Discount Records Ltd v Barclays Bank Ltd and another

CHANCERY DIVISION
MEGARRY J
16 JULY 1974
Bank Documentary credit Irrevocable credit Circumstances in which court
may restrain bank from paying on presentation of draft Interlocutory injunction
Need to show sufficiently grave cause Bank instructed by purchasers of
goods to provide irrevocable confirmed credit Allegation by purchasers that
goods supplied not in accordance with order Allegation of fraud Whether
court should restrain bank from paying on presentation of draft.
On 6 April 1974 the plaintiffs ordered certain quantities of goods from a company
in France. On 17 May they instructed the first defendant bank to open an
irrevocable confirmed documentary credit with full cash cover. The beneficiary
stated in the credit was the French company and the amount of the credit was
the equivalent of nearly 4,000 sterling. The goods were stated in the order and
they were to be shipped not later than 30 May. The last date on which a draft
could be presented was 7 June and the maturity date under the credit was 20
July. The credit was made through the second defendant bank who, on the same
day, sent telex instructions to a third bank in France directing the opening of an
irrevocable credit with a fourth bank ('the Discount Bank'), also in France. On 20
May the French company made out an invoice and on 21 May the shippers'
agents received the goods and invoice. In the event the goods were not shipped
by 30 May. The third bank sent the second defendants an 'advice on
presentation' asking them to authorise the Discount Bank to accept a draft due
on 20 July and to authorise the third bank to debit the first defendants at
maturity. On 5 June the first defendants notified the plaintiffs of discrepancies
between the goods in those documents and the plaintiffs' instructions. The first
defendants made enquiries and, following discussions with the French company,
gave assurances which the plaintiffs accepted. On 6 June the second defendants
gave instructions to the third bank to accept bills and on 7 June the first
defendants debited the plaintiffs with 4,000 which was placed in a new account
in the joint names of the first defendants and the plaintiffs. The goods were
eventually shipped on 12 June. According to the plaintiffs, however, the cartons,
when opened, were found to contain only a small quantity of the goods ordered;
otherwise they were empty or contained rubbish and goods not ordered. The
plaintiffs brought an action against the defendants, alleging that the French
company had been guilty of fraud, and sought an interlocutory injunction
restraining them from paying the draft drawn on them by the French company of
from paying out any sums to the French company or to any party pursuant to the
irrevocable letter of credit.
Held The court would only interfere with bankers' irrevocable credits if a
sufficiently grave cause were shown. No such cause had been shown. Even if
granted, an injunction would not prevent the French company from being paid.
Since a bill of exchange had been accepted by the Discount Bank, it might
already have passed into the hands of a holder in due course. Although there
might be cases in which the court would intervene even though an allegation of
fraud had not been substantiated, the plaintiffs' application was, in the
circumstances, misconceived. Their real claim against the first defendants was
for breach of contract and there was no suggestion that the first defendants

would not be good for the money. Accordingly the injunction would be refused
(see p 1075 g to p 1076 a, post).
Sztejn v J Henry Schroder Banking Corpn (1941) 31 NYS 2d 631 distinguished.
[1975] 1 All ER 1071 at 1072
Note
For commercial letters of credit, see 3 Halsbury's Laws (4th Edn) 99104, paras
131137, and for cases on the subject, see 3 Digest (Repl) 282285,846858.
Case referred to in judgment
Sztein v J Henry Schroder Banking Corp (1941) 31 NYS 2d 631.
Motion
By a writ issued on 11 July 1974 the plaintiffs, Discount Records Ltd, brought an
action against the defendants, Barclays Bank Ltd and Barclays Bank International
Ltd, claiming an injunction, the return of 4,000 held by the first and/or second
defendants to the plaintiffs' use and damages for breach of contract. By notice of
motion dated 11 July 1974 the plaintiffs sought an injunction restraining the
defendants until judgment or further order from (i) paying a draft drawn on them
or either of them in the sum of 44,175 French francs being equivalent to or
alternatively 4,000 sterling by Promodisc SA BYG Records and/or (ii) paying out
either to Promodisc SA BYG Records or to Discount Bank or to any party at all any
sums pursuant to the irrevocable credit requested by the plaintiffs to be opened
on their behalf by the first and/or second defendants in favour of Promodisc SA
BYG Records. The facts are set out in the judgement.

