Turkiye IS Bankasi as v Bank of China
| Jurisdiction | England & Wales |
| Judge | HIRST L.J.,SWINTON THOMAS L.J.,MANTELL L.J. |
| Judgment Date | 17 December 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J1105-15 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 December 1997 |
| Docket Number | QBCMF 96/0559/B |
[1997] EWCA Civ J1105-15
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(Mr. Justice Waller)
Royal Courts of Justice
Lord Justice Hirst
Lord Justice Swinton Thomas
Lord Justice Mantell
QBCMF 96/0559/B
MR. A. BUENO Q.C. and MR. J. McLINDEN (instructed by Messrs Cruickshanks) appeared on behalf of the Appellant/Defendant.
MR. E. HAMILTON Q.C. and MR. S. THROWER (instructed by Messrs Barretts) appeared on behalf of the Respondent/Plaintiff.
Introduction
This is an appeal against the judgment of Waller J (as he then was) sitting in the Commercial Court, in which he upheld a claim by the respondent plaintiff Turkiye Is Bankasi AS (TIB) which is a Turkish bank, against the defendant appellant, Bank of China (BOC) to enforce six counter guarantees given to TIB by BOC to back six corresponding performance bonds (PB's) in favour of ETA Construction and Trade Company Inc. (ETA); these PB's were issued to ETA by TIB as correspondent bank at BOC's request on 18 May 1994.
The PB's totalled in aggregate the sum of US$ 1.130m., and were issued in order to secure the obligations of China State Construction Engineering Company (CSC) under three building sub-contracts entered into between CSC and ETA in relation to substantial construction works which ETA as main contractor had contracted with the Libyan Government authorities to perform.
There were three sub-contracts in all, dated in April/May 1984, and the PB's were to be provided by CSC, pursuant to a clause in each of those sub-contracts, as guarantees of the timely completion of the sub-contract works by CSC. The sub-contracts also stipulated that CSC was to furnish advance payment guarantees (APG's) against advance payments (AP's) totalling US$3.4m., which ETA was required to make to CSC under the sub-contracts.
CSC requested BOC to issue the PB's and APG's to BOC, and the latter in its turn requested TIB to provide them against BOC's counter guarantees; TIB issued the 6 performance bonds on 14 June 1984, but not the APG's.
It is of course well settled that PB's stand on the same footing as letters of credit, and a bank which gives a PB must honour it according to its terms, and is in no way concerned with the relations between the supplier and the customer (in this case BSC and ETA respectively), nor with the question whether the former has or has not performed his contractual obligations to the latter. The bank must pay according to its guarantee on demand if so stipulated, without proof or condition. The only exception is where there is a clear fraud of which the bank has notice ( Edward Owen Ltd. v. Barclays Bank [1978] 1 QB 159).
The bonds specifically provided that ETA "will be paid in cash and in full immediately and without any delay to you or to your order, upon your first written request, together with legal interest for the days elapsed between the date of such written request and the date of actual payment, without need to resort to any legal procedure or to issue a protest or to obtain a court sentence or the contractor's consent, and without taking into any consideration any conflict and its consequences and legal effects between (CSC) and your administration."
Under the counter guarantees BOC undertook irrevocably to pay TIB "at first written demand stating that you have been called upon to make payment under your guarantee up to the above-mentioned amount plus legal interest for the days to be elapsed between the date of the beneficiary's demand and the date of our actual payment."
On 4 March 1985 ETA made written demands on TIB under the terms of the PB's, and TIB immediately made a demand on BOC by telex the following day. After considerable correspondence and discussion TIB made payments under the demands on 5 December 1985, and BOC were notified the same day, but declined to honour the counter guarantees, relying on the fraud exception. The sole question in this appeal is whether Waller J was right in concluding on the voluminous evidence that BOC had not made good their entitlement to invoke that exception.
Main Narrative
CSC's main obligation under the sub-contracts was to supply labour, with ETA being responsible for producing workable machinery, all materials, spare parts etc. and water and electricity. CSC's obligation to provide the PB's and the APG's was required to be fulfilled within 30 days of each sub-contract receiving approval. ETA in its turn was obliged within 20 days of receipt of the APG's to remit to CSC the corresponding AP, which was a condition precedent to CSC's obligation to provide its workforce in Libya. ETA was responsible for making monthly payment to CSC within 10 days of ETA's receipt of payment from the Libyan employers, CSC being obliged to submit to ETA's project manager for his approval a monthly statement of executed works, which ETA as main contractor would then submit to the Libyan employer.
It was the evidence of Mr. Kayalioglu (Mr. K) who was manager of the Kadikoy branch of TIB, and who handled the transactions on TIB's behalf, that TIB was unaware of the precise terms of the sub-contracts, and in particular, of the linkage between the provision of the PB's and the provision of the APG's, and that TIB was also unaware that remittance of the AP's was a condition precedent to the obligation of CSC to provide labour. The judge accepted this evidence, and indeed the evidence of Mr. K in general, but this finding is now challenged by the appellant.
The story concerning the APG's is a long and rather complicated saga which loomed large in the appeal. Originally, as already noted, at the same time as BOC requested TIB to issue the PB's, it also requested TIB to issue the APG's, there being of course no obligation whatsoever on TIB to comply with this request. TIB responded on 13 June 1984 saying that it was going to issue the PB's but was still examining the APG's. Three weeks later on 6 July TIB proposed that, in place of the APG's, a loan should be provided by them to ETA, guaranteed by BOC. This alternative proposal was not acceptable to BOC, whereupon TIB reverted to the APG proposal, and put forward their own standard form: this was unacceptable to BOC without an addendum stipulating automatic reduction of the guaranteed amount pari passu with deductions from the AP, which was unacceptable to TIB. This impasse was never resolved and the correspondence on the topic between BOC and TIB came to an end in September 1984.
Shortly thereafter ETA made an alternative arrangement with BCCI, which loaned it US$ 1m. of which some US$750,000 was earmarked for use in Libya and the remaining US$250,000 to settle outstanding liabilities from ETA to TIB. The BCCI loan was guaranteed by TIB.
Meantime the operations in Libya ran into very severe problems, as is apparent from the correspondence in which CSC and ETA each blamed the other. CSC provided a workforce in Libya, but ETA blamed CSC for not starting work punctually, while CSC in their turn blamed ETA for non-provision of funding and of the necessary materials, spare parts etc. Eventually the work camps set up by ETA in which the CSC workforce was housed were closed down by the Libyan authorities.
Following ETA's written demands on TIB under the terms of the PB's on 4 March 1985, CSC sent a telex to TIB on 10 March 1985 stating that the non-performance was the fault of ETA and that the demands were unreasonable. There followed meetings between CSC and ETA representatives in an attempt to thrash out the problems, held in late March 1985, which were minuted in terms that CSC had asked ETA to withdraw its claims under the PB's, but that ETA had refused that requirement but were prepared to wait longer to seek a new solution.
CSC followed up this meeting with a telex to TIB dated 20 April 1985 informing them that ETA had failed to supply CSC with funding, materials and spare parts etc. that the problem concerning the AP's remained, that the facts showed that ETA had completely failed...
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