THE ROYAL BANK OF SCOTLAND PLC v HOLMES

 

OUTER HOUSE

 

1999 SLT 563, 1999 SCLR 297

 

8 January 1999

 

CATCHWORDS: Fraud -- Fraudulent misrepresentation -- Guarantee -- Bank making payment to Lloyd's under guarantee -- Bank seeking reimbursement from name -- Name alleging fraud by Lloyd's which induced him to join -- Whether defence of fraud available -- Whether averments of fraud sufficiently specific.

 

Bank -- Guarantee -- Fraud -- Bank making payment to Lloyd's under guarantee -- Bank seeking reimbursement from name -- Name alleging fraud by Lloyd's which induced him to join -- Whether defence of fraud available -- Whether averments of fraud sufficiently specific.

 

Process -- Pleadings -- Specification -- Incorporation of documents brevitatis causa -- Whether appropriate or sufficient.

 

HEADNOTE: A Lloyd's name procured guarantees by a bank in favour of Lloyd's amounting in total to 60,000, and granted corresponding indemnities in favour of the bank. In 1994, Lloyd's made claims under the guarantees of 22,681.02 which were paid by the bank, and the name duly indemnified the bank. From 1995 to 1997 Lloyd's claimed the balance of 37,318.98 which was paid by the bank. In an action by the bank for payment under the indemnities the name argued that the bank should not have paid this sum due to fraud by Lloyd's. He averred that he had been induced to become a name at Lloyd's due to fraud on their part. For specification of the fraud, reference was made to correspondence, including two lengthy letters from the defender's solicitors to the bank which were incorporated brevitatis causa and made reference to various proceedings in other jurisdictions in which similar allegations of fraud were being made.

 

Held, (1) that in Scotland as in England, in appropriate circumstances fraud was an exception to the rule that a bank was entitled to make payment under a letter of credit or guarantee (dictum in Centri-Force Engineering Ltd v Bank of Scotland, 1993 SLT 190, followed) (p 569C); (2) that allegations of fraud had to be supported by specific averments clearly setting out the acts or representations founded upon, the occasions on which such acts were committed or representations made, and the circumstances relied on as yielding the inference of fraud (p 569K-L); (3) that in averring fraud it was essential to identify the person committing the fraudulent act or making the fraudulent misrepresentation, and it was insufficient to aver that an organisation such as Lloyd's had perpetrated a fraud without specifying the individuals concerned (Thomson & Co v Pattison Elder & Co (1895) 22 R 432, applied) (pp 569K-570A); (4) that it was appropriate to refer at debate to documents incorporated into the pleadings brevitatis causa (Eadie Cairns v Programmed Maintenance Painting Ltd, 1987 SLT 777, distinguished) (p 570E-F); (5) that the correspondence incorporated brevitatis causa in this case did not provide adequate specification of the allegations of fraud against Lloyd's (pp 570L-571D); and defences repelled and decree de plano pronounced.

 

Opinion reserved, as to whether an allegation of fraud in the underlying contract as opposed to fraud in the claim for payment from the bank was a relevant defence to a claim for reimbursement by the bank (p 569J).

 

Observed, that in some cases where it was necessary to specify a large amount of technical information, presentation by a document incorporated brevitatis causa might be preferable to narrating the information in the pleadings, but that the wholesale incorporation into pleadings of a lengthy document, only parts of which were relevant, was generally unsatisfactory (p 570G-H).

 

CASES-REF-TO: Centri-Force Engineering Ltd v Bank of Scotland, 1993 SLT 190.

Discount Records Ltd v Barclays Bank Ltd [1975] 1 WLR 315; [1975] 1 All ER 1071.

Drummond's Trustees v Melville (1861) 23 D 450.

Eadie Cairns v Programmed Maintenance Painting Ltd, 1987 SLT 777.

Gillespie v Russel (1856) 18 D 677.

Harbottle (RD) (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146; [1977] 3 WLR 752; [1977] 2 All ER 935.

L v L, 1996 SLT 767.

