the call, they did not specifically
plead fraud as a defence themselves but only as an allegation of the Names. The
English Actions statement of defence of the Banks in this regard asserted:
7(a)
The
defendant [Bank] has been provided with information which its customer [Names]
alleges amount to a sufficient case of fraud as to entitle the Defendant to
decline to honour the draft that has been presented. Full particulars of the
said information are set out in the Schedule hereto and copies of all such
information have been provided to the Plaintiff [Lloyd's].
(b)
The
Defendant contends that the material provided was, to a reasonable banker in
the position of the Defendant, sufficient to amount to notice of clear fraud by
the Plaintiff. Further or alternatively, the material provided was such as
would lead a reasonable banker in the position of the Defendant to infer fraud
by the Plaintiff. Accordingly, the Defendant was entitled to dishonour the
draft and to decline to make any payment to the Plaintiff under the letter of
credit.
(c)
For
the avoidance of doubt, the Defendant does not allege fraud against the
Plaintiff. [Emphasis added]
It was a curious defence by the Banks. They submitted that the
Names have alerted them to and provided them with sufficient information for
the Banks to conclude that there was a clear and obvious case of fraud by Lloyd's
on the Names. Hence to protect their reimbursement rights against the Names
they dishonoured the LC. However notwithstanding what was accepted by them as a
clear and obvious case of fraud by Lloyd's, the Banks did not plead fraud on
the Names against Lloyd's nor attempt in any other way to defend against
payment by the Banks on the call on the LC by Lloyd's by attempting to prove
this alleged fraud. It is therefore quite puzzling to also see that the Bank of
Montreal (as per the affidavit of Peter Wren ("Wren"), Managing
Director, Trade Finance) was possibly influenced by its customers' entreaties,
was concerned about an Ontario court possibly second guessing it, was possibly
influenced by the aspect of giving its customers additional breathing room in
their dispute with Lloyd's and was not apparently sufficiently concerned with
the integrity of the letter of credit system:
66.
In
October 1993, Lloyd's delivered a "demand before action" letter to
the English solicitors for the Four Banks warning that Lloyd's intended to
commence court action in England to recover payment on a large number of Other
Calls dishonoured on letters of credit issued at the request of the Defendant
Names. A copy of Lloyd's letter was forwarded to the Ontario solicitors for the
Defendant Names, who responded that "our clients will not seek an
injunction in England" (emphasis not mine)
67.
As
late as December 1994, correspondence exchanged with their Ontario solicitors
made it clear that the Defendant Names still declined:
(a)
to
intervene in any English litigation brought by Lloyd's against the Four Banks
to enforce payment on the letters of credit, or
(b)
to
take any active steps to prevent Lloyd's from obtaining judgment against the
Four Banks (unless the Four Banks were to first plead fraud against Lloyd's).
68.
Since
the Four Banks had given clear notice that they would not plead fraud against
Lloyd's, the inaction of the Defendant Names made it inevitable when Lloyd's
served its "demand before action" letters that Lloyd's would obtain
judgment in England for the Other Calls. If the Four Banks had further delayed
payment to Lloyd's on the Other Calls, then the Four Banks would have become
liable to Lloyd's for additional interest.
10The Names on the other hand, despite repeated request by the Banks
to join in and take action against Lloyd's based upon the fraud they claimed
had been perpetrated against them by Lloyd's, did not do so. Rather than
aggressively pursuing this, once the Names had got the Banks to dishonour the
call on the LC by Lloyd's, the Names became quite passive and adopted what at
most might be characterized as a watching brief in the English Actions. They -
or their counsel - did not take up Saville J.'s suggestion on May 26, 1993 and
his comments from the bench that if the Names failed to seek an English
injunction than it could be said that they had had their chance and should have
intervened in the English Actions and that they could then not be heard to
complain about the conduct of the Banks. This was noted by Wren when he reports
in his affidavit at paragraph 85(g) that Saville J. commented:
(a)
Regarding
the reimbursement rights of the Four Banks, the Defendant Names would have some
explaining to do if they made no attempt to obtain an English injunction restraining
payment on the letters of credit. If no injunction was sought, the Banks could
say to the Names that they had had their chance and they should have intervened
in the English LC actions. If the Banks decided to pay in such circumstances,
the problem would be one for the Names, and not for the Banks;
(b)
In
the event of the trial of the proposed preliminary issue decided against the
Four Banks, Mr. Justice Saville was minded to give the Banks the opportunity to
consider amending the Points of Defence to plead fraud. In that event, the
Defendant Names would have an opportunity to reconsider their position and to
seek an English injunction to restrain payment on the letters of credit; and
(c)
If
the Banks decline to plead fraud against Lloyd's, then they would become
legally obligated to make payment on the letters of credit. In such
circumstances, the risk of prejudice to the Banks' reimbursement rights would
be small. (emphasis added)
On the other hand, notwithstanding that Saville J. gave the Banks
the opportunity for the Banks to plead fraud against Lloyd's, following his
determination that the Banks pleading as set out above in the English Actions
would not provide them a defence (see The Society of Lloyd's v. Canadian
Imperial Bank of Commerce et al., unreported decision of Saville J. dated July
5, 1993, Queen's Bench Division, Commercial Court, 1993, Folio Nos. 112-116)
the Banks declined to do so. The end result was that the Banks were found
liable to Lloyd's in the English Actions on July 20, 1993 and were required to
pay up on the LC. Without the Banks themselves pleading fraud, the Banks were
naked as in essence there was then no defence; it was not sufficient for the
Banks to assert that the Names alleged fraud by Lloyd's. Saville J. had stated on
July 5, 1993 at pp. 3-6:
Faced with these difficulties, Mr. Carr sought to support the
defence by another route. He pointed out that a customer of a Bank who had
requested the Bank to issue a Letter of Credit could obtain an injunction
restraining the Bank from paying the beneficiary if he could persuade the Court
that there was clear evidence of fraud of a kind which, if established, would
amount to a defence to a claim on the Letter of Credit. Surely, he suggested,
the Bank should in effect be able to do the same.
The difficulty with this argument is twofold. Firstly, unlike the
present case, the plaintiff in the postulated case would be making an
allegation of fraud. Secondly, the injunction obtained by the customer would
only be of a interim kind, and would be made permanent only if the customer was
able at the trial to prove that there had in fact been a fraud of a relevant
kind. There is nothing in those cases to suggest that evidence of fraud, as
opposed to fraud itself, provides any form of permanent as opposed to temporary
defence to a claim under a Letter of Credit. The correct analogy with a
customer seeking a temporary injunction would be a case where the beneficiary
sought summary judgment against a Bank that resisted on the basis that there was
a relevant fraud. If the Court considered that there were sufficient grounds
for this allegation, it would be likely to give the Bank leave to defend the
proceedings, but if the Bank ultimately failed to prove the existence of a
relevant fraud, then it would be adjudged liable to honour the Letter of
Credit.
At one stage in the argument Mr. Carr submitted that the present
application was really only concerned with the management of the cases pending
trial. This, however, is not the position. I am not dealing with an application
for summary judgment but whether the plea, if established, would provide a
defence to the claims.
Mr. Carr also submitted that if the Banks did have clear notice of
fraud but nevertheless paid, then they would be most unlikely to obtain
reimbursement from their customers, who could correctly assert that since the
Banks were not legally obliged to pay, there was no corresponding obligation to
reimburse them. This, of course, is true, provided that the Banks were indeed not
legally obliged to pay, but to my mind this does not advance Mr. Carr's
argument. If a Bank has notice of matters which might amount to evidence of
fraud, then it must make up its mind whether or not the material is sufficient
to justify a plea of fraud. If it is, then the Bank can resist payment on this
basis and if it can establish relevant fraud it will be under no obligation to
honour the Letter of Credit. If the Bank considers the material to be
insufficient to plead fraud, then its assessment will be either right or wrong.
If right, then ex hypothesi there will be no notice of relevant fraud and thus
the customer can hardly resist reimbursing the Bank who pays in those
circumstances. If the Bank incorrectly concludes that there is insufficient material
to plead fraud, then it can hardly complain if it is not reimbursed, any more
than it could if it mistakenly paid on non-conforming documents.
Quite apart from these considerations, I am unpersuaded that the
rights and obligations under a Letter of Credit should somehow depend on
whether or not the Bank has a right to reimbursement from its customer or
otherwise, or on the rights and obligations existing between the Bank and these
third parties. The authorities both here and abroad are unanimous in treating
Letters of Credit contracts as quite independent transactions. So far as these
are concerned it is to my mind clear beyond argument that the only substantive
defence to a claim for payment relevant in the present context is that there
was fraud of a relevant kind. As I have said, the Bank may be able to resist
summary proceedings if it alleges relevant fraud and persuades the Court that
there is sufficient material to justify a trial of this issue. In the present
case, whether or not such material exists is irrelevant, since no plea of fraud
is made.
In conclusion I should note that neither party suggested that
there was anything in the form of the Letters of Credit that affected the
question at issue, and all were of the view that the position would be the same
whether or not the documents in question are to be regarded as more akin to
performance guarantees or standby Letters of Credit than documentary Letters of
Credit. I too agree with this. Finally, it seems to me to be clear beyond doubt
that the proper law of the Letters of Credit is English law and even Mr. Carr,
with all his skill, was unable to suggest any basis on which the contrary could
be argued.
For these reasons I hold that even if the matters alleged in
Paragraph 7(a) and (b) of the Points of Defence were to be established, they
would provide no defence to the claim.
11In Darlington at p. 55 Blair J. commented on this situation of the
Banks pleading in paragraph 7 as they did:
This pleading is apparently similar to ones filed by other
Canadian Banks in similar U.K. proceedings [i.e. the Banks in the English
Actions]. The Respondents submitted to the Applicant Banks in these proceedings
that the U.K. pleading constituted an admission on the part of the other
Canadian Banks that clear or obvious fraud had been established. It constituted
no such admission, however, in my view. It was simply a pleading and an attempt
to set up a "reasonable banker" defence. "Fraud" was
specifically not alleged against the Society of Lloyd's. In any any event, Mr.
Justice Saville in the U.K. Court struck out the pleading, giving CIBC leave to
amend to allege fraud directly against the Society. The Bank declined to do so,
and judgment was subsequently granted against it in favour of the Society
requiring CIBC to pay on the letters of credit.
Blair J. went on at pp. 74-5 to discuss the task of a banker faced
with an assertion by its customer that the customer had been a victim of fraud
by the beneficiary of the letter of credit.
What is the duty cast upon a banker presented with materials and
information which the customer asserts establishes clear or obvious fraud on
the part of the beneficiary of the letter of credit? Is the measuring stick by
which the performance of that duty is to be assessed an objective one, i.e., is
it the test of "the reasonable banker"; or is the performance of the
duty to be measured by some other parameter? Does the banker have an obligation
to make independent inquiries beyond the information and materials provided by
the customer?
These questions raise difficult practical concerns for the
bankers, for in the performance of this exercise, it seems to me, they operate
under two major disabilities. In the first place they are neither lawyers nor
judge. In the second place, they are not experts in the particular field of
commerce or business which is the subject of the underlying transaction. With
respect to this latter difficulty, and in the context of these particular
proceedings, they are not insurers; and the world insurance market, which
provides the setting for the underlying transactions here, is extremely complex
and sophisticated.
Although the bankers have professional advice available to them in
both the legal and insurance fields, they are ill-equipped as bankers -- and it
is their function as bankers which is at issue here -- to carry out the task
ascribed to them by the Supreme Court of Canada in Angelica Whitewear and by
the English Court of Appeal in Edwards Owens Engineering. It is for these
reasons, I am sure, that both of those Courts have placed the standard of
convincing so high.
