High Court: Injunction restraining payment on foot of letter of credit refused for second time

About this case:

• Citation:
  [2024] IEHC 1
• Judgment:
  External link
• Court:
  High Court
• Judge:
  Mr Justice Rory Mulcahy

Delivering judgment for the High Court, Mr Justice Rory Mulcahy emphasised that “the test for an injunction to restrain payment on foot of a letter of credit is not met by showing that there is a reasonable basis for suspecting fraud. Rather, as stated in Construgomes, the fraud relied on must be ‘clear, obvious or established’.”

Background

The plaintiff, a Nigerian company, contracted with a Canadian company, Ennovate, for the supply and installation of a gas plant in Nigeria. The second defendant, a Chinese company named Bosai, was subcontracted by Ennovate to supply the gas plant.

The plaintiff issued a letter of credit in favour of Bosai, pursuant to which the first and third defendants were obliged to pay the sums claimed by Bosai upon satisfaction of the letter’s terms. Bosai presented the required documentation to prove that it had shipped the goods to Nigeria so that it could receive payment. The plaintiff claimed that Bosai did not dispatch the goods and that the documentation relied upon by Bosai was not genuine, and so attempted to restrain the payment of $1.65 million to Bosai by the first and third defendants.

The High Court had previously refused an almost identical application by the plaintiff on 5 September 2023, in which the plaintiff had sought an injunction in aid of a Nigerian arbitration preventing payment on foot of the letter. The court had refused the reliefs sought based on lack of jurisdiction where the parties to be restrained were not parties to any agreement which could allow them to be joined to the arbitration.

Further, the High Court had not been satisfied that the “very high threshold” to restrain payment on foot of a letter of credit had been reached, being “a seriously arguable case that the only reasonable inference that the claim for payment on foot of the letter of credit was fraudulent” as set out in Construgomes and Anor v Dragados Ireland Ltd and Ors [2021] IEHC 79.

In the interim, the plaintiff retained Chinese lawyers to investigate Bosai’s claim that it had shipped the goods and based upon the information revealed, the plaintiff made an application for Mr Justice Mulcahy to revisit his 2023 judgment and issued further proceedings seeking injunctive relief. Prior to the hearing of those applications, a ruling was given in the arbitration refusing to join Bosai to the arbitration, and so the plaintiff discontinued its application to re-open the judgment but continued with its application for an injunction.

The High Court

Mr Justice Mulcahy set out the objections of the defendants in respect of the plaintiff’s application, which they contended to be an abuse of process contravening the rule in Henderson v Henderson (1843) 3 Hare 100.

Agreeing that Henderson does not arise for consideration unless the court is satisfied that the plaintiff has met the threshold for the injunctive relief sought, the court considered the plaintiff’s contention that the correct approach was to ask whether there was credible material before the court with the potential to be of real significance to the outcome of the proceedings, and if so, the court should then ask why that material was not before the court at first hearing and to what extent the plaintiff was responsible for that.

Mr Justice Mulcahy explained that he had already concluded in his 2023 judgment that the requisite threshold for restraining payment on foot of a letter of credit had not been met, as the plaintiff had failed to identify anything in its engagement with Bosai to suggest that Bosai would engage in the fraudulent actions alleged, and that the court had identified that it was the plaintiff which seemed to be attempting to avoid its obligations.

Having examined the Goodwell Report prepared by the plaintiff’s Chinese lawyers, the court determined that significantly less weight should attach to the report as it was clearly hearsay in the absence of a verifying affidavit and no explanation was provided for the plaintiff’s reliance on hearsay evidence.

The judge continued: “Leaving aside for present purposes whether it is permissible to pursue a second application for the same relief at all, where First Modular had, in effect, been given a roadmap to the proofs necessary to secure that relief, the failure to secure the best or direct evidence of those proofs undermines to a material degree the reliance which can be placed on this hearsay evidence.”

Finding that fraud could not be ruled out, Mr Justice Mulcahy remarked: “Bosai could have done more to establish that there was no such fraud on its part. However, the test for an injunction to restrain payment on foot of a letter of credit is not met by showing that there is a reasonable basis for suspecting fraud. Rather, as stated in Construgomes, the fraud relied on must be ‘clear, obvious or established’.”

The court observed that “only a clear, obvious or established fraud would justify an injunction to restrain payment. This reflects two features of letters of credit. First, that by granting the benefit of a letter of credit, a party takes on the risk that the beneficiary will obtain payment under its terms notwithstanding some default in the performance of its obligations to the grantor… Secondly, any loss occasioned by payment on foot of a letter of credit will, by definition, be a monetary loss, readily compensatable in damages. That is why payment must be made unless it is seriously arguable that there has been a clear, obvious or established fraud.”

Despite finding it unnecessary to do so, Mr Justice Mulcahy nonetheless considered the defendants’ objections of abuse of process, considering that a distinction should be drawn between cases where the new evidence sought to be relied upon discloses fraud for the first time, and cases where fraud was the entire subject matter of the first application.

Noting that “In the first scenario, a court faced for the first time with an allegation of fraud might very well consider that evidence of that fraud constituted special circumstances justifying a relaxation of the rule in Henderson v Henderson. But in the second scenario, the admission of the additional evidence of fraud would involve allowing precisely the sort of litigation conduct the rule is intended to prevent”, the court considered that “each case must turn on its own facts and might depend on the extent to which fraud had been established… The justice of a case might well require a court to disregard a breach of the rule in Henderson v Henderson where fraud had been established or was admitted.”

The court concluded that “in the particular circumstances of this case, it would have taken something more compelling than evidence meeting even that high bar to justify rejecting the defendants’ objections that the plaintiff’s second bite at the cherry was an abuse of process. Insofar as the competing interests of justice required to be considered, the fact that damages are clearly an adequate remedy for any loss which First Modular may suffer… would have made it possible to mitigate any risk of injustice by the refusal of relief on Henderson v Henderson grounds.”

Conclusion

Accordingly, the court refused the reliefs sought.

First Modular Gas Systems Ltd v Citibank Europe PLC & Ors [2024] IEHC 1