Mullan v Anderson, 1993 SLT 835.

Owen (Edward) Engineering Ltd v Barclays Bank International Ltd [1978] QB 159; [1977] 3 WLR 764; [1978] 1 All ER 976.

Shedden v Patrick (1852) 14 D 721.

Society of Lloyd's v Canadian Imperial Bank of Commerce [1993] 2 Lloyd's Rep 579.

Sztejn v J Henry Schroder Banking Corporation 31 NYS 2d 631 (1941).

Thomson (RH) & Co v Pattison, Elder & Co (1895) 22 R 432.

United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168; [1982] 2 WLR 1039; [1982] 2 All ER 720.

United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554.

 

INTRODUCTION: Action of payment

 

The Royal Bank of Scotland plc raised a commercial action against Peter Holmes, a Lloyd's name, for payment of sums due to the bank under certain indemnities in respect of sums paid by the bank to Lloyd's under corresponding guarantees.

 

The case came to debate before the Lord Ordinary (Macfadyen).

 

Textbooks referred to

McBryde, Contract, p 225, para 10-61(3)(a).

Walker and Walker, Evidence, para 70.

 

COUNSEL: Counsel for Pursuers, LJ Milligan; Counsel for Defender, GM Henderson.

 

PANEL:

LORD MACFADYEN

 

JUDGMENTS: LORD MACFADYEN: The defender was, at the times material for the purposes of this action, a name at Lloyd's. In that connection he entered into a security and trust deed in terms of which he undertook an obligation to procure a guarantee in favour of Lloyd's for the due payment of sums covenanted by him to be paid to Lloyd's. In pursuance of that obligation the defender procured that the pursuers granted in favour of Lloyd's three guarantees, "the first guarantee" (which was for 37,500), "the second guarantee" (which was for 12,500), and "the third guarantee" (which was for 10,000). The defender in turn granted indemnities in favour of the pursuers, undertaking to pay to them any sums which they became liable to pay to Lloyd's under the guarantees. There were two such indemnities, one ("the first indemnity") in respect of the first guarantee, and the other ("the second indemnity") in respect of the second and third guarantees. In due course Lloyd's made certain claims under the guarantees. On 7 March 1994 Lloyd's demanded payment of 12,500 under the second guarantee and 10,181.02 under the first guarantee. These demands were met by the pursuers, and the defender in due course met his corresponding obligations to the pursuers under the indemnities. Subsequently Lloyd's made three further demands, namely (i) on 3 August 1995 a demand for 16,528.09 under the first guarantee, (ii) on 6 November 1996 a further demand for 10,790.89 again under the first guarantee, and (iii) on 30 May 1997 a demand for 10,000 under the third guarantee. Each of these demands was met by the pursuers. The pursuers have called upon the defender to make corresponding payments to them under the indemnities, but he refuses to do so. In this action the pursuers accordingly seek to enforce the defender's obligations under the indemnities by seeking payment of the three sums of 16,528.09, 10,790.89 and 10,000, with interest in each case from the date on which they made payment to Lloyd's under the guarantees.

 

The defender's position is that the pursuers, having had notice of his contention that Lloyd's had acted fraudulently, ought not to have made payment to Lloyd's under the guarantees, and are accordingly not entitled to pursue him for reimbursement under the indemnities. The pursuers dispute the relevancy of that contention as a defence to their claims. That issue was appointed to debate. Although there are other factual issues which on the face of the pleadings appear to be disputed, counsel for the defender accepted at the beginning of the debate that if the fraud defence were held to be irrelevant, there was no other basis on which the defender could seek to resist the pursuers' claims, and that in that event decree de plano should be granted.

 

The debate took a somewhat unusual course, in respect that, despite the fact that the debate was on the pursuers' plea to the relevancy of the defences, counsel for the defender addressed me first. Counsel for the pursuers did not object to that order of proceeding.