Peter Pain QC and Michael Burton for the plaintiffs.

R Neville Thomas for the first and second defendants.
16 July 1974. The following judgment was delivered.
MEGARRY J.
This is a motion for an injunction brought by the plaintiffs, Discount Records Ltd
Counsel moves against the two defendants, Barclays Bank Ltd, the first
defendants, and Barclays Bank International Ltd, the second defendants. As will
appear, the case involves two other banks, who are not parties. The motion
arises out of an order given by the plaintiffs by a letter dated 6 April 1974 to a
French company, Promodisc SA BYG Records: I shall refer to it as 'Promodisc'. The
order was for 8,625 discs (meaning thereby, I understand, gramophone records)
and 825 cassettes, specified by their numbers in accompanying lists. On 17 May
the plaintiffs signed instructions to the first defendants for a documentary credit
with full cash cover, the credit being made through the second defendants. The
beneficiaries stated in the credit were Promodisc, and the amount of the credit
was 44,175 francs. The credit was expressed to be irrevocable, and was stated to
be at the 'urgent rate'. The numbers of discs and cassettes were stated as in the
order, and they were to be shipped not later than 30 May. The document stated:
'This credit to be available for negotiation or payment abroad until 7.6.1974.' I
understand this expression to mean that 7 June 1974 was the last date on which
a draft could be presented by Promodisc for acceptance. The maturity date under
the credit became 20 July 1974. On the day on which the credit was taken out,

17 May, the second defendants sent telex instructions to the third bank which
comes in to the picture, Barclays Bank SA, a French bank, directing the opening
of an irrevocable credit with the fourth bank, the Discount Bank of Paris, and
giving the necessary details as to invoices, and so on.
On 20 May Promodisc made out an invoice for 825 cartridges (and not cassettes)
and 8,625 records, and also a packing list showing 91 cartons and indicating the
contents of each by numbers. On 21 May the shippers received the goods and
invoice in their Paris agent's warehouse. 30 May, the latest date for shipment
stated in the credit, then came and went. Barclays Bank SA sent the second
defendants an 'advice of presentation', asking the second defendants to
authorise the Discount Bank to accept a draft due on 20 July and to authorise
Barclays Bank SA to debit Barclays Bank, London, at maturity. The document
described the goods as 'Records Cartridges'. On 12 June the goods were at last
shipped; there is some
[1975] 1 All ER 1071 at 1073
evidence of delays by Promodisc in releasing the goods. In the meantime, it
appears from the evidence that on 5 June the first defendants had told Mr
Golovner, an official of the plaintiffs, of discrepancies between the goods in the
documents and his instructions. The differences were between records and discs,
which is of no importance, between cartridges and cassettes, which is a matter
of substance, and between there being 91 cartons instead of 94. The evidence is
that Mr Golovner accepted all of these discrepancies except that between
cartridges and cassettes; and he asked the first defendants to enquire about this.
The first defendants were assured by Promodisc that cassettes would be
delivered. There may at this time have been some discussion about some
indemnity being provided. There is also evidence that the first defendants
telephoned Mr Golovner about this state of affairs, and he accepted it.
On 6 June, the second defendants cabled instructions to Barclays Bank SA to
accept bills, and on 7 June the first defendants debited the plaintiffs with 4,000,
which was placed in a new deposit account in the joint names of the plaintiffs
and the first defendants. On 12 June, as I have already mentioned, the goods
were shipped; and by 16 June they had arrived and were opened by the plaintiffs
in the presence of a representative of the first defendants. The plaintiffs'
evidence is that there were 94 cartons, but of these two were empty, five were
filled with rubbish or packing, twenty-five of the record boxes and three of the
cassette boxes were only partly filled, and two boxes labelled as cassettes were
filled with records; instead of 825 cassettes, as ordered, there were only 518
cassettes and 25 cartridges. Out of the 518 cassettes delivered, 75 per cent were
not as ordered; instead of 112 different records as ordered, only 12 different
records were despatched; and, in toto, out of the 8,625 records ordered, only 275
were delivered as per order. The rest were not as ordered and were either rejects
or unsaleable. There was some evidence from the state of the boxes, one of
which is before me in evidence, that the numbers indicating the serial number of
the records inside which appear on the outside of the box had been pasted over
with some semi-transparent material and different numbers had been put on the
outside, the outside numbers corresponding with the order and the covered-up
numbers not corresponding with the order. In those circumstances, the plaintiffs
allege that Promodisc has been guilty of fraud.