For "fraud", although an easy word to say, is a concept
that is not always easy to apply. And the world insurance market, as I have
observed, is very complex. To ask bankers to make a determination that fraud
has been established in a fashion that is "clear or obvious" in such
a context, is to assign them a difficult task -- one for which, as I have said,
they are not well equipped.
This can cut both ways, however, and raises two further questions.
Does it follow that bankers can take a more laissez-faire approach and allow
themselves to be persuaded more easily that fraud has not been
"established" with the required clarity? Or, does it mean that the
banker's obligations are even more onerous, and that, in such circumstances, in
order to protect the interests of their customers, as well as to ensure that
they are meeting their obligations to the beneficiary contracting party, that
they must dig deeper and make extra enquiries and that, as Mr. Lenczner
submitted, the test should be applied in a more elastic fashion (my words) in
recognition that fraud may be more difficult for the customer to establish in
such circumstances? [emphasis added]
12Blair J. had considerable sympathy for the position of issuers of
credit when faced with a customer claiming a fraud has occurred when he
observed at p. 85:
... It was said at the outset of these proceedings that the U.K.
trial, when it takes place, is estimated to last several months. One might be
forgiven, it seems to me, for asking -- rhetorically, at least -- how bankers,
who are neither lawyers nor judges, could be expected to determine that clear
or obvious fraud had been established when it is expected to take a court such
a long time to assess the evidence in that regard!
Questions to be Answered
13As discussed infra, the Banks took a curious hybrid
approach. While apparently reasonably reaching a conclusion on the material
presented to them by the Names that there was a case of clear and obvious fraud
by Lloyd's against the Names, the Banks declined to plead fraud against Lloyd's
in the English Actions. Was this appropriate (in the sense of preserving their
reimbursement rights against the Names)? To answer that it would seem to me
that the following questions have to be answered:
(a)
Who
has the responsibility for fighting a lawsuit by the beneficiary of a letter of
credit if the customer has provided the issuer with material on which the
issuer reasonably makes the conclusion that there is a clear and obvious case
of fraud by the beneficiary against the customer?
(b)
Can
this responsibility be shared or transferred?
(c)
If
so, on what basis? Need the issuer do anything more than resist payment and
advise in its defence that while it does not plead fraud its customer alleges
same leaving it to the customer to prove fraud?
(d)
Do
the circumstances present in this situation allow the sharing or transfer?
(e)
If
the issuer does not fulfill all requirements of it in the issuer - beneficiary
call on a letter of credit action, can the customer raise this deficiency in
defence of a resultant reimbursement and indemnification action by the issuer?
(f)
Are
there other bases upon which the issuer can rely in advancing its reimbursement
and indemnification action - namely (i) the Parker v. Lewis indemnity
principle; (ii) estoppel by conduct; and (iii) res judicata?
Questions (a) to (e) are intertwined; the discrete aspects of
question (f) are also somewhat intertwined.
14It appears clear from Angelica-Whitewear at pp. 177-8 that
a customer in a letter of credit situation may take legal steps to prevent the
issuer from paying out on a letter of credit. That would be for either the
customer:
(i)
to
start legal proceedings in an attempt to obtain an interlocutory injunction
prohibiting the issuer from paying out on the letter of credit pursuant to a
call otherwise reasonably made by a beneficiary with the grounds for such
injunction being a strong prima facie case of fraud of the beneficiary to the detriment
of the customer; or
(ii)
to
notify the issuer of the beneficiary's fraud, providing the issuer with such
evidence sufficient enough for the issuer to reasonably reach the conclusion
that there was a clear and obvious case of fraud.
However in this second instance it appears to be the issuer who is
required to participate in the lawsuit as a party - i.e. be the defendant in a
lawsuit which may be brought by the beneficiary for payment of the letter of
credit; it is not the customer's lawsuit in the sense of a lawsuit being
brought by or against the customer. I reach this conclusion in light of what Le
Dain J. said at pp. 177-8 of Angelica-Whitewear.
... In view of the strict obligation of the issuing bank to honour
a draft that is accompanied by apparently conforming documents, the fact that
the decision as to whether or not to pay must as a general rule be made fairly
promptly, and the difficulty in many cases of forming an opinion, on which one
would hazard a lawsuit, as to whether there has been fraud by the beneficiary
of the credit, it would in my view be unfair and unreasonable to require
anything less of the customer in the way of demonstration of an alleged fraud.
(emphasis added)
15The Banks, aside from the Bank of Montreal, apparently relied on
legal advice for which privilege was claimed in reaching their decision not to
honour the call by Lloyd's. Wren of the Bank of Montreal appears to be the only
bank official who reviewed the documentation provided by the Names. Wren, in
advising that he tried to apply the test in Angelica-Whitewear, testified on
August 9, 1996 in his cross-examination on his affidavit sworn November 24,
1995 as follows:
52.
Q.
Yes, a Statement of Defence was prepared on behalf of the bank and paragraph
7(b) of that defence states, and I quote - and this is the Bank of Montreal
"the defendant contends that the material provided was, to a reasonable
banker in the position of the defendant, sufficient to amount to notice of
clear fraud by the plaintiff Lloyds." Now stopping there, that was your
Statement of Defence?
A.
That
was part of it, yes.
53.
Q.
Right and the reasonable banker referred to at the Bank of Montreal is you?
A.
That's
right.
54.
Q.
And it is therefore your statement that the material supplied by your customer
was sufficient to amount to a notice of clear fraud?
A.
It
was sufficient to, yes.
55.
Q.
And that pleading is consistent with the statement in the letter of December
24, 1992 which I have read to you, "the banks are concerned that the
materials submitted has, on the objective standard of a reasonable bank, put
them on notice of clear and obvious fraud"?
A.
Yes.
56.
Q.
And that was the reason for the dishonour?
A.
Are
you asking for my reason for recommending we dishonour?
57.
Q.
No, that's what the Statement of Defence says, correct?
A.
That's
what the Statement of Defence says, yes.
58.
Q.
Yes, that's the Bank of Montreal's Statement of Defence.
A.
I
guess so.
59.
Q.
Now, sir, prior to November of 1992, when you had to make a decision whether to
honour or dishonour Lloyds' call, you were familiar with the decision of the
Supreme Court of Canada in a case of Bank of Nova Scotia versus
Angelica-Whitewear?
A.
Yes.
...
64.
Q.
You knew the Supreme Court of Canada is the highest court in the land?
A.
Yes.
65.
Q.
You knew that it was a significant decision?
A.
I
knew it was an important decision, yes.
66.
Q.
And you had read it?
A.
Yes,
several years before.
67.
Q.
And I think you knew what it stated because if I can assist you, would you turn
to your paragraph 103(b) and in 103(b) in the second sentence you say, "I
understand that in England and in Canada the fraud exception only applies where
documented evidence of fraud by the beneficiary has been presented to the
issuing bank before or at the time when a call is made on the Letter of
Credit", correct?
A.
What's
the question, that I am aware of that?
68.
Q.
Yes. That's your statement, correct?
A.
That's
right.
69.
Q.
And you were aware of that in November of 1992?
A.
Yes.
70.
Q.
And that is in effect what the Supreme Court of Canada has said in Angelica?
A.
Yes.
71.
Q.
And then you go on to say, "once presented with such documentation the
issuing bank must then decide whether that documented evidence of fraud meets
the test of being clear and obvious". That's right?
A.
That's
right.
...
76.
Q.
Once it has been presented what you mean by the bank must then decide, once it
has the documents it must then decide? Is that a subsequent action, having the
material in front of it the bank has to decide?
A.
As
it does with any documents presented on a Letter of Credit it has to make a
decision on them.
77.
Q.
It has to make a decision whether to honour or dishonour, correct?
A.
Based
on the material presented.
78.
Q.
Yes, and that was the judgement that was exercised in November of 92 by you?
A.
In
looking at the material that was presented with these claims by the names, by
the beneficiaries, by the applicants I was sufficiently concerned that a court
of law might decide that there was in fact fraud and therefore I felt uncomfortable
and decided to give the benefit of the doubt to the names.
79.
Q.
You applied this test, didn't you? You have said, "I understand that in
England and Canada the fraud exception only applies where documented evidence
of fraud has been presented to the issuing bank before payment", correct?
That's what you have said.
A.
Right,
that's what I have said.
80.
Q.
And that was your understanding of the legal tests that applied?
A.
At
the time that I made the decision I didn't have all this information in terms
of the legal tests in mind. I was looking at the evidence that was presented, a
lot of the material that you provided yourself on behalf of the names, and
looked at it and felt that the issues were sufficiently complex that there
might be a chance that some court might decide that there was in fact fraud and
therefore I felt uncomfortable in honouring the payments.
|
|
|
... |
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85. |
|
Q. What did you hear about it? From somebody on the street said,
oh, before you have to make up your mind whether to honour or dishonour this
you have to have documentary evidence provided to you? Did you not understand
that this is a test that was being applied by various courts? |
|
A.
I
was aware that fraud was a reason not to pay under Letters of Credit, if it
could be proved.
86.
Q.
Then you go on to say, "the issuing bank must then decide whether that
documented evidence of fraud meets the test of clear and obvious". Where
did you understand that from?
A.
From
various sources of information, including the Supreme Court case that you
mentioned.
87.
Q.
Right, including the Angelica case?
A.
Right.
88.
Q.
All right, and so this was your understanding of the test that comes partly out
of Angelica, is that fair?
A.
Yes.
89.
Q.
And that is the test that you tried to apply in November of 1992?
A.
Well,
can you define again what you think the test is?
90.
Q.
The test, sir, that you have set out yourself. I am not trying to put out
anybody else's. The issuing bank, being the Bank of Montreal, must then decide
whether that documented evidence of fraud meets the test of being clear and
obvious. That's the test that you tried to apply?
A.
That's
the test that I tried to apply. [emphasis added]
As presently constituted and set out in Angelica-Whitewear the
clear and obvious fraud reason for an issuer to dishonour an otherwise regular
call by a beneficiary on a letter of credit is a question for the issuer to
decide. It is up to the issuer to make up its own mind; the issuer does not
have the luxury of having a court make up the issuer's mind. It is for that
reason as well that the test is set so high - it must be clear and obvious to
the issuer that the beneficiary has perpetrated a fraud against the issuer's
customer. The test for the issuer is not whether a court will or may eventually
determine that there was fraud, but rather when the issuer looked at the
situation, was it clear and obvious to him acting reasonably that there had
been a fraud.
16Blair J. then went on in Darlington to discuss a bank's
duty to advise its customer. While he was looking at the front end of the
situation in the sense of whether a bank had an obligation to counsel its
customer relating to the customer's use of the money being advanced by the bank
when they were entering into a loan or credit relationship, it would seem to me
that a bank when faced with a customer claiming to be victim of fraud by the
beneficiary of a letter of credit would have no higher duty regarding the
question to honour or dishonour. Blair J. stated at pp. 112-3:
In my opinion, no such dominating influence existed between the
Banks and the respondent customers in these proceedings with respect to the
issuance of the Letters of Credit; nor were there any circumstances of
vulnerability or dependency which could give rise to any relationship other
than that of ordinary lender and borrower. The Respondents were each
arms-length commercial customers who came to the Banks with the form of
instrument they were seeking to have issued on their behalf (and which, indeed,
they were required by contract with Lloyd's to have issued). They requested the
Banks to issue that instrument. The Banks did so. No one asked for any advice.
Most had independent legal and accounting advice available to them, and some
even took such advice. With the exception of Mrs. Marjorie Hendrie, and the
possible exception of Mrs. Perrin (who did not testify), they were all
reasonably sophisticated people with business experience. To the extent that
they were careless in not protecting their own interests, or were content to
rely on others to do so, they cannot shift the responsibility for that conduct
to the Banks in these circumstances. No duty to advise or to explain arises in
a relationship of the sort which existed between the Banks, as issuers of the
Letters of Credit, and the Respondents, as customers requesting their issuance,
in my view, and none existed here.