 

Counsel for the defender began with a number of preliminary submissions on aspects of the law relating to the proof of fraud. He accepted that there is a presumption in favour of honest behaviour, one corollary of which is that the burden of proving fraud rests on the party alleging it (Walkers on Evidence, para 70). He also submitted that fraud could be proved by uncorroborated evidence (Civil Evidence (Scotland) Act 1988, s 1(1)), and that the relevant standard of proof was the balance of probabilities (L v L, per Lord Hamilton at 1996 SLT, p 773B-E; Mullan v Anderson). Apart from the acceptance that the onus of proof, and therefore of averment, rests on the party alleging fraud, these points, sound though they are, do not appear to me to have any bearing on the only issue presently before me, namely whether the defender's averments constitute a relevant defence to the pursuers' claims.

 

The next part of the defender's submissions was concerned with authorities on the so called "fraud exception", on which counsel relied for support for the relevancy of the defences. The first case cited was RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd. There the plaintiffs had entered into contracts of sale with Egyptian buyers. Each contract provided that the plaintiffs would establish a guarantee confirmed by a bank in favour of the buyers. The guarantees were widely expressed, and secured payment on the buyers' demand. They were established with Egyptian banks and confirmed by the defendant English bank. The buyers demanded payment under the guarantees. The plaintiffs maintained that there was no justification for the demand for payment, and sought declarations to that effect and injunctions against the defendants from making payment under the guarantees. Interlocutory injunctions were granted ex parte but then discharged on the application of the defendant bank. Counsel for the defender relied on the case as exemplifying the reluctance of the court to interfere by way of injunction, as a matter of the balance of convenience. The point was expressed by Kerr J (at [1978] QB, p 155 B-D) thus:

 

"If [the threatened payment] is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract . . . then the plaintiffs would have good claims for damages against the bank. In that event the injunctions would be inappropriate, because they interfere with the bank's obligations to the Egyptian banks, because they might cause greater damage to the bank than the plaintiffs could pay on their undertaking as to damages, and because the plaintiffs would then have an adequate remedy in damages. The balance of convenience would in that event be hopelessly weighted against the plaintiffs."

 

At pp 155H-156A he added: "Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take . . . The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by courts. Otherwise, trust in international commerce could be irreparably damaged."

 

In discussing the authorities, Kerr J noted one American case, Sztejn v J Henry Schroder Banking Corporation, in which an injunction against a bank under a confirmed credit was granted on the assumption that the bank had clear notice of an established fraud, but noted also that it had been distinguished by Megarry J in Discount Records Ltd v Barclays Bank Ltd.

 

Counsel for the defender next referred to Edward Owen Engineering Ltd v Barclays Bank International Ltd. That case concerned a contract by the English plaintiffs to erect greenhouses in Libya for Libyan customers. The contract contained provision for a performance guarantee. It also provided that an irrevocable confirmed letter of credit would be opened by the customers in favour of the plaintiffs. After the plaintiffs had granted a counter guarantee in favour of the defendants, an English bank, the defendants gave a performance bond to a Libyan bank, in terms of which they confirmed that their guarantee was payable "on demand without proof or conditions". The Libyan bank then issued a corresponding guarantee bond in favour of the Libyan customers. No letter of credit which complied with the requirements of the contract was opened. The plaintiffs therefore told the customers that the guarantee was in the circumstances of no effect, and treated the failure to open a letter of credit as repudiation of the contract by the customers. At the customers' request the Libyan bank made a claim under the guarantee against the defendant bank. An interim injunction was granted ex parte but then discharged. The Court of Appeal declined to hold that fraud had been established, and refused the appeal. Lord Denning MR said (at [1978] QB, p 169A-G): "It has long been established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit . . . To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank . . . (The) bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment"; and (at p 171B), after concluding that a performance bond stands on a similar footing to a letter of credit, added: "The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is where there is a clear fraud of which the bank has notice."

 

Browne LJ said (at pp 172H-173A):

 

"That exception is that where the documents under the credit are presented by the beneficiary himself and the bank knows when the documents are presented that they are forged or fraudulent, the bank is entitled to refuse payment.