On the next day, 17 June, the plaintiffs instructed the first defendants not to pay
on the credit, and on 19 June Promodisc wrote a somewhat curious letter to the
plaintiffs. The signatory of the letter says that he had just returned from the USA,
'and am very surprised to hear of a delivery of records and cassettes to you and
a price quoted for this sale. I wish to point out that I did not come to an
agreement with you about the selling price of our products and I am extremely
shocked by your action jeopardizing a future co-operation between our firms.'
The next word in the letter is the word 'sincerely'. On 21 June the plaintiffs'
solicitors wrote a letter to the first defendants setting out the matters
complained of, and on 24 June the first defendants replied, saying that the letter
was being forwarded to their legal advisers, but also saying that in view of the
fact that the credit was an irrevocable confirmed credit it appeared that there
was no way that the first defendants could avoid making payment. The first
defendants refused to give any undertaking not to pay, and on 11 July the writ
and notice of motion were issued.
The writ seeks an injunction substantially in the terms of the notice of motion,
though there are variations. It also seeks the return of the sum of 4,000 as well
as damages for breach of contract. The injunction sought by the notice of motion
prior to being amended was an injunction restraining the two defendants until
judgment or further order from
'(i) Paying a draft drawn upon them or either of them in the sum of 44,175 French
francs being equivalent to or alternatively 4,000 sterling by Promodisc S.A.,
B.Y.G. Records their servants or agents and/or (ii) Paying out either to
[1975] 1 All ER 1071 at 1074
Promodisc S.A., B.Y.G. Records or to Discount Bank or to any party at all any
sums pursuant to the irrevocable credit requested by the Plaintiffs to be opened
on their behalf by the First and/or Second Defendants in favour of Promodisc S.A.,
B.Y.G. Records.'
Counsel for the plaintiffs puts his claim for an injunction on two grounds. First of
all, he says that this is a case where Promodisc has been guilty of fraud, and that
fraud is one of the instances in which the court will intervene even in the case of
bankers' irrevocable confirmed credits. He told me that there was no English
authority directly on the point or anywhere near it, but he did put before
me Sztejn v J Henry Schroder Banking Corpn, a case which is summarised in
Gutteridge and Megrah, The Law of Bankers' Commercial Credits a. There, it was
alleged that the seller had shipped rubbish and then passed his draft for
collection. Shientag J (31 NYS 2d at 633) referred to the well-established rule that
a letter of credit is independent of the primary contract of sale between the
buyer and the seller, so that unless the letter of credit otherwise provides, the
bank is neither obliged nor allowed to enter into controversies between buyer
and seller regarding the quality of the merchandise shipped. However, the
learned judge (and I use the phrase as no empty compliment) distinguished mere
breaches of warranty of quality from cases where the seller has intentionally
failed to ship any of the goods ordered by the buyer. In relation to the latter case,
the judge uttered a sentence (31 NYS 2d at 634) (quoted in the book) b on which
counsel for the plaintiffs placed great reliance:
a