17Blair J. determined that the Other Banks were justified in coming
to the conclusion on the evidence presented to them by the Other Names that
there was no clear and obvious case of fraud made out in that material. He
determined that the Other Names were required to reimburse the Other Banks.
That issue of reimbursement is a question of Canadian law. What is before me is
one aspect of the reimbursement litigation between the Banks and the Names; The
subject case will have to be determined pursuant to Canadian law. Thus while
the observations of Saville J. in the English Actions well may be prudent
counsel for all involved, not only are they merely observations in the English
Actions but they do not of course set out Canadian law, nor do they purport to
do so. I take his observations as intended to have the positions of the Names
in essence primarily advanced by those Names in light of their stake in the
situation and not to have something go by way of "default" when that
result would affect the vital interests of the Names. His observations insofar
as the aspect of the Banks being required to plead fraud and his giving them time
to do so on the other hand directly affected the Banks in the English Actions
since that litigation was governed by English law.
18In the same way the situation is somewhat murky as to why
the Banks acceded to the Names in dishonouring the call of Lloyd's on the LC
when the Other Banks reached what Blair J. considered to be a justified
conclusion in determining that there was no clear and obvious case of fraud
made out in the documentation presented to them (as it seems that each had
equivalent material presented to it). Although of course Blair J. determined at
pp. 74-8 that the banker's duty was not an objective one but rather that the
banker must exercise his own judgment reasonably in the sense of acting
honestly and in good faith in his capacity as a banker. Thus each issuer had to
make up his own mind. However at pp. 97-8 Blair J. concluded that the Other
Banks had in any event met the "reasonable banker" objective test if
he were in error and it were the applicable test. It is similarly puzzling why
the Banks not only dishonoured the call originally but persisted in doing so
all the way through the English Actions but without providing any evidence of
fraud. Rather as seen in their defence in paragraph 7, they pleaded that the
Names were asserting fraud but that the Banks were not pleading fraud
themselves. Rather than carry the ball (of proving fraud) themselves, they
wished to effectively retire from the playing field and have the Names come
into the game as substitutes. In passing I would observe that I have the
greatest of sympathy for the predicament of the Banks. In the real world of
banking, including in particular situations involving letters of credit,
decisions and actions have to be taken forthwith in the circumstances. Letters
of credit as a genus unless "instantly" acted on - i.e. an otherwise
regular call upon a letter of credit - would depreciate radically in value as a
general financial obligation. Then as well, one must consider the business
result for a financial institution which dithered as to whether to honour a
call; I think it a fair observation that its letters of credit would be
downgraded in the marketplace if not generally shunned. UCP 400 applies to
documentary and standby letters of credit (the subject case being a standby letter
of credit situation). The issuing bank, pursuant to article 16(c), has a
reasonable time in which to examine the material and to decide whether to
refuse payment.
19In their factum the Banks stated that they did not plead
fraud against Lloyd's because:
48.
(a)
banks do not undertake when issuing letters of credit either to investigate or
to litigate their customers' complaints against the beneficiaries of the
letters of credit; (b) the Four Banks neither participated in, nor were victims
of, Lloyd's alleged fraud against the Names; and (c) the Defendant Names
themselves declined to plead fraud in England or to seek an English injunction
when called upon by the Four Banks to do so.
20Wren in his affidavit gave the following reasons why the Banks (the
Four Banks as they are referred to) did not plead fraud in the English Actions:
102.
In
essence, the Four Banks declined to plead fraud against Lloyd's for two
reasons: (1) When a bank issues its letter of credit it does not undertake to
its customer that it will investigate or litigate any subsequent complaints
made by its customer against the beneficiary of the letter of credit (such as
breach of contract, negligence, or fraud), and (2) Secondly, the Four Banks
neither participated in, nor were they the intended victims of, Lloyd's alleged
fraud on the Defendant Names. The Four Banks had no responsibility for
establishing the fraud allegations made by the Defendant Names against Lloyd's.
These two reasons will be more fully explained below.
103.
Firstly,
no undertaking is given by an issuing bank to either investigate or litigate
its customer's complaints against the beneficiary of a letter of credit for the
following reasons:
(a)
The
economic viability of letter of credit turns on the so-called "autonomy
principle" codified by Article 3 of UCP 400 and General Provision (c) of
UCP 290 [earlier version of UCP 400] and also recognized by the Supreme Court
of Canada in Angelica Whitewear. The autonomy principle states, in essence,
that the payment obligation of the issuing bank on a letter of credit is
independent of, or unaffected by, any commercial dispute that may arise as
between the parties to the underlying transaction which gave rise to that
letter of credit. The independence of letter of credit under the autonomy
principle is recognized by Mr. Justice Saville at page 5 of his Reasons of July
5, 1993 (previously identified as Exhibit 27).
(b)
The
autonomy principle is subject to the fraud exception, which is not codified in
the UCP and which, I understand, is applied somewhat differently by the courts
of various countries. I understand that in England and in Canada, the fraud
exception only applies where documented evidence of fraud by the beneficiary
has been presented to the issuing bank before, or at the time when, a call is
made on the letter of credit. The issuing Bank must then decide whether that
documented evidence of fraud meets the test of being "clear and
obvious".
(c)
Article
15 of UCP 400 and Article 7 of UCP 290 provide that it is the responsibility of
the issuing bank to take reasonable care to ensure that call documents
presented by the beneficiary for payment conform in all respects with the terms
of that letter of credit. This principle is often referred to as the "rule
of strict documentary compliance".
(d)
In
essence, the combined effect of the autonomy principle, the fraud exception,
and the strict rule of documentary compliance is to make the issuing bank under
a letter of credit an "examiner of documents". By this, I mean that
the issuing bank acts like an examiner of documents for the purpose of
determining whether call documents comply with the terms of the letter of
credit or whether documented evidence of fraud by the beneficiary received at
the time of a call meets the "clear and obvious" test. The bank has
no responsibility for the underlying business transaction or for any commercial
disputes which may arise from that transaction and its decisions. Underlying
disputes, if any, are usually settled by the applicant and beneficiary and, if
not resolved, may become subject to review by the courts.
(e)
As
examiners of paper, banks do not, when they issue a letter of credit, give
their customer any undertaking to investigate or to litigate for that customer
whatever allegations of wrongdoing that customer might in future assert against
the beneficiary, whether those allegations be for breach of the underlying
contract, negligence, or fraud.
(f)
To
the contrary, when such allegations are made by the customer, the usual
practice is for a Bank to ask its customer to pursue its own remedies against
the beneficiary. these may include injunctive relief in appropriate cases in
the proper jurisdiction.
(g)
In
the rare circumstance where an issuing bank decides to plead fraud against the
beneficiary, either the beneficiary has admitted its fraud or the bank has
concluded that its own interests will be best served by making that pleading.
(h)
Letters
of credit are most commonly issued at the outset of a business transaction
before either party has begun to perform its business obligations. At that
time, the issuing bank has no reason to suspect that it could be drawn into
expensive litigation between the applicant and beneficiary. In all my years of
experience, I have never heard that any Bank anywhere in the world routinely
requires its customers to provide security sufficient to cover investigation or
litigation costs for advancing a customer's position in disputes that might
arise in future with the beneficiary of the letter of credit.
(i)
Since
banks usually ask their customers to litigate their own allegations of
wrongdoing against the beneficiary of a letter of credit, the fees charged for
letters of credit are very small, usually in the magnitude of 1% of the face
amount of the credit per annum (or less), based on the credit risk of the
applicant. Banks do not factor in the heavy costs of investigating or
litigating any allegations (fraud or otherwise) that our customer may make
against the beneficiary.
(j)
I
am unaware of any institution anywhere in the world which prices its letter of
credit business or defines its security requirements to include the cost of
investigating and litigating fraud or other disputes that may arise between a
customer and the beneficiary. To do so would fundamentally alter letter of
credit business by making it too expensive and raising a risk factor not
justified from experience. To do so, would in my view seriously imperil the
business viability of Canadian letters of credit in the international
marketplace.
104.
Secondly,
as set out below, the Four Banks neither participated in, nor were they the
intended victims of, Lloyd's alleged fraud on the Defendant Names. For the
following reasons, the Four Banks had no responsibility for establishing the
fraud allegations made by the Defendant Names:
(a)
As
explained in paragraph 25(i), the Defendant Names admit that the Four Banks had
no involvement in Lloyd's alleged fraud. Further, the Four Banks are not
parties to the English Fraud Actions (where the merits of the fraud allegations
will ultimately be decided at trial). The factual merits of the fraud dispute
raise issues solely between Lloyd's and the defendant Names.
(b)
The
Defendant Names were given many opportunities to participate in the English LC
Actions and to plead and make their case of fraud against Lloyd's. They declined
every opportunity to do so, even though they pleaded (or adopted) fraud
allegations made against Lloyd's in the Ash Action, the Alper Action, and the
English Fraud Actions. They also declined to seek an English injunction
restraining payment on the letters of credit.
(c)
The
Defendant Names (being the alleged victims of Lloyd's fraud) were in the best
position to plead and prove their case of fraud against Lloyd's in the English
LC Actions and the Four Banks repeatedly called upon them to do so. When the
Defendant Names declined to plead fraud against Lloyd's in those proceedings or
to take any other active steps to protect their position before Saville J., I
was persuaded that Bank of Montreal should not in the circumstances of this
case undertake the enormous costs and risks of pleading serious allegations of
fraud against Lloyd's. The legal costs for trial of the Mason English Fraud
Action were estimated by the English barrister for the Defendant Names, Mr.
Craig Orr, to be in excess of 1 million British pounds sterling for each party
(as explained in paragraph 83(g) above).
(d)
Since
the Four Banks were not involved in Lloyd's alleged fraudulent acts and the Ash
Names declined every opportunity to plead their own case of fraud in the
English LC Actions or to otherwise protect their own interests by seeking an
English injunction against Lloyd's, the Four Banks declined to plead the
Defendant Names' case of fraud against Lloyd's or to participate at the trial
of the issue of whether Lloyd's has in fact defrauded Mr. Mason or the other
Defendant Names.
105.
I
infer from their inaction that the Defendant Names decided that it was in their
best interests to take no steps to prevent Lloyd's from obtaining summary
judgment against the Four Banks in the English LC Actions. It seems a fair
inference to me that the Names declined all such opportunities in the hope that
they might somehow shift the financial burden of their enormous investment
losses on to the banking system. [emphasis added in paragraph 103(g)]
As to the emphasized portion (paragraph 103(g)) I would note that
the fraud on the issuer's customer by the beneficiary of a letter of credit is
the only permitted defence by an issuer (here the Banks) against a beneficiary
(Lloyd's) on an otherwise regular call on the issuer's obligations under the
letter of credit. Hence the pleading, if so warranted (and here the Banks
reached the conclusion that there was clear and obvious fraud), would have been
in the Bank's own interest. I would assume that issuing institutions generally
take security and price their letter of credit charges so that overall on their
total book of business they do not expect to be caught short on security nor to
make a loss. In his July 20, 1993 reasons Saville J. at p. 3 noted in obiter that:
It is noteworthy in this connection that nearly a year ago the
Names endeavoured in Canada to injunct the banks from making payment, but that
attempt failed since the proceedings were stayed on the grounds that England
was the appropriate forum. However no similar application for an injunction has
been made in this country. It is said by way of explanation that the reason for
this is there was no need for an injunction since the banks have been minded
not to pay while advancing the defence referred to earlier. However, this fails
to explain why no application for an injunction has been made since 5th July,
although the Names were aware of the judgment given on that day and were aware
that it would result in an application for payment of the sums claimed.