"But it is certainly not enough to allege fraud; it must be 'established,' and in such circumstances I should say very clearly established." (See also Geoffrey Lane LJ at p 175E-H.)

 

In United City Merchants (Investments) Ltd v Royal Bank of Canada, a letter of credit case, the House of Lords (per Lord Diplock at [1983] 1 AC, p 183G) reaffirmed the scope of the fraud exception as being: "where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue", adding (at p 184A): "The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, 'fraud unravels all'. The courts will not allow their process to be used by a dishonest person to carry out a fraud."

 

Two further propositions may be taken from United Trading Corporation SA v Allied Arab Bank Ltd. In the context of discussion of the bank's liability in negligence to its customer if it complied with a demand made by the beneficiary which, to the bank's knowledge, was fraudulent, Ackner LJ said (at [1985] 2 Lloyd's Rep, p 560, col 1): "Knowledge in this context would include what the bank ought to know on the basis of clear information already made available to it, but would not of course include notice of a mere allegation by the plaintiffs that [the beneficiary's] demand was fraudulent; the bank is under no duty to investigate such an allegation."

 

Later (also at p 560, col 1) Ackner LJ added: "It seems to us clear that, where payment has in fact been made, the bank's knowledge that the demand made by the beneficiary on the performance bond was fraudulent must exist prior to the actual payment to the beneficiary and that its knowledge at that date must be proved."

In Lloyd's v Canadian Imperial Bank of Commerce, the position of the bank, faced with information suggesting fraud, was described by Saville J (at [1993] 2 Lloyd's Rep, p 581 col 2) as follows: "If a bank has notice of matters which might amount to evidence of fraud, then it must make up its mind whether or not the material is sufficient to justify a plea of fraud. If it is, then the bank can resist payment on this basis and if it can establish relevant fraud it will be under no obligation to honour the letter of credit. If the bank considers the material to be insufficient to plead fraud, then its assessment will be either right or wrong. If right, then ex hypothesi there will be no notice of relevant fraud and thus the customer can hardly resist reimbursing the bank who pays in those circumstances. If the bank incorrectly concludes that there is insufficient material to plead fraud, then it can hardly complain if it is not reimbursed, any more than it could if it mistakenly paid on non-conforming documents."

 

Finally, counsel for the defender cited one Scottish case, Centri-Force Engineering Ltd v Bank of Scotland. There the pursuers sought to obtain interim interdict preventing the bank from making payment under a letter of credit, averring that an engineer's certificate vouching that equipment had been properly commissioned (which was one of the documents which in terms of the letter of credit required to accompany a demand for payment) had been fraudulently issued, in that at its date the equipment was not in satisfactory forking condition, and that the signatory of the certificate knew that it was false or was reckless as to whether it was true or false. Lord Abernethy refused to grant interim interdict. Citing UCM v Royal Bank of Canada, his Lordship said at 1993 SLT, p 193D-F: "The only exception to the basic rule recognised by English law, drawing on authority from the United States of America, is where the beneficiary himself presents the documents required by the letter of credit and they are forged or fraudulent . . . I have no reason to doubt that . . . that exception would apply in Scots law. But it does not assist on the facts of this case. Although prima facie the commissioning certificate was in my view presented fraudulently, it was not presented by or on behalf of the beneficiary. It was presented by a third party".

 

Counsel for the defender submitted that in light of those authorities it was a relevant defence to the claims made by the pursuers in this action for the defender to offer to prove that at the time when the pursuers made payment to Lloyd's under the guarantees they had been made aware of fraud on the part of Lloyd's. The defender's pleadings concentrate on setting out the basis for the contention that the pursuers were aware of the allegation of fraud. Counsel accepted, however, that for the defence to be relevant it was necessary for the defender to assert not only that the pursuers had had notice of the fraud, but also that the allegation of fraud of which the pursuers had been given notice was well founded.