4th Edn (1968), pp 133, 134

Op cit

'In such a situation, where the seller's fraud has been called to the bank's
attention before the drafts and documents have been presented for payment,
the principle of the independence of the bank's obligation under the letter of
credit should not be extended to protect the unscrupulous seller.'
During the argument on this point before me, the familiar English phrase 'Fraud
unravels all' was also discussed. However, it is important to notice that in
the Sztejn case the proceedings consisted of a motion to dismiss the formal
complaint on the ground that it disclosed no cause of action. That being so, the
court had to assume that the facts stated in the complaint were true. The
complaint alleged fraud, and so the court was dealing with a case of established
fraud. In the present case there is, of course, no established fraud, but merely an
allegation of fraud. The defendants, who were not concerned with that matter,
have understandably adduced no evidence on the issue of fraud. Indeed, it
seems unlikely that any action to which Promodisc was not a party would contain
the evidence required to resolve this issue. Accordingly, the matter has to be
dealt with on the footing that this is a case in which fraud is alleged but has not
been established. I should also add that on the facts required to be assumed in
the Sztejn case the collecting bank there was not a holder in due course, who
would not be defeated by the fraud, but was merely an agent for the fraudulent
seller.
Counsel for the plaintiffs' second ground was that there was a lack of
correspondence between the documents and the goods, and that whatever
might be said about the allegation that the plaintiffs had in some way waived the
lack of conformity there remained the fact that the goods were shipped 13 days
after the latest day for shipment stated in the documents establishing the credit.
However, in claiming the relief before me, counsel for the plaintiffs accepted that
the first head of the notice of motion might not be entirely appropriate. He relied
primarily on the second head, but
[1975] 1 All ER 1071 at 1075
preferred to leave the precise formulation of that claim until he had heard
counsel for the defendants.
For his part, counsel for the defendants did not seek to deal with the points on
fraud or a lack of correspondence between the goods and the documents. His
case was that the claim for an injunction was misconceived. He said that what
would happen was this. Somewhere there is a bill of exchange which has already
been accepted by the Discount Bank. That bill may well have been negotiated; it
may indeed have passed into the hands of a holder in due course. That bill will
be presented for payment, and the Discount Bank is bound to pay it on 20 July.
The Discount Bank will then debit Barclays Bank SA. Barclays Bank SA will then
debit the second defendants and the second defendants will then debit the first
defendants. The injunction against the two defendants, if granted, would not
achieve counsel for the plaintiffs' avowed purpose, which was to prevent
Promodisc from being paid. Promodisc, indeed, may already have been paid by
discounting the bill. All that the injunction would do would be to prevent the
banks concerned from honouring their obligations. As regards the two
defendants (as distinct from whatever claim there might be against Promodisc),
the plaintiffs' only real claim, counsel for the defendants said, was against the

first defendants, and the first defendants alone, and there was, and could be, no
suggestion that the first defendants were not good for the money.
Faced with that, and with an invitation from the bench to reconsider the terms of
the injunction, counsel for the plaintiffs, after a certain amount of hesitation,
accepted that a revised form of injunction against the first defendants alone
would sufficiently protect him. He amended his notice of motion so as to claim an
injunction restraining the first defendants from paying out of the 4,000
deposited on or about 7 June 1974, in the joint names of the plaintiffs and the
first defendants, to any party at all, any sums pursuant to the irrevocable credit
requested by the plaintiffs to be opened in favour of Promodisc, and so on. He
accepted that he had a money claim against the bank for breach of contract, but
asserted that it was better to have a proprietary claim against the 4,000 as
well. When invited to explain why this was better, he said that he could not
explain it exactly, but that he felt in his bones that it was better; and he said that
in particular he was not satisfied that the same matters must be determined
however his case was put.
I would not dismiss counsel for the plaintiffs' contentions merely because he
failed to particularise them. The sense of litigation of an experienced silk is not
something to be cast lightly overboard. Nevertheless, I do not think that this is a
case for an injunction at all. It cannot harm the plaintiffs in any way if Promodisc
is paid, so long as the money does not come out of the plaintiffs' funds; and the
revised form of injunction is, I think, the most that the plaintiffs should ever have
sought. Even in that form I cannot see any real justification for it. If the first
defendants have acted in breach of contract, the plaintiffs will have their claim
against them. As I have said, there is no question of them not being good for the
money. I see no need to keep the 4,000 in any state of security, nor have
adequate grounds been put before me for doing anything except leaving the
plaintiffs to their claim in contract. I would be slow to interfere with bankers'
irrevocable credits, and not least in the sphere of international banking, unless a
sufficiently grave cause is shown; for interventions by the court that are too
ready or too frequent might gravely impair the reliance which, quite properly, is
placed on such credits. The Sztejn case is plainly distinguishable in relation both
to established fraud and to the absence there of any possible holder in due
course. I do not say that the doctrine of that case is wrong or that it is incapable
of extension to cases in which fraud is alleged but has not been established,
provided a sufficient case is made out. That may or may not be the case. What I
do say is that the present case falls far short of establishing any ground on which
it would be right
[1975] 1 All ER 1071 at 1076
for the court to intervene by granting the interlocutory injunction claimed, even
in its revised form. The motion accordingly fails and will be dismissed.
Motion dismissed