I understand the concern of the banks who, following a judgment
against them in this jurisdiction, will face the prospect of seeking to obtain
reimbursement from their customers in Canada. However, it seems to me that the
chances of them being unable to recover in Canada in the circumstances of this
case are slim, but that in any event, at the end of the day that is one of the
risks a bank takes when issuing letters of credit, for which of course it is
remunerated.
[emphasis added]
As for the expense of litigation, I note that contractually and by
the principle of indemnification (see infra), the Banks are entitled to be
reimbursed for this expense and there would not seem to be any impediment to
interim billing (and collecting). The Banks do not appear to have taken steps
to have the English Actions heard after or in conjunction with the English
fraud litigation between Lloyd's and the Names, or if so, they would appear to
have been unsuccessful. The Banks have not shown any contractual obligation in the
part of the Names pursuant to the autonomous reimbursement and indemnity
agreement (or otherwise) whereby the Names were required to pursue Lloyd's as a
means of allowing the Banks to in essence withdraw from actively defending the
Lloyd's Action (the English Actions) against the Banks to honour the Banks'
autonomous obligation to Lloyd's pursuant to the letter of credit agreement.
21As to the question of the Names being involved in the
English Actions, the Names stated in their factum.
33.
Secondly
the Banks at no time requested the assistance of the Names to plead fraud and
had they done so the evidence and assistance would have been forthcoming.
This statement was made without reference to any of the record
before me. However it appears from the chronology summary that the Bank's
factum entitled: "Chronology of Request made by the Banks to the Names as
to obtain an English Injunction or to otherwise intervene in the LC
Actions" that the 19 requests detailed there did not specifically request
the Names to assist the Banks in pleading fraud but rather were directed to the
end of the Names directly participating - either by way of obtaining an English
injunction against Lloyd's or being added as party defendants or third parties
(there being of course some difficulty in third partying someone where the
defendant does not have a defence himself and here the Banks were not directly
availing themselves of the fraud defence). I did not see any undertaking or
other indication of the Names' willingness to assist the Banks in this regard
of pleading fraud although this may have been in some other way discussed or
offered.
22The flavour of the dynamic tension discussions between
counsel for the Names and for the Banks may be illustrated by the following
letters (copies of which are appended to these reasons) exchanged the week
before Saville J. struck out the Banks' defence relating to fraud:
(i)
July
12, 1993 letter from Names' English counsel to Banks' English counsel;
(ii)
July
13, 1993 letter from Banks' Canadian counsel to Names' Canadian counsel;
(iii)
July
15, 1993 letter from Banks' Canadian counsel to Names' Canadian counsel.
It would appear rather obvious that the Names did not wish to
become involved as parties in the English Actions nor in any way facilitate
that result; similarly it would not appear that the Names wished to take on the
role of primary actor in the English Actions but rather that they appear to
have been content to leave the Banks in that role. The Names appear to have
been content to have the July 20, 1993 motion proceed before Saville J. without
asking for an adjournment to facilitate receiving information and giving
instructions to counsel to interview. As Wren said in cross examination:
263.
Q.
Are you suggesting here that the names are bound by the English judgment?
A.
I
am saying that the names deny that they are bound by the English judgment.
264.
Q.
Are you suggested that they are bound by the English judgment?
A.
No,
I am not saying that.
23On the other hand, I am of the view that it would be inappropriate
for a bank, if otherwise obligated to defend against a beneficiary's call in an
alleged fraud situation, to take the position that it does not wish to take on
the expense of that litigation in an attempt to justify such relative inaction
by suggesting that the fee it charged the customer on the issue of the letter
of credit was insufficient to engage in such expensive litigation. While I have
no doubt that a situation of the magnitude and complexity of the Lloyd's matter
(keeping in mind that the Banks were presented by the Names with 12 boxes of
material to support the fraud claim) is fairly unique, litigation involving
fraud defences to letters of credit situations are not unknown. There is no
requirement that the documentation of fraud be confined to merely a few pages
nor that it be self evident on the material presented by the beneficiary. One
may be tempted to observe that it is puzzling how clear and obvious the fraud
as presented to the Banks was if it took 12 full boxes for the Names to
demonstrate it, although one may possibly presume that there was a road map and
perhaps a great deal of redundant (or repetitious), equivalent material
included. If the pricing structure of a financial institution is such that it
cannot afford to defend cases of the nature of the English Actions, then it
should consider revising either its pricing structure or its reimbursement and
indemnity agreements with its customers to directly require the customer to
defend such litigation while allowing the financial institutions to take a back
seat. It was the Banks' money at stake in the English Actions (not the Names'
money); the second question is whether the Banks can be reimbursed by the Names
for their pay out of their money to Lloyd's.
24I went on in Westpac at pp. 533-4 to state:
At first glance it would appear that Bank has a strong case as to
its position that it should be paid by Duke Can on a reimbursement or
subrogation basis. This is so especially where one takes into account that
while there are multiple contracts involved, they all evolve out of one overall
relationship. However, this is not a situation where the autonomy principle can
be ignored or overlooked to some degree or other. It should be noted that Bank
and Duke Can are not liable to SG for the same debt. There is no joint
liability. Neither is it a guarantee arrangement. When Bank paid SG, it paid
its own debt arising out of its own contract with SG (the L.C.); Bank did not
pay Duke Can's debt to SG. In fact, it must be recognized that Duke Can
defaulted on payment of its debt to SG and that it was this act which permitted
SG to issue the certificate which compelled Bank to pay on its contract with
SG. Granted the two amounts are identical but the parties are not. Perhaps it would
be helpful to emphasize this distinction if we appreciate that there could be a
standby letter of credit issued by X to Y collectible on the basis of Z failing
to construct for Y a building on time (or not delivering a painting to Y or
even to A), especially when it is understood that the amount of payment under
the letter of credit need not be the equivalent of damages or loss.
...
The parties chose to cover off the situation by way of letter of
credit arrangements. As indicated previously it would be extremely dangerous to
say that this is a matter of form which one should overlook and thereby
reimburse Bank on the basis of substance. One must remember that the parties
chose the letter of credit method as the way of satisfying the requirements;
thus they chose how the substance of this transaction would be dealt with. The
autonomy principle is not form, it is a foundation of the letters of credit
regime. It is this regime which on a policy basis is recognized as being quite
valuable to society (and the economy) as a whole.
25As an example of the reimbursement and indemnity arrangements, Dr.
Bodnar's application for the Canadian Imperial Bank of Commerce to issue an LC
to Lloyd's contained the following agreements by him as a customer (in the capacity
as an account party):
3.
The
Applicant agrees to reimburse the Bank forthwith on demand for all payments
that the Bank has made under the Credit. Subject to paragraph 6 hereof,
reimbursement shall be in the currency in which the Bank has made payment.
4.
The
Applicant hereby indemnifies and agrees to hold the Bank harmless from all
losses, damages, costs, demands, claims, expenses and other consequences which
the Bank may incur, sustain or suffer, other than pursuant to its own gross
negligence or wilful misconduct, as a result of issuing the Credit or enforcing
or protecting the provisions hereof, including without limitation legal and
other professional expenses reasonably incurred by the Bank and whether
incurred in defending any action brought against the Bank to compel payment
under the Credit or to restrain the Bank from making payment thereunder in any
proceedings brought by or on behalf of the Beneficiary or the Applicant, or in
any proceedings brought by the Bank against the Applicant, any guarantor of the
Applicant's liabilities to the Bank hereunder or with respect to the
Applicant's or any guarantor's property charged or pledged to the Bank for the
purpose of protecting, taking possession thereof, holding or realizing thereon,
or otherwise in connection herewith.
10.
Except
as otherwise expressly provided the Credit shall be subject to Uniform Customs
and Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce, Publication No. 400 ("UPC"). Without limitation thereof,
none of the Bank, its agents or correspondents shall be responsible for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents received under the Credit.
12.
This
Confirmation and all rights, obligations and liabilities arising hereunder
shall be governed by and construed in accordance with the law of the place
where the Branch is situate. If this Confirmation is executed by more than one
Applicant, the liabilities of the Applicants to the Bank hereunder shall be
joint and several.
26It does not appear that any of the other reimbursement and
indemnity arrangements were materially different. It should be noted that while
there is a monetary requirement of indemnification, there does not appear to be
any positive obligation expressed to require a customer to join in or indeed in
effect carry any litigation in defending on the grounds of beneficiary fraud
the refusal to pay on a call by the beneficiary. See UCP 400 in this regard as
well.
Article 1
These articles apply to all
documentary credits,
including, to the extent to
which they may be
applicable, standby letters
of credit, and are
binding on all parties
thereto unless otherwise
expressly agreed. They
shall be incorporated into
each documentary credit by
wording in the credit
indicating that such credit
is issued subject to
Uniform Customs and
Practice for Documentary
Credits.
Article 3
Credits by 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.
Article 4
In credit operations all
parties concerned deal in
documents, and not in
goods, services and/or other
performances to which the
documents may relate.
Article 10
a. An irrevocable credit
constitutes a definite
undertaking of the issuing
bank, provided that the
stipulated documents are
presented and that the
terms and conditions of the
credit are complied
with: ...
Article 20
c. The applicant for the
credit shall be bound by
and liable to indemnify the
banks against all
obligations and
responsibilities imposed by foreign
laws and usages.
27Keeping in mind the autonomy of the various contracts in a letter
of credit situation, let us examine what comes into play in the present
situation.
281. Lloyd's as beneficiary of an LC makes a call upon it for
payment by the Bank as issuer.
292. However Name as an account party customer (rather than
bringing interlocutory proceedings for an injunction against such payment by
bringing an action in fraud against Lloyd's) has advised the Bank not to do so
based on its allegations of fraud as supported by evidence which it anticipates
will convince the Bank that there is clear and obvious fraud by Lloyd's
affecting the Name so as to make it inappropriate to pay out as stated by Lord
Diplock at p. 725 of United City Merchants (Investments) Ltd. et al. v. Royal
Bank of Canada et al., [1982] 2 All E.R. 720 (H.L.):
... 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. (p. 726)
303. If the Bank were to be negligent in its review of the evidence
presented by the Name so that it reached a "not clear and obvious fraud
conclusion" when it should have found that there was a case of clear and
obvious fraud on the part of Lloyd's, then the Name would not be required to
make good on its reimbursement and indemnification obligation to the Bank.
314. Apparently the Banks did reach the conclusion that there
was a clear and obvious fraud case in this situation so as to justify them not
honouring the call by Lloyd's. They must reach this conclusion reasonably in
their banker capacity - they cannot do so capriciously nor merely to
accommodate their customer for business or humanitarian grounds.
32Can the Banks resile from this conclusion? I am of the view
that they cannot except in the following circumstances:
(a)
A
dishonouring issuer may change its decision based upon further information
which may be obtained from the beneficiary, from its own independent research
(if it is so inclined to do so although it is not obligated to do so) or
conceivably even from the customer. This was apparently not the case here.
I am less favourably disposed to a second circumstance since a
decision, although made forthwith, should be made in the first instance upon
proper reflection.
(b)
A
dishonouring issuer may change its mind as to the correctness of its decision
if upon appropriate reflection it reasonably comes to the opposite conclusion
that there were no case of clear and obvious fraud on the part of the
beneficiary against the issuer's customers. This implies that such a change of
mind would have to be sufficiently justified to an extremely high degree so as
to show that its original decision was too hastily and inappropriately reached.
Similarly this was apparently not the case here either.
It would seem to me that a collorary of either change would be
that the dishonouring issuer would have to advise both the customer and the
beneficiary that it had made such a change and that it was going to honour the
call by paying the beneficiary (thereby allowing the customer to take whatever
additional steps it felt necessary). It would of course not defend a lawsuit
against it by the beneficiary any further.