 

As becomes evident when regard is had to the correspondence which is incorporated into ans 5 of the defences, the fraud of which the defender says the pursuers had notice was alleged fraud on the part of Lloyd's in connection with the terms on which he was invited to become, and did become, a name at Lloyd's. The contention is that that fraud undermines the validity of his underlying contract with Lloyd's, and thus undermines Lloyd's entitlement to make demands for payment under the guarantees. The alleged fraud is thus more remote from the demand for payment under the guarantee than was the case in any of the authorities cited. They were all concerned with a demand fraudulently made or fraudulently vouched. Counsel for the defender submitted, however, that that distinction did not affect the availability of the fraud exception.

 

As a preface to his submissions as to the sufficiency of the defender's averments of fraud and of notice of fraud, counsel for the defender submitted that it was no longer appropriate to apply the approach to the pleading of fraud that was required in the 19th century. Reference was made in the course of the debate to McBryde on Contract, p 225, para 10-61(3)(a) where it is stated that: "it is settled law that there must be specific averments of fraud". Among the authorities there cited for that proposition, which were also cited in the course of the debate, were Gillespie v Russel, Drummond's Trs v Melville, Shedden v Patrick and RH Thomson & Co v Pattison, Elder & Co. Counsel submitted, however, that cases such as those were distinguishable, because they were concerned with an issue as to fraud in a litigation between the victim of the fraud and the perpetrator. Different considerations applied when, as here, the pursuers were not party to the fraud. He pointed also to the fact that the law of evidence as to the proof of fraud was different at the time the cases referred to were decided, corroboration then being required, but that now not being so. As I understood him, he also maintained that the defender was constrained as to the specification of the alleged fraud which he could give by the fact that the only fraud which was relevant was the fraud of which the pursuers had been given notice. Reference to the letters incorporated in the pleadings, by which it was said that notice of the fraud had been given to the pursuers, was therefore the appropriate way to give such specification of the fraud as was required.

 

The averments on which the defence is based are set out in ans 5. They begin with the statement that: "the defender has made repeated allegations of fraud [against Lloyd's] as have his agents acting upon his behalf". Reference is then made to a letter of 8 August 1995 from the defender's London solicitors to the pursuers, and the letter is incorporated in the pleadings brevitatis causa. The content of part of the letter is then briefly summarised, and it is averred: "As at the date of receipt of the letter the pursuers were given sufficient notice of fraud. The effect of fraud being established would render the security void ab initio." There follows reference to a letter of 24 August from the defender to the pursuers, which is not incorporated in the pleadings, and to the pursuers' indication that they had not been provided with clear evidence of fraud. A second letter from the defender's solicitors to the pursuers dated 14 November is described as containing further specification of fraud, and is also incorporated in the pleadings brevitatis causa. A letter from the defender himself to the pursuers dated 9 January 1996 indicating that there was "sufficient evidence" of fraud is also incorporated in the pleadings brevitatis causa. The averments then conclude as follows: "In the circumstances the pursuers ought not to have made any payment to Lloyd's confronted with escalating information with regard to fraud on the defender during the material period. They are not entitled to be reimbursed by the defender in respect of any sum paid after being fixed with clear evidence and knowledge of fraud upon the defender. Any payment made by the pursuers in said period of imputed knowledge would have been in breach of contract with the defender. They would not have been able to insist upon performance by the defender."

 

The defender's solicitors' letter of 8 August 1995 runs to six closely typed pages, and need not be set out in full. It begins by referring to proceedings taken by Lloyd's against Canadian and United States names, in which defences had been served which contained "detailed allegations that Lloyd's had acted fraudulently in its conduct of the Lloyd's insurance market and had made false misrepresentations to its members". It then states that the pleading is fully particularised, and that counsel were satisfied from the evidence in their possession that the defendant was able to allege fraud. It then continues: "The circumstances of the underwriting of your Customers [sic; sc the defender] are the same in all material respects as those on whose behalf the Defences have been served". Reference is then made to a request for further and better particulars made in those proceedings and to the fact that the defendants had served a response comprising 166 pages and three appendices. There then follows a passage (which is referred to in the summary of the letter in ans 5) dealing with the assertion that five Canadian banks which had provided letters of credit to Lloyd's refused to make payment to Lloyd's on the basis that their customers had provided information which amounted to a sufficient case of fraud to entitle the banks to decline to honour drafts that had been presented. The passage from the judgment of Saville J in Lloyd's v Canadian Imperial Bank of Commerce which I have quoted above is then set out. Later in the letter there is reference to a litigation in Texas and a lengthy quotation from a speech made by the Chief Executive Officer of Lloyd's, which is cited as "Clear evidence that Lloyd's itself does not believe in the sums which it is now demanding from your Customers".

