Generale Bank Nederland NV (formerly Credit Lyonnais Bank Nederland NV) v Export Credits Guarantee Department
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE STUART-SMITH:,LORD JUSTICE HOBHOUSE,LORD JUSTICE THORPE |
| Judgment Date | 23 July 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J0723-10 |
| Docket Number | QBCMF 95/1705/B |
| Court | Court of Appeal (Civil Division) |
| Date | 23 July 1997 |
[1997] EWCA Civ J0723-10
Lord Justice Stuart-Smith
Lord Justice Hobhouse
Lord Justice Thorpe
QBCMF 95/1705/B
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(MR JUSTICE LONGMORE)
Royal Courts of Justice
Strand
London W2A 2LL
MR ANDREW SMITH QC and MR RICHARD SLADE (instructed by Messrs Linklater & Paines, London EC2V 7JA) appeared on behalf of the Appellant (Plaintiff).
MR JONATHAN HIRST QC, MR GRAHAM DUNNING and MR JOHN SNIDER (instructed by Messrs Clyde & Co, Guildford, Surrey) appeared on behalf of the Respondent (Defendant).
The Claims
The Plaintiff Bank's claims arise from five banker's guarantees issued by the Export Credits Guarantee Department ("ECGD") between 1985 and 1988. Its case is that the guarantees were issued as part of a scheme to defraud the Bank, the parties to the scheme being a Mr Chong and a Mr Pillai, a senior "underwriter" in the Bank Guarantee Division ("BGD") of ECGD, who dealt with the underwriting of the five guarantees. The scheme was that in reliance upon the guarantees the Bank should buy forged bills of exchange from companies owned or used by Mr Chong. Bills bought by the Bank with a face value of some £12 million were dishonoured on presentation. Mr Pillai retired from ECGD on 31 May 1988, and died on 30 November 1988. Mr Chong disappeared towards the end of 1988 or shortly thereafter.
The Bank brought claims against ECGD both in contract, claiming that ECGD's guarantees secured payment of bills, and in tort, claiming that ECGD are vicariously liable for the acts of Mr Pillai in authorising the underwriting of the guarantees, which was his essential role in the scheme. These claims were dismissed by the Judgment of Longmore J dated 29 September 1995., [1996] 1 LI L R 200). The Bank appeals against the Judge's decision to dismiss the claim in tort and also against his decision to dismiss the claim in contract under one of the guarantees, a Comprehensive Banker's Guarantee ("CBG") dated 23 October 1985. The Bank does not appeal in relation to the contractual claims under the other four guarantees (which were Specific Banker's Guarantees or "SBGs").
ECGD
ECGD is a department of the Secretary of State for Trade and Industry. Sections 1 and 12 of the Export Guarantees and Overseas Investment Act 1978 (now replaced by the Export and Investment Guarantees Act 1991) empowered the Secretary of State for the purpose of encouraging trade with other countries to make arrangements through ECGD to give guarantees to persons carrying on business in the UK.
During the period relevant to this action, ECGD operated through two headquarters in London and Cardiff and nine regional offices. The BGD, which was based in the London headquarters, was disbanded on 1 July 1991. On 1 December 1991, ECGD's short term credit business was privatised, the nine regional offices and the Cardiff HQ was sold.
ECGD supported UK exporters by indemnifying them in the event of default on the part of their overseas buyers, the exporters would be paid part (generally 90%) of the purchase price. The standard such policy to the exporters was a Comprehensive Short Term Guarantee ("CST"), although ECGD also issued Comprehensive Extended Terms Guarantees ("CXTs"). The essential difference between CSTs and CXTs was that the latter allowed longer periods for both delivery of and payment for the guaranteed export.
ECGD also promoted exports by issuing guarantees to banks in order to encourage them to provide finance to exporters. They were issued by staff in the BGD, following authorisation by an underwriter such as Mr Pillai. There were two types of banker's guarantees, namely CBGs, which subject to a financial limit guaranteed any number of export transactions, provided they had a credit period of less than two years, and SBGs, which guaranteed finance for specific transactions and had a credit period of between two and five years.
The CBG immediately relevant in this case was a Bills or Notes guarantee. Under such a guarantee, the bank financed the export by purchasing bills or promissory notes accepted or issued by the buyer, or, as some CBGs allowed, by making advances against unaccepted bills.
As for SBGs, ECGD issued a SBG (Purchase-Interest) form of guarantee, whereunder a bank would purchase bills or promissory notes, and a SBG (Advance/Purchase-Interest) guarantee, whereunder a bank might make advances against bills of exchange/promissory notes or purchase them.