33However what we appear to have here is a curious hybrid.
The Banks have apparently reached a reasonable conclusion on the material
presented to them by the Names that there was a clear and obvious case of fraud
by Lloyd's at the expense of the Names. Based on that conclusion the Banks
(apparently recognizing that they will not be reimbursed by the Names if they
paid Lloyd's) dishonoured the call and persisted in doing so notwithstanding
the institution of lawsuits (the English Actions) by Lloyd's against the Banks
to require the Banks to make good on their LC obligations. However the Banks
did not claim in their defence that only their customers, the Names, alleged
fraud by Lloyd's but they also pleaded that the Banks reasonably concluded that
there was such a clear and obvious fraud present. Rather than defending the
dishonour of the call on their contract (the LC) with Lloyd's on the basis of
this "clear and obvious fraud", the Banks may have attempted to
straddle the picket fence by curiously asserting:
7(c)
For
the avoidance of doubt the Defendant [Bank] does not allege fraud against the
plaintiff [Lloyd's].
Further the Banks did not make any arrangements to have the Names
added as parties in the English Actions by making such provisions as may have
been necessary to have the Names voluntarily join in. Rather more importantly
and fully within the control of the Banks (it would seem), the Banks did not
fight the English Actions using the Names as witnesses to the extent necessary
plus the documentation provided by the Names to prove a defence of fraud but
Lloyd's on the Names. In fact it would not seem that they asked the Names to
assist in this regard. Rather it appears that the Banks perceived themselves in
effect as innocent bystanders to a battle between the Names and Lloyd's. In
their view it was for the Names to fight this battle directly against Lloyd's.
This overlooks that the litigation was brought by Lloyd's against the Banks
under the Banks' autonomous obligation to pay Lloyd's upon otherwise
"innocent" calls reasonably made upon the LC issued by the Bank in
favour of Lloyd's. It was not a lawsuit which either Lloyd's or the Names have
brought against the other based upon their respective obligations as to the
Names becoming and continuing to be members of Lloyd's under another autonomous
agreement. Of course there was the remaining and third autonomous agreement
where under the Name agreed to reimburse the Bank for any payments the Bank
made to Lloyd's pursuant to the LC and to indemnify the Bank for any loss the
Bank may suffer. However if the Bank paid Lloyd's "voluntarily"
notwithstanding the Bank had reasonably reached the conclusion that there was a
clear and obvious case of fraud by Lloyds upon the Name, then the Name would be
justified in refusing to reimburse or indemnify the Bank.
34In conclusion as to the first aspect of the Banks' motion,
I do not find that the Banks have made out an automatic case that the Names
were required to take over the defence of the English Actions effectively in
the place of the Banks. The Banks had the responsibility of fighting the
English Actions; they could not directly sluff this off to the Names. If the
issuer adopts a passive role in this aspect, it does so with risk to itself
unless it can prevail by virtue of the issues in question (f). Sometimes one
has to be cruel to be kind. It may well be that in being kind to their
customers, if the reason for dishonouring was to give their customers breathing
time to be able themselves to fight Lloyd's in litigation, the Banks may have
ended up by being cruel to themselves. I would note in passing that such an
inappropriate reason for a dishonour would be completely against the integrity
of the letter of credit system which is so valued by the commercial world of
trade and finance (including banking). The Banks may also have inappropriately
raised the hopes of the Names as to the strength of their dispute with Lloyd's
in the sense of them being objective observers who had concluded to their
reasonable satisfaction that there was a clear and obvious case of fraud; I
hasten to note that I have reached no conclusion (on even a preliminary basis)
on the strength of the Names' position since that has never been before me.
35If there were no clear and obvious case of fraud reasonably
concluded by the Banks or if it were otherwise determined that there were no
fraud perpetrated by Lloyd's on the Names in any litigation between the Names
and Lloyd's, then the Banks would have paid Lloyd's on the call and proceeded
to claim reimbursement from the Names. However the twist here is that the Banks
continued to dishonour the calls and defended the English actions. I would note
that the Banks have lost the English Actions and have been required pursuant to
that litigation to pay Lloyd's under the previously dishonoured calls. As to
such payments, if Lloyd's is successful in its litigation as to those affected
Names so that Lloyd's is able to obtain judgment against such Names, it would
appear to me that the judgment as to quantum could only be as to the extent of
the Names' then existing liability to Lloyd's - i.e. the original liability
amount less what Lloyd's has recovered from the Banks as a result of the
English Actions judgment against the Banks regarding their prior dishonour. If
the Banks had not dishonoured - i.e. based on a reasonable conclusion that
there was no clear and obvious case of fraud - they would have paid Lloyd's on
the call and there would be no basis grounded in the fraud exception regarding
letters of credit that the Banks would not have been able to obtain judgment
for reimbursement and indemnity against the Names. Thus it may well be that the
Names may obtain in effect a legal windfall as to what would otherwise have
been their liability to Lloyd's (assuming for the purposes of this discussion a
successful result for Lloyd's in its litigation involving the Names) to the
extent of the amount of the LC - unless the Banks have some other perhaps
indirect way of retrieving such amounts paid out. Practical considerations
would also come into play since the legal windfall aspect of course presumes
that each of the Names would be able to make good for the total amount of their
individual liability to Lloyd's. If there were a shortfall then to the extent
that the Banks did not hold security for reimbursement and indemnification,
there would be a competition between the Banks and Lloyd's as to avoiding this
deficiency.
Question (f) - Other Considerations
36If that were the extent of the Banks' arsenal in its
summary judgment motion for dismissal of the Names' defence that the Banks had
lost their reimbursement rights by failing to plead fraud in the English
Actions, then I would dismiss that motion. However the Banks have also raised
the following as weapons in such motion to the issue of a non-litigant (here
the Names) being bound by judgment which he was not a party (such as the
judgment in the English Actions). The Banks raised three circumstances in which
they asserted this would prevail:
(a)
Indemnity
Principles as set out in Parker v. Lewis (1873), L.R. 8 Ch.1035 (C.A.) to the
effect that a person who indemnifies another under a contract of indemnity will
be estopped from denying a judgment against the person indemnified if the
indemnifier had notice of the proceeding but refused to defend it on behalf of
the indemnified person with the result that the person indemnified defended the
action but lost.
(b)
Estoppel
by Conduct as set out in Nana Ofori Atta II. Omanhene of Akyem Abuakwa and
another v. Nana Abut Bonsra II as Adanshehene and as Representing the Stool of
Adanse and Another, [1958] A.C. 95 (P.C.) and ATL Industries Inc. v. Han Eol
Ind. Co. Ltd. (1995), 36 C.P.C. (3d) 288 (Ont.Gen.Div.) to the effect that a
non-litigant may be estopped by his own conduct from denying a previous
judgment which intimately involved the non-litigant.
(c)
Res
Judicata as discussed in Nana and ATL to the effect that a person who is a
privy of a party to a prior proceeding is estopped from denying the judgment by
application of the rule of res judicata.
The position of the Banks was that it ought to be successful in
its summary judgment motion by knocking out the Names' defence as to the Banks
having lost their reimbursement rights by virtue of the Parker v. Lewis
indemnity principles, but failing that then they relied on estoppel by conduct.
If failing both those thrusts then they relied on res judicata. Let us examine
each of those in turn.
Parker v. Lewis Indemnity Principles
37Sir G. Mellish L.J. stated at pp. 1059-60 of Parker v.
Lewis:
... I think that the law with reference to express contracts of
indemnity is, that if a person has agreed to indemnify another against a
particular claim or a particular demand, and an action is brought on that
demand, he may then give notice to the person who has agreed to indemnify him
to come in and defend the action, and if he does not come in, and refuses to
come in, he may then compromise at once on the best terms he can, and then
bring an action on the contract of indemnity. On the other hand, if he does not
choose to trust the other person with the defence to the action, he may, if he
pleases, go on and defend it, and then, if the verdict is obtained against him,
and judgment signed upon it, I agree that at law that judgment, in the case of
express contract of indemnity is conclusive. But I apprehend it is conclusive
on account of what the law considers the true meaning of such a contract of
indemnity to be. It is obvious that when a person has entered into a bond, or
bought land, or altered his position in any way on the faith of a contract of
indemnity, and an action is brought against him for the matter against which he
was indemnified, and a verdict of a jury obtained against him, it would be very
hard, indeed, if, when he came to claim the indemnity, the person against whom
he claimed it could fight the question over again, and run the chance of
whether a second jury would take a different view and give an opposite verdict
to the first. Therefore, by reason of that contract of indemnity, the judgment
is conclusive; but in my opinion it is conclusive because that is the meaning
of the contract between the parties, for it unquestionably is not the general
rule of law that a judgment obtained by A. against B. is conclusive in an
action by B. against C. On the contrary, the rule of law is otherwise. It is
quite plain that the ordinary rule of law is, that a judgment in rem is
conclusive, but a judgment inter partes is conclusive only between the parties
and the persons claiming under them.
38Duffield v. Scott and Others (1789), 3 T.R. 376 was discussed at
pp. 1058-9 of Parker v. Lewis. In Duffield Buller J. at p. 630 stated:
... As to that, I believe there are cases which say that, to
entitle a person to recover on a bond of indemnity, he must shew that he was
compelled by law to pay the debt. They go a great way to prove that the
plaintiff in this case is entitled to recover the costs and expenses. The
purpose of giving notice is not in order to give a ground of action; but if a
demand be made which the person indemnifying is bound to pay, and notice be
given to him, and he refuse to defend the action, in consequence of which the
person to be indemnified is obliged to pay the demand, that is equivalent to a
judgment, and estops the other party from saying that the defendant in the
first action was not bound to pay the money.
In London Guarantee and Accident Co. v. Davidson et al., [1926] 1
W.W.R. 148 (B.C.S.C.) Gregory J. commented on Parker v. Lewis at p. 153 in
saying:
In Parker v. Lewis (1873) L.R. 8 Ch. 1035, at p. 1044, 43 L.J. Ch.
281, at p. 291, it was held that where A. contracts to indemnify B. against a
claim, and a judgment is obtained against B. in an action bona fide defended by
him and he pays the demand, A. cannot be heard to contend that the judgment was
erroneous. (emphasis added)
39In my view the emphasized portion in London is quite important. In
the subject case the Banks did not allege fraud against or pursue Lloyd's on
the point of what had been shown to them by the Names and concluded by the
Banks to be clear and obvious fraud. That would have been, if proven, a defence
to payment out on the otherwise regular call by Lloyd's for the Banks to make
good on their LC. The Banks chose not to do so for whatever reason. In effect
they allowed the English actions to go against them (i.e. the Banks) in essence
by default since their pleadings, after Saville J. struck the fraud defence,
did not contain any defence at law. As well it would appear that the Banks did
not ask the Names to defend the English Actions in the sense of taking over the
Banks' defence. Rather it appears that the Banks requested the Names to bring
English injunctive proceedings or to become party defendants or third parties
on some consent arrangement. If the indemnified person defends the action
against him without giving the opportunity to the indemnifier to defend that
action, then the indemnifier is entitled to challenge that judgment according
to Parker v. Lewis. If the indemnified person does give notice to the
indemnifier requesting that the indemnifier defend the indemnified person in
the action and the indemnifier does not do so, then the indemnified person is
entitled to defend (or compromise) the claim against him in a bona fide way and
then bring an action in indemnity against the indemnifier for the amounts so
paid out (plus costs). On the information before me the Banks did not request
the Names to take over the defence, although it appears that they did ask the
Names to do everything but that in and relating to the English Actions.