 

The defender's solicitors' letter of 14 November is also six pages long. It begins with lengthy quotation from the judgment of Cresswell J in a litigation involving Merrett Syndicates Ltd, goes on to discuss the position adopted by Lloyd's in relation to asbestos and pollution claims, and then (at p 6) contains the following passage:

 

"Throughout the 1980's Lloyd's, in full knowledge of the extent of the escalating problems associated with asbestos and pollution claims, fraudulently misrepresented the state of the Market to Names . . . Lloyd's continuously published material which contained statements as to the nature, role and function of Lloyd's to the effect that:

 

"1. Lloyd's conducted itself with utmost good faith;

 

"2. The ownership, control and activities of underwriting agents operating in the Lloyd's market were strictly regulated by Lloyd's;

 

"3. Lloyd's required syndicates' annual reports and accounts to show a true and fair view of the profit or loss of syndicates for closed years of account;

 

"4. The insurance market at Lloyd's was properly regulated by Lloyd's.

"Lloyd's manifestly misrepresented the true state of affairs in each instance and your customers contend that it did so knowingly . . .

 

"In the continued absence of any substantive denial from Lloyd's and in the context of all the matters of which you have notice, your Customers have more than discharged the burden upon them to provide you with 'clear and obvious' evidence of fraud by Lloyd's."

 

The defender's letter of 9 January 1996 contained no specification of the fraud complained of, but made reference to further litigation in Colorado, USA, and made the following statement of his own position: "if I had been fully informed of all the asbestos, pollution risk, LMX Spiral and self insuring of all loss policies during my Syndicate and ROTA interviews on 1st Nov 1984 I would never have joined Lloyd's or pre-signed the indemnity on 18th October 1984".

 

Counsel's submission was that the averments in ans 5, when read with the contents of the letters which were incorporated in the pleadings, gave sufficient specification of the fraud which was alleged against Lloyd's, and of the notice and evidence of that fraud given to the pursuers.

 

Counsel for the pursuers submitted that an allegation of fraud required to be specifically averred. She referred to the authorities which I have already mentioned, drawing attention in particular to the following dicta: "I think a party laying an action on that ground is bound to set forth in very explicit terms, the fraud of which he complains . . . (The) question here is, whether this party has made the ground of action -- that is, this fraud -- perfectly clear and explicit in statement" (Gillespie v Russel, per Lord President McNeill at (1856) 18 D, p 682); "If an action is laid upon misrepresentation, the misrepresentation itself must be set forth . . . no person accused of fraudulent misrepresentation can be bound to go to trial, unless he is told what the fraudulent misrepresentation is that he is said to have made" (Drummond's Trs v Melville, per Lord President McNeill at (1861) 23 D, p 462); "It is not enough for a party, founding a reduction on the head of fraud, to state that fraud has been committed . . . The party . . . must state in what the fraud consists, and what the acts are from which the existence of fraud is to be inferred" (Shedden v Patrick, per Lord Fullerton at (1852) 14 D, pp 727-728); and "Fraud is a personal matter, and can only be committed by an individual . . . Now, this record does not allege acts complained of against any individual at all. Accordingly, it is not by a mere euphemism that this case differs from and falls short of a case of fraud" (Thomson & Co v Pattison, Elder & Co, per Lord President Robertson at (1895) 22 R, p 436).