The Bank
The Plaintiff Bank's head office is in Rotterdam. At the times relevant to this action, it had UK branches in London and Manchester. The fraud was practised upon the London branch, whose managers at the material times were Mr Herod and Mr Kellner. The Bank was a subsidiary of the French bank, Credit Lyonnais, having changed its name to Credit Lyonnais Bank Nederland BV from NV Slavenburg's Bank in 1983 following the acquisition of its shares by the French bank. Since these proceedings were brought, Singer and Friedlander has acquired part of the business of the UK branches and the Plaintiff has been acquired from Credit Lyonnais by Generale Bank NV and changed its name to Generale Bank Nederland NV.
Mr Chong and his companies
Mr Chong, who moved to England from Singapore in about 1980, was introduced to the Bank in November 1980 and shortly afterwards opened an account with the Bank. He operated through numerous UK and other companies. By the end of 1980 at least one of his companies, Western International (Textiles) Limited, had applied to ECGD for CST cover. Thereafter Mr Chong and his companies dealt with the Bank and with ECGD on an increasing scale until about the end of 1988.
The Banker's Guarantees
In essence, the fraudulent scheme worked as follows: ECGD, acting pursuant to the authorisation of Mr Pillai, would underwrite Banker's Guarantees to support the provision of finance by the Bank to Mr Chong's companies, and Mr Chong would draw upon the Bank's facilities by fraudulently selling to the Bank bills of exchange with forged buyer acceptances in relation to imaginary export contracts.
The five banker's guarantees which led to losses for which the Bank claims are the following:
(a) a CBG (Bills or Notes) (CBG 8) dated 23 October 1985 by which ECGD guaranteed payment to the Bank of "Guaranteed Instruments" purchased from Sycamore Holdings Limited ("Sycamore") and Westred Limited ("Westred"), two of Mr Chong's companies. Seven of the bills of exchange bought from Westred were unpaid, causing loss of £3,725,990.80.
(b) a SBG (Advance/Purchase-Interest) (SBG 1) dated 22 December 1987 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Texasgulf Inc and purchased from Sloane International (UK) Limited ("Sloane"), another of Mr. Chong's companies. Four of the bills purchased from Sloane were unpaid, causing loss of £1,211,173.05.
(c) a SBG (Advance/Purchase-Interest) (SBG 2) dated 8 January 1988 by which ECGD guaranteed payment to the Bank of six bills drawn on Newmont Mining Corporation and purchased from Tempest Diesels Limited ("Tempest"). Five of the bills purchased from Tempest were unpaid, causing loss of £3,392,826.20. Tempest, which was owned by a Mr Allam, not Mr Chong, was introduced to Mr Chong by Mr Pillai and was used as a "fronting" company for the fictitious deal.
(d) a SBG (Purchase-Interest) (SBG 3) dated 8 April 1988 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Cooper Industries Inc ("Cooper") and purchased from Westred. All six bills were unpaid, causing loss of £2,300,106.29.
(e) a SBG (Advance/Purchase-Interest) (SBG 4) dated 8 April 1988 by which ECGD guaranteed payment to the Bank of six bills of exchange drawn on Cooper and purchased from Westred. All six bills were unpaid, causing loss of £1,581,323.30.
CBG 8 and the fraud in relation to it
It is necessary to set out substantial parts of CBG 8:
"THIS GUARANTEE is given on 23 October 1985 by the Secretary of State, acting by the Export Credits Guarantee Department (hereinafter called "the insurer") to Credit Lyonnais Bank Nederland NV of 4 Old Park Lane, London, W1., (hereinafter called "the Bank").
WHEREAS Sycamore Holdings Limited and Westred Limited of 27/29 Albert Embankment, London, SE1, are each holders of a Comprehensive Short Term Guarantee numbered CSTP/629107/1084 issued by the Insurer; and
WHEREAS the Bank has entered into an agreement severally with the said Sycamore Holdings Limited and Westred Limited (hereinafter severally called "the Exporter") dated 22 October 1985 (hereinafter called "the Bank Facility") in pursuance of which the Bank will subject inter alia to the giving of this Guarantee, make advances to the Exporter in respect of certain bills of exchange drawn by the Exporter and will purchase from the Exporter without recourse certain accepted bills of exchange and promissory notes
NOW THEREFORE IT IS HEREBY AGREED as follows:-
1. For the purposes of this Guarantee -
(1) "Guaranteed Instrument" means any sterling bill of exchange drawn by the Exporter and accepted by a buyer and any sterling promissory note issued by a buyer, being a bill or note -
i which has been purchased before its maturity date by the Bank without recourse between 1 October 1985 and 30 September 1986 (both dates inclusive); and
ii which has a maturity date less than 2 years from the date of exportation of the goods to which the bill or note relates; and
iii to which such written...
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