Additionally I do not think it reasonable to conclude on the material before me
as well that the Banks appropriately defended the English Actions; rather than
defending on the basis of what the Banks had satisfied themselves of - namely
the material they relied on demonstrating to the Banks that there was a clear
and obvious fraud by Lloyd's against the Names which would have been a defence,
if proven, to the English Actions, the Banks curiously did not allege fraud
against Lloyds. Neither did the Banks take up the invitation of Saville J. to
amend their pleadings to that effect. As well it is difficult to see how the
Banks are entitled to reimbursement and indemnification on this principle when
they consciously allowed that defence to go down the drain in the English
Actions. On that basis I would not see that the Banks have made out their case
for summary judgment on the principles of indemnification.
Estoppel by Conduct
40In the alternative the Banks assert that a non-litigant
party (the Names) who had knowledge of prior proceedings (such as the English
Actions, as it is not predicated upon the proceedings being domestic), a clear
interest in those proceedings and the ability to intervene as a participant to
protect its interest cannot stand by (and watch those proceedings without
intervening) with impunity. Rather if it stands by, then it will be estopped by
its conduct in doing so from proceeding to a trial in a subsequent proceeding
with one of the participants in the prior proceedings on the same issue or
issues which have already been determined in the prior proceedings. The Banks
submitted that the failure of the Names to participate in the English Actions
by either seeking an English injunction or seeking leave to plead their own
case of fraud or supporting any motion by the Banks to have them added as a
party estops the Names from denying that the Banks were required to pay and
Lloyd's entitled to be paid on the LC.
41In Nana Lord Denning at pp. 101-3 stated:
The general rule of law undoubtedly is that no person is to be
adversely affected by a judgment in an action to which he was not a party,
because of the injustice of deciding an issue against him in his absence. But
this general rule admits of two exceptions: one is that a person who is in
privity with the parties, a "privy" as he is called, is bound equally
with the parties, in which case he is estopped by res judicata: the other is
that a person may have so acted as to preclude himself from challenging the
judgment, in which case he is estopped by his conduct. Their Lordships propose
in this case to consider first estoppel by conduct.
English law recognizes that the conduct of a person may be such
that he is estopped from litigating the issue all over again. This conduct
sometimes consists of active participation in the previous proceedings, as, for
instance, when a tenant is sued for trespassing on his neighbour's land and he
defends it on the strength of the landlord's title and does so by the direction
and authority of the landlord. If the tenant loses the action, the landlord
would not be allowed to litigate the title all over again by bringing an action
in his own name. On other occasions the conduct consists of taking an actual
benefit from the judgment in the previous proceedings, such as happened in In re
Lart, Wilkinson v. Blades [[1896] 2 Ch. 788]. Those instances do not however
cover this case, which is not one of active participation in the previous
proceedings or actual benefit from them, but of standing by and watching them
fought out or at most giving evidence in support of one side or the other. In
order to determine this question the West African Court of Appeal quoted from a
principle stated by Lord Penzance in Wytcherley v. Andrews [[1871] L.R. 2 P.
& M. 327, 328]. The full passage is in these words: "There is a
practice in this court, by which any person having an interest may make himself
a party to the suit by intervening; and it was because of the existence of that
practice that the judges of the Prerogative Court held, that if a person,
knowing what was passing, was content to stand by and see his battle fought by
somebody else in the same interest, he should be bound by the result, and not
be allowed to re-open the case. That principle is founded on justice and common
sense, and is acted upon in courts of equity, where, if the persons interested
are too numerous to be all made parties to the suit, one or two of the class
are allowed to represent them; and if it appears to the court that everything
has been done bona fide in the interests of the parties seeking to disturb the
arrangement, it will not allow the matter to be re-opened."
Mr. Phineas Quass argued before their Lordships that the principle
stated by Lord Penzance was confined to wills and representative actions and
has never been extended further. No decision, however, was cited to their
Lordships which confines the principle to wills and representative actions.
Their attention was indeed drawn to one case where a like principle was applied
to mortgages in somewhat special circumstances: see Farquharson v. Seton
[(1828) 5 Russ. 45]. But assuming, without deciding, that the English decisions
have hitherto been so confined, their Lordships would point out that there is
nothing in the principle itself which compels it to be limited to wills and
representative actions. The principle, as Lord Penzance said, is founded on
justice and common sense. (emphasis added)
However since the Banks did not fully contest the fraud which the
Banks had in their view reasonably concluded was clear and obvious by Lloyd's
against the Names, can it be said that the Banks did everything bona fide in
the interests of the Names who are now seeking to dispute the result of the
English Actions? I think not (but this as will be seen, is not the end of this
issue). This is not a case similar to ATL, supra,; in that case the Bank of
Montreal ("B of M") actively participated in the Korean court with a
defence that the Korean banks who had acquired the drafts issued pursuant to
the letters of credit were not holders in due course but rather were tainted
with knowledge of the beneficiary's fraud (acknowledged by the B of M and the
customer) prior to the Korean banks acquiring the drafts for value.
Notwithstanding the act of participation by the customer in the Korean action
as a witness for the B of M there was no evidence to refute the Korean banks'
evidence that they were holders of value without notice. The B of M defended
the Korean proceedings essentially at its customer's insistence. In ATL it
would appear to me that the B of M did all that it could in protecting its
customer's interests, especially when it is realized that the customer had
"advance" knowledge of the beneficiary's fraud quite some time before
notifying the B of M, apparently delaying advice to the bank for business
reasons of the customer. In ATL at p. 315 I concluded:
It seems to me that ATL having knowledge of the Korean
proceedings, a clear interest therein, the ability to intervene as a
participant and be heard to protect its interests, and in fact, participating
through having witnesses testify and be "part of the litigation
teams" would be estopped by its conduct from proceeding to trial in the
Ontario action when the same issues have been determined in the Korean
judgment. Alternatively, I am of the view that it would be an abuse of process
for ATL to re-litigate the same issues.
42I do not see this as an abuse of power question in the sense of it
being a coordinant of estoppel by conduct as discussed by Stuart-Smith L.J. in
House of Spring Garden Ltd. and others v. Waite, [1990] 2 All E.R. 990 (C.A.)
at p. 1000:
Abuse of Process
Sir Peter Pain did not find it necessary to deal with the question
of abuse of process. In my opinion the same result can equally well be reached
by this route, which is untrammelled by the technicalities of estoppel. The
categories of abuse of process are not closed: see Hunter v. Chief Constable of
West Midlands, [1981] 3 All E.R. 727 at 729, [1982] A.C. 529 at 536, where Lord
Diplock said:
My Lords, this is a case
about abuse of the process of the High Court. It concerns the inherent power
which any court of justice must possess to prevent misuses of its procedure in
a way which, although not inconsistent with the literal application of its
procedural rules, would nevertheless be manifestly unfair to a party to
litigation before it, or would otherwise bring the administration of justice
into disrepute among right-thinking people. The circumstances in which abuse of
process can arise are very varied; those which give rise to the instant appeal
must surely be unique. It would, in my view, be most unwise if this House were
to use this occasion to say anything that might be taken as limiting to fixed
categories the kinds of circumstances in which the court has a duty (I disavow
the word discretion) to exercise this salutary power'.
This was a case where the court would not permit a collateral
attack on the decision of a court of competent jurisdiction. The principle has
recently been applied in this court to analogous cases, where issues of fact
have been litigated exhaustively in sample cases; it is an abuse of the process
for a litigant, who was not one of the sample cases, to relitigate again all
the issues of fact on the same, or substantially the same evidence: see Ashmore
v. British Coal Corp. [1990] 2 All E.R. 981, [1990] 2 W.L.R. 1437.
The question is whether it would be in the interests of justice
and public policy to allow the issue of fraud to be litigated again in his
court, it having been tried and determined by Egan J. in Ireland. In my
judgment it would not; indeed, I think it would be a travesty of justice. Not
only would the plaintiffs be required to relitigate matters which have twice
been extensively investigated and decided in their favour in the natural forum,
but it would run the risk of inconsistent verdicts being reached, not only as
between the English and Irish courts, but as between the defendants themselves.
The Waites have not appealed Sir Peter Pain's judgment, and they were quite
right not to do so. The plaintiffs will no doubt proceed to execute their
judgment against them. What could be a greater source of injustice, if in years
to come, when the issue is finally decided, a different decision is reached in
Mr. Macleod's case? Public policy requires that there should be an end of
litigation and that a litigant should not be vexed more than once in the same
case. (emphasis added)
However in the subject case here, there has been no exhaustive
litigation in the English Actions; it was in essence a walk over once the Banks
failed to plead fraud notwithstanding their prior determination which they
reasonably reached of a clear and obvious case of fraud by Lloyd's against the
Names. Further the litigant Lloyd's is not involved as a party in the
reimbursement litigation between the Banks and the Names.
43With that said however, is it estoppel by conduct of the
Names since they did not avail themselves of the opportunity of joining in the
English Actions to pursue their claim of fraud against Lloyd's? Clearly they
are aware of the English Actions; the Banks had been continually begging them
to come in as parties (or take English injunctive proceedings). The Names
certainly had an interest in the outcome of the English Actions: if the Banks
won, then the Names would not be called upon to reimburse and indemnify the
Banks; if Lloyd's won, then the Banks would demand reimbursement from the
Names. No reason was given for the Names' reluctance to participate; at least
they offered a token reason for not bringing English injunctive proceedings in
the perhaps double-pronged submission that (i) they did not think an English
Court would reach a conclusion that the balance of convenience favoured the
Names if by some domino effect it meant a downfall of the long standing
significant institution of Lloyd's and (ii) apparently there had not been an
English injunction granted on a fraud exception in a letter of credit case
until a subsequently decided one in 1995. Of course in England, the strength of
the moving party's case is downgraded as a test in light of their lack of
cross-examination of affidavits, a factor perhaps overlooked in those Canadian
cases which advocate the American Cyanamid test adopted in England. Certainly
the Names stood by here and watched the English Actions proceedings. They had
English counsel doing watching briefs. But notwithstanding that they had been
put on notice that the Banks did not intend to amend their pleadings to allege
fraud, they chose to sit on the sidelines and watch - cautioning the Banks that
the Banks would lose their reimbursement rights if they continued to insist
that the Names participate as active players instead of the Banks.
44Reluctantly and narrowly I must conclude that the Names are
estopped by their conduct. While the Banks can be justly criticized for not
appropriately defending the English Actions, the Names were well aware of the
position of the Banks, yet the Names did nothing to preserve the fraud defence
despite the many entreaties by the Banks that the Names should take
responsibility for their own fight on this point. I think that Stuart-Smith
L.J.'s views at pp. 999-1000 of Spring Gardens after reviewing the estoppel by
conduct discussion in Nana as instructive (and the fact that the three defendants
were joint tort feasors does not appear to be determative in light of the
concentration on the ability of the third defendant to join in the Irish
litigation if he had wished to do so):
How are these principles to be applied in this case? All three
defendants were joint tortfeasors, having acted in breach of the duty of
confidence in relation to the confidential information imparted to them and in
breach of the plaintiffs' copyright in the cutting patterns for the vest. The
judgment against them was joint and several. If the Waites's action to set
aside Costello J.'s judgment had succeeded, that judgment would have been set
aside in toto, not just against the Waites; it obviously could not stand. Even
if (which I do not accept) the judgment against Mr. Macleod did not
automatically fall in the event of the Waites succeeding, it is plain that in
the English proceedings the plea of estoppel or abuse of process would have
prevented the plaintiffs pursuing the claim on Costello J.'s judgment against Mr.
Macleod.
Mr. Macleod was well aware of those proceedings. He could have
applied to be joined in them, and no one could have opposed his application. He
chose not to do so and he has vouchsafed no explanation as to why he did not.
