Fraud Exception eroded? Solo Industries UK Ltd v Canara Bank, CA 3 July 2001

For the first time, the Court of Appeal has allowed a bank to repudiate a performance bond without clear and obvious evidence of fraud.

The bank had repudiated the bond on the grounds that the underlying supply contract was a sham and that the performance bond had been procured by fraud. It has long been accepted that banks accept the risks inherent in the terms of the instruments they issued, including the risk that a beneficiary might make a demand that was unjustified or fraudulent, but had to be met because it could not clearly be established to be so. The bank is expected in cases which fall short of established fraud to pursue a separate claim against a beneficiary making a fraudulent demand, and to do so subsequent to payment. Those risks arise out of the instruments issued and assume the integrity of the instrument issued by the bank. Banks should not however have to accept the risk that the instrument itself had been induced by conspiracy between or misrepresentation by their customers and beneficiaries.

Even though the bank's defence of fraud was described as speculative, the court held the bank had succeeded in demonstrating that it had a reasonable prospect of success in justifying its claim to have avoided the bond.

The alleged fraud concerned the procurement of the bond as well as the call. It is probable therefore that the departure from the long, well-established principle that a bank should only refuse to meet its obligations on a bond where there is clear and obvious evidence of fraud does not indicate significant erosion of that principle, but that the decision was made on the special facts of the case.

For further information, please contact Ruth Pedley by e-mail at [email protected] or by telephone on +44 (0)20 7367 2098.