Counsel for Mr. Macleod says he was not obliged to do so; he was not obliged to
go to a foreign jurisdiction; he could wait until he was sued here. He speaks
as if Mr. Macleod was required to go half way round the world to some primitive
system of justice. That is not so. He had to go to Dublin whose courts, as the
judge said, are perfectly competent to deal with this matter. Moreover, it was
a process that was good enough for the Waites. Instead, he was content to sit
back and leave others to fight his battle, at no expense to himself. In my
judgment, that is sufficient to make him privy to the estoppel; it is just to
hold that he is bound by the decision of Egan J.
But there is a further point on which counsel for the plaintiffs
relies, and it is the pleading in Mr. Macleod's defence, which I have already
quoted, referring to the Waites's proceedings to set aside the judgment.
Counsel submits that this is a plea of estoppel by Mr. Macleod, and that since
estoppels are mutual, it can be relied on against him. Counsel cited the case
of Re Defries, Norton v. Levy (1883) 48 L.T. 703 at 704, where Pollock B. said:
But the defendants cannot
be said to have waived the estoppel by not pleading this judgment, for it was
not in existence when the pleadings closed. I think it will be found that there
is an old decision that it is sufficient to plead pendency of another action in
order to enable the party pleading to put the judgment in such action in
evidence by way of estoppel.'
In my judgment, the plea in the defence was a plea of estoppel;
and as I have already said, had the Waites succeeded it was a plea that would
have availed Mr. Macleod. It is plain that he was asserting that although he
was not a party to those proceedings, he was privy to them. He was right.
Stuart-Smith L.J. did not confine the principles of Nana to a
representative or sample action. Neither did Lord Denning in Nana at p. 102
where he stated:
... No decision, however was cited to their Lordships which
confines the principles to wills and representative actions ... But assuming,
without deciding, that the English decisions have hitherto been so confined,
their Lordships would point out that there is nothing in the principle itself
which compels it to be limited to wills and representative actions. The principle,
as Lord Penzance said, is found on justice and common sense.
45The Names appear to have played a waiting game with the Banks to
see which would blink first. It appears that neither did. However the Names
could have joined into the English proceedings and advanced their cause by
demonstrating the fraud they alleged Lloyd's perpetrated on them. Rather it
seems that the Names resisted being joined with the English actions. It was in
essence their money which was at stake: if Lloyd's wins, the losing Banks stand
on the shoulder of the Names; if Lloyd's loses, the Names do not have to worry
about reimbursing the Banks. The Banks are in many respects middlemen; the
Banks do not gain anything extra if they win nor in theory do they lose
anything if the lose if they are able to collect it back from the Names in
turn. It would also appear to me that the Banks had only second hand
information or knowledge of the alleged fraud; the Names would be in a much
better position to fight the fraud issue with direct or at least closer at hand
information, knowledge and material. If the English actions had gone to trial,
it may be difficult to think of any Bank employee or agent who would have been
a witness of any materiality. To the extent that the Bank found it necessary to
provide any of its own witnesses or evidence, I would have thought the evidence
would have been so non-controversial that such would have been readily admitted
by Lloyd's.
46Thus on the basis of estoppel by conduct, I am of the view
that the Banks have narrowly made out their case for summary judgment as
claimed.
Res Judicata
47The Banks submitted that the Names had a privity of
interest with the Banks on the issue raised in the English Actions of whether
Lloyd's was entitled to payment on the LC in face of the clear and obvious
fraud evidence delivered by the Names to the Banks. In this regard see the
views of Lord Denning in Nana at p. 101 as cited above. See also my views in
ATL at pp. 312-4. However it should be noted that in the ATL situation, the
motion before me was by the B of M to discharge the interlocutory injunction
that restrained it from paying under its letter of credit obligations; the
action in which that was granted did not involve the B of M's reimbursement
rights against its customer (which constituted a separate autonomous contract)
as discussed at p. 312.
48As I said at pp. 313-4 of ATL:
... Someone who is privy in interest to a party in an action and
has notice of that action is equally bound by the final judgment in those
proceedings. See Nana, at pp. 101-102; Oak v. Frobisher Ltd. (1959), 27 W.W.R.
594 (Sask.Q.B.), at p. 603.
What makes one privy? As Lord Reid said in Carl-Zeiss-Stiftung v.
Rayner & Keeler Ltd. (no. 2), [1967] 1 A.C. 853 (H.L.), at p. 890, the
requisite privy is said to be privity of either blood, title or interest and
the relevant one here is privity of interest (which is difficult to detect from
the authorities what constitutes this, especially what is sufficient
connection) ...
...
In Gleeson v. J. Wippell & Co. Ltd., [1977] 3 All E.R. 54
(Ch.D.), at p. 60 Megarry V.-C. stated that there must be a sufficient degree
of identification between the two persons (the party to a proceeding and a
non-party) to make it just to hold that the decision to which one was party
should be binding against the other. See also Sopinka, Lederman and Bryant, The
Law of Evidence in Canada (Toronto: Butterworths, 1992), at pp. 1007-1009;
Spencer, Bowen and Turner, The Doctrine of Res Judicata, 2nd ed. (London:
Butterworths, 1969), at pp. 209-211.
It seems to me that ATL is clearly and sufficiently identified
with B of M in the Korean litigation. Neither ATL nor B of M had any relevant
evidence to support ATL's assertion that the Korean banks were not holders in
due course of the drafts pursuant to the LCs. B of M was compelled to defend
the Korean proceedings, essentially at ATL's insistence. ATL was, as a
consequence of its reimbursement obligations to B of M, clearly interested in
the outcome of the Korean litigation. In a futile attempt to assist B of M, ATL
had its two representatives attend and testify in Korea. If B of M had won in
Korea, it would have been to the advantage of ATL as it would have eliminated
the reimbursement obligation. For B of M to have won in Korea, the Korean court
would have had to be convinced that the Korean banks were not holders in due
course. Such was not proven; as discussed there was only evidence to prove that
the Korean banks were holders in due course without notice of Han's fraud when
negotiating the drafts with B of M. It would seem just and common sense to
apply the principle of res judicata against ATL in the Ontario action because
of its close connection, identification and active participation with B of M in
the Korean proceedings.
49For privity of interest to exist there must be a sufficient degree
of connection or identification between the two parties for it to be just and
common sense to hold that a court decision involving the party litigant that it
should be binding in a subsequent proceeding upon the non-litigant party in the
original proceeding, as discussed above, where that non-litigant party has
sufficient interest in those original proceedings to intervene but instead
chooses to stand by and have the battle in which he has a practical and legal
concern fought by someone else, it is appropriate to have the non-litigant
abide by that previous decision: see ATL at pp. 312-4; Spring Garden at pp.
998-1000. As well, of course, it is the Names' interest at the very base of
this question of the fraud defence; the interest of the Banks in this regard is
in essence derivative from that of the Names.
50It appears that the Names were content to let the Banks
stumble and fall in the English Actions and in that regard merely reminded the Banks
that they risked their reimbursement action against the Names if they did not
plead fraud against Lloyd's. In that, it appears that the philosophy of the
Names was that a stumble by the Banks was as good as a win by the Banks in the
English Actions. It mattered not to the Names whether they achieved legal (and
economic success by either route) this should be contrasted to what might well
be characterized as the more regular and appropriate view that the Names and
the Banks were allies in the question of attempting to prove fraud by Lloyd's -
a win by the Banks would be a win for the Names as they would not have to face
a reimbursement claim by the Banks now. In ATL, the B of M and its customers
were allies in the Korean litigation. Of course it may not have been timely or
opportune for the Names to have fought a fraud battle with Lloyd's in 1993;
they may have wished to have more time to prepare a "better case", or
to have husbanded their scarce resources (although it would not appear that the
Banks would have been prevented from interim billing the Names and collecting
as to the legal costs of the English Actions) or to have seen how other cases
came out or to have engaged in or prepared for resolution discussions. That of
course is speculation. However to the extent that a win was a win for both the
Banks and for the Names, they shared an identical interest in substance and
therefore the Names had a privity of interest with the Banks in the English
Actions.
51Res judicata prevents parties and their privies from
raising matters which might and ought to have been brought forward in the
earlier proceedings, but were not: see Hennig v. Northern Heights (Sault) Ltd.
et al. (1980), 30 O.R. (2d) 346 (C.A.), leave to appeal to S.C.C. refused
December 1, 1990. In Hennig at pp. 354-5 the court stated:
Mr. Mills next submitted that, if it should be considered that all
of the requisite elements for the application of res judicata exist with
respect to the counterclaim, the doctrine should not apply because of
"special circumstances". He bases this submission on the much-quoted
statement of Wigram V.-C. in Henderson v. Henderson (1843), 3 Hare 100 at p.
115, 67 E.R. 313:
... where a given matter becomes the subject of litigation in, and
of adjudication by, a Court of competent jurisdiction, the Court requires the
Parties to that litigation to bring forward their whole case, and will not
(except under special circumstances) permit the same parties to open the same
subject of litigation in respect of matter which might have been brought
forward as part of the subject in contest, but which was not brought forward,
only because they have, from negligence, inadvertence, or even accident omitted
part of their case. The plea of res judicata applies except in special cases, not
only to points upon which the Court was actually required by the parties to
form an opinion and pronounce a judgment, but to every point which properly
belonged to the subject of litigation, and which the parties, exercising
reasonable diligence, might have brought forward at the time.
(Emphasis added.)
In so far as this passage is relied upon as authority for not
applying res judicata in "special circumstances: or "special
cases", I think that it makes it reasonably clear that the exception is
potentially applicable only with regard to the extended application of res
judicata. i.e., to matters or points which might and should have been brought
forward in the earlier proceeding, but which were not. I can quite appreciate
the reason for some flexibility were not. I can appreciate the reason for some
flexibility with respect to the "might have" kind of issue, but apart
from the implicit reasoning in Braithwaite v. Haugh (1978), 19 O.R. (2d) 288,
84 D.L.R. (3d) 590, which I shall discuss, I am unaware of any authority
countenancing the exception where what is involved in the second proceeding is
the identical claim as that in the first, advanced on the basis of the same
evidence and legal theory. It was with respect to a situation such as this that
Lord Denning M.R. in Fidelitas Shipping Co., Ltd. v. V/O Exportchleb, [1965] 2
All E.R. 4 at p. 8, said that there is a "strict rule of law that he
cannot bring another action against the same party for the same cause: Transit
in rem judicatam ..." (emphasis added). (In Lockyer v. Ferryman et al.
(1877), 2 App. Cas. 519 at p. 528, Lord Selborne put the matter this way:
"When there is res judicata, the original cause of action is gone, and can
only be restored by getting rid of the res judicata.") Lord Denning then
went on to say that, with respect to issue estoppel and estoppel relating to
points within an issue, respectively, res judicata is a "general
rule" and "not an inflexible rule", which can be departed from
in "special circumstances". Cross on Evidence, 5th ed. (1979), at p.
333, questions Lord Denning's suggestion that the extended form of res judicata
may apply to issue estoppel.
52In regard to my concerns about the Banks allowing the English
Actions to go against them in essence "by default" when they did not
plead fraud, I am mindful of what Viscount Redcliffe said in Kok Hoong v. Leong
Cheong Kweng Mines Ltd., [1964] 1 All E.R. 300 (P.C.) at pp. 305-6 in
discussing what Wigram V.-C said in Henderson v. Henderson,. he said at p. 306:
... In their Lordships' opinion the New Brunswick Ry. Co. case can
be taken as containing an authoritative reinterpretation of the principle of
Howlett v. Tarte, 142 E.R. 673, in simpler and less specialised terms. This
reinterpretation amounts to saying that default judgments, though capable of
giving rise to estoppels, must always be scrutinised with extreme particularity
for the purpose of ascertaining the bare essence of what they must necessarily
have decided and, to use the words of Lord Maugham, L.C. , they can estop only
for what must "necessarily, and with complete precision" have thereby
been determined.
53But in the subject case, Lloyd's was successful in the English
Actions as the Banks did not and would not plead fraud and so as discussed the
English Action in essence went by default as the defence as pleaded was
determined by Saville J. not to be a defence. The Names were well aware of
this.
54As a foundation of res judicata is the avoidance of
multiple litigation, I do not see that the doctrine requires that those privy
in interest remain on the same side.
55As to the question of special cases or circumstances, the
only aspect of this case which might be considered in that regard would be that
the Banks did not plead fraud against Lloyd's in the English Actions. However
it seems to me that the requirement of acting with reasonable diligence applies
not only to the litigating parties (here the Banks in the English Actions) but
also their privies (the non-litigating Names) as it was open for them to step
into the English Actions and fill the "gap" created by the Banks not
pleading fraud by taking over the defence of the English Actions in pleading
the fraud of Lloyd's against the Names as a defence. See above in Estoppel by
Conduct the discussion as to the Names being fully conversant with the English
Actions and the Banks' position. The Banks are bound by the judgment in the
English Actions. As the Names are privy in interest to the Banks in that
litigation, the Names cannot in law assert that the result might have been
different if the Banks had pleaded fraud against Lloyd's and succeeded in the
end result. It would not seem to me that the Names' defence to this
reimbursement action in that regard raises a genuine issue to be tried in the
reimbursement actions. In effect, notwithstanding Wren's views at Questions
263-4 supra, the Names are bound by the judgments in he English Actions by
virtue of the doctrine of res judicata.
End Result
56In the end result, I am of the view that the Banks have been
successful but only narrowly on the basis of estoppel by conduct and on the
basis of res judicata in their summary judgment motion in the reimbursement
actions to have eliminated the defence of the Names as to the failure by the
Banks to plead fraud in the English Actions being a bar to the Banks succeeding
in the reimbursement action. Given the nature of this success by the Banks (and
its lack of success on the other grounds), I would think it appropriate for
counsel to book an appointment before me to argue costs (including quantum)
unless they are otherwise able to resolve this question between themselves
before the end of this month.
FARLEY J.
* * * * *
APPENDIX A
Herbert Smith & Co.
Exchange House
Primrose
Street
LONDON EC2A
2HS
July 12, 1993
Dear Sirs
THE SOCIETY OF LLOYD'S v. ROBERT LOUIS ROBINSON &
OTHERS
We acknowledge receipt of your letter of July 9,
1993. We have no instructions to accept service on behalf of the Canadian Names
and can not realistically expect those instructions by July 20. There are some
200 Canadian Names in five provinces several thousand miles apart. As lay
people, such Canadian Name would expect to know the nature of the proceedings
and its personal effect. Furthermore, we are advised that it is in the holiday
period in Canada and that many people are absent until early September.
You should also be aware that the Indemnity Contracts
between the Canadian Names and the Canadian Banks contain exclusive
jurisdiction clauses making the respective provinces of Canada the place where
the matter must be heard. Also, many of these Indemnity Contracts, if not all,
have choice of law clauses, making the law of the respective province the
appropriate law.
Additionally, there are guarantors to the Indemnity Contracts
who are not Names at Lloyd's. Their rights can not be compromised by altering
the situs of the litigation, without their consent. To obtain their consent
would require a full notice to these guarantors explaining the situation and
advising them to obtain independent legal advice before responding.
Mr. Justice Saville has on page 4 of his recent
written Decision stated that it is up to the Bank to make up its mind. If the
Bank believes that it has sufficient evidence of fraud, then it must plead the
fraud in order to avoid payment to Lloyd's. In paragraph 7 of its Defence the
Bank indicated that it had sufficient evidence of fraud. It listed, as a
schedule, voluminous documentary proof of such fraud. You should now plead
fraud on behalf of the Bank.
If the Bank determines not to plead fraud, it will
have done so intentionally and, as Saville J. states, if it did so wrongly it
will not be reimbursed by its customer. Since the Bank has made no independent
investigation of the evidence of fraud provided to it by its customers over the
past 22 months and in the light of the voluminous evidence that it has pointing
to fraud on the part of Lloyd's, the Bank would be wrong in concluding that it
does not have sufficient evidence to plead fraud.
Yours faithfully,
MICHAEL FREEMAN & CO.
* * * * *
July 13, 1993
VIA FACSIMILE
Mr. Alan J. Lenczner
Lenczner,
Slaght, Royce,
Smith, Griffin
Barristers and
Solicitors
130 Adelaide
Street West
Suite 2300
Toronto,
Ontario M5H 3P5
Dear Mr. Lenczner:
Re: The Society of Lloyds
I have reviewed your letter of July 9 and I have the
following comments.
In your letter, you state that the Banks are obliged
to plead your clients' allegations of fraud against Lloyd's as a consequence of
the decision rendered by Mr. Justice Saville on July 5 in the English letter of
credit actions. You also state that, unless the Banks make that pleading in
those English actions, the Banks will lose their rights of reimbursement
against your clients. For the reasons set out below, the Banks are unable to
agree.
The Banks are not the potential victims of Lloyds'
alleged fraud and they have never made any allegations of fraud against
Lloyd's. All of the allegations of fraud are made exclusively by the Canadian
Names who, despite repeated requests from the Banks, have failed to step
forward to plead and prove their own allegations of fraud in the English
letters of credit actions. The Banks are simply not in a position to plead and
prove your clients' case for them, particularly where your clients are
unwilling or unable to do so themselves. In all the circumstances, the Banks
cannot agree that they are under any duty to become fraud investigators on your
clients' behalf or to prosecute and prove the Names' allegations of fraud in a
massive and complex trial in England.
Your letter also states that "the Bank has not
sought to third party its customer" in the English letter of credit
actions and that "the Bank had an opinion that it could not" do so.
These statements are misleading for the following reasons:
1.
Third
Party Claims and the Banks' Legal Advice - First, the Banks have been advised
by their English lawyers that leave to issue third party claims against your
clients could proceed in England if the Canadian Names will agree (or consent)
to attorn to English jurisdiction on the Bank's reimbursement claims. If that
consent is given, the Canadian Names will be entitled (with leave of the
Court), effectively to plead fraud in defence of the main actions brought by
Lloyd's against the Banks for payment on the letters of credit. In that manner,
the Canadian Names could deliver the pleading (alleging fraud against Lloyd's)
that the Banks are unable to deliver.
2.
Third
Party Claims and the Names' Consent - I have previously asked for your consent
to such third party proceedings being brought in England and you have chosen
not to respond to my request. Your clients' inaction confirms that they have no
real desire to plead and prove their allegations of fraud in the English letter
of credit actions. It is hardly reasonable for you to rely on the fact that no
third party proceedings have been brought when you have failed to provide the
consent required for the Banks to pursue those proceedings effectively. I
enclose a copy of a letter from Michael Freeman & Co. dated July 12 which I
assume was sent on your instructions. This letter makes it clear that the
Canadian Names have no intention of either providing the necessary consent to
the third party proceedings or of appearing before Mr. Justice Saville to
obtain an adjournment so that the necessary consents may be sought.
3.
The
Banks' Motion to consolidate - Your letter ignores the fact that the Banks have
served a motion in England to consolidate Lloyd's letter of credit actions with
Lloyd's separate actions brought against the Canadian Names or, alternatively,
to stay the letter of credit actions. (I note that your clients' pleading of
fraud is due in Lloyd's actions against the Names on July 20, as indicated in
your letter). I asked weeks ago for you to confirm in writing that all Canadian
Names who allege fraud against Lloyd's will agree to be bound by the outcome of
a trial in such a consolidated action. I also asked you to obtain instructions
from your clients to bring their own motion to consolidate the same actions.
You have not responded to either request, demonstrating again that your clients
prefer to avoid pleading and proving their fraud allegations against Lloyd's in
the English letter of credit actions.
4.
Other
Opportunities for the Names to Participate in England - Your letter also
ignores the many suggestions made in my letter of June 10 on the options
available to the Canadian Names to protect their interests in the English
letter of credit actions. Similar correspondence was simultaneously sent in
mass mailings to all of your clients. Your clients had had ample time to
convene a meeting to provide you with instructions on those options. Again,
your clients' inaction demonstrates that they have no real interest in
participating in the English letter of credit actions or in pleading and
proving their allegations of fraud in those proceedings.
In the Ash decision, the Ontario Court of Appeal made it clear
that England, not Canada, is the proper forum for your clients' to plead and
prove their allegations of fraud against Lloyd's in the context of the Banks'
payment obligations on their letters of credit. Your clients failure to
participate in the English letter of credit actions makes it clear that their
true goal is to make "an end run" around the Ash decision by
reopening the fraud issue in Canada when the Banks seek to enforce their
reimbursement rights. Your clients should be estopped or precluded from relying
on such tactics in any future Canadian litigation.
Although it seems apparent that your clients will
make no effort to plead or prove their case of fraud in the letter of credit
actions, the Banks have decided to proceed on July 20 with their motion in
England to consolidate and in the meantime will seek leave to issue the third
party proceedings against the Canadian Names. For either avenue to have any
real prospect of success, the support and consent of your clients are required.
Please indicate your position immediately (as requested in the past).
Alternatively, please instruct your clients' English counsel to appear before
Saville J. on July 20 and to request an adjournment if you require additional
time to seek and obtain instructions from your clients.
Yours very truly,
R. Bruce Smith
* * * * *
July 15, 1993
VIA FACSIMILE
Mr. Alan J. Lenczner
Lenczner,
Slaght, Royce,
Smith, Griffin
Barristers and
Solicitors
130 Adelaide
Street West
Suite 2300
Toronto,
Ontario M5H 3P5
Dear Mr. Lenczner:
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I have received your fax of July 15. Your clients have not filed
any pleading of fraud yet in England. The pleading mentioned in your letter is
in draft only and, unless the Banks motion on July 20 is successful, that
pleading has nothing to do with the letter of credit actions.
Your letter incorrectly states that you have
previously written to the Banks' English solicitors and consented to the Banks'
consolidation motion. As far as I am aware, the only letter sent by you to the
Banks' solicitors in England is your letter to Herbert Smith dated May 18,
1993, a copy of which is attached. Nowhere in this letter do you consent to the
consolidation application. Your letter of today's date is, as far as I am
aware, completely incorrect when it states that you have previously provided as
written consent of that nature. If I am wrong, please fax me your written
consent immediately.
Our English solicitors had been communicating with
your English solicitor, Mr. Freeman, and have been asking for your clients'
active participation and support on July 20 in support of the Banks' motions to
consolidate and for leave to issue third party proceedings. The Banks are
persuaded that your clients must appear on July 20 and ask for an adjournment
to defend the letter of credit actions on the basis of the pleadings of fraud
made in your draft pleading in Lloyd's actions against the Names. Your failure
to do so would likely be construed by Mr. Justice Saville as a lack of
commitment to proving your case of fraud in the letter of credit actions and will
almost certainly result in judgment being granted against the Banks.
I am not persuaded that there are any bona fide
"difficulties" in having the Canadian Names appear before Mr. Justice
Saville on July 20 in active support of the relief sought by the Banks. The
third Party Motion relates to only 23 Canadian Names and there are no
jurisdiction clauses of the nature stated in your letter. As you have your own
English solicitors, there is no reason for the Banks to waive privilege on
their legal advice (even if there was a written opinion to provide you). I
remain of the view that your clients inactivity constitutes a clear attempt to
make an "end run" on the Ash decision. I have provided you with
copies of all the relevant court material which has been filed. If your clients
fail to actively assert their unqualified support for the Banks' position on
July 20, they will become the authors of their own misfortune.
Yours very truly,
End
of Document