 

Counsel for the pursuers submitted that the need for specific averments of fraud was all the greater where, as here, the averments of fraud were made in defence to a claim by a party other than the one who was alleged to have committed the fraud. Here the defender's pleadings, even if they were to be taken to include all that was set out in the letters incorporated into the defences, did not clearly and specifically identify the fraudulent act or acts or statement or statements on which the defender founded, or the person or persons who committed the acts or made the statements. In short the defender had wholly failed to meet the strict standards of pleading required in a case based upon fraud.

 

In connection with the defender's incorporation of the terms of the letters mentioned in ans 5 into the defences, counsel for the pursuers referred to Eadie Cairns v Programmed Maintenance Painting Ltd. In that case the court declined to permit a party to rely on specification given not in the pleadings but in reports which were lodged as productions and merely referred to in the pleadings. It is to be noted that there the productions were not said to be incorporated or repeated in the pleadings. The most strongly worded rejection of that approach to specification is to be found in the opinion of Lord Avonside at 1987 SLT, p 780E: "It is a strict rule of our system of pleadings, for long recognised, that in debates related to relevancy and specification no reference whatsoever can be made to productions lodged by one side or another said to support written pleadings unless both sides are in agreement that such productions are accurate and acceptable." Counsel, however, accepted that the defender had here taken the step, which had been omitted in Eadie Cairns, of adopting the correspondence as part of his pleadings. She submitted, however, that it was for the defender clearly to identify the fraud on which he founded, and that it was not adequate specification to leave the pursuers and the court to search through the mass of assertion and argument contained in the correspondence to find the core of the defender's case.

 

Counsel for the pursuers did not dispute the availability in principle of the fraud exception as a defence to the pursuers' claims, but based her submission that the defences were irrelevant principally on the absence of adequate specification of the fraud founded on. She made the additional point that the normal foundation for the fraud exception is fraud in making the claim for payment under the letter of credit, performance bond or guarantee, and that the fraud here alleged appeared to be fraud on the part of Lloyd's at the earlier stage when the defender became a name. There was, she submitted, no precedent for the fraud exception being given effect on the basis of fraud at that stage.

 

I agree with the view expressed by Lord Abernethy in Centri-Force Engineering Ltd v Bank of Scotland that there is no reason to suppose that the fraud exception is not available under Scots law in appropriate circumstances. The authorities disclose two situations in which it may be relied upon. It may be deployed in support of an application for interdict to prevent the bank from meeting a demand made by the beneficiary in the letter of credit or guarantee, where the bank's customer is in a position to satisfy the court that there is a prima facie case that the beneficiary is acting fraudulently in making the claim, and that the balance of convenience favours interim interdict. As is always the case, the strength of the prima facie case of fraud will have an influence on the balance of convenience, but the authorities suggest that the balance of convenience will seldom favour interference with the performance of the bank's obligation under the letter of credit, since such interference may do incalculable commercial harm and the customer has other remedies (see, for example RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd, per Kerr J at p 155). The fraud exception may also be deployed as a defence to a claim for reimbursement by the bank against its customer in respect of sums paid in response to the demand of the beneficiary in the letter of credit or guarantee. That will arise when the bank, faced with the dilemma described by Saville J in Lloyd's v Canadian Imperial Bank of Commerce at p 581, has decided that the evidence presented to it by its customer before the payment was made was insufficient to support the fraud exception, and has therefore satisfied the beneficiary's demand. In that situation, to resist reimbursement, the customer must show that a fraud has indeed been committed by the beneficiary, and that (contrary to the view taken by the bank) the material presented to the bank before the demand was met was sufficient evidence of that fraud to justify the bank in refusing to meet the demand.

 

All of the authorities on the fraud exception cited in the course of the debate, whether concerned with injunction to prevent the bank from meeting the beneficiary's demand or with the customer's defence to a claim by the bank for reimbursement, depended upon an allegation of fraud in the making of the demand by the beneficiary, either in tendering false or forged documents or in making the claim in knowledge that the payment was not properly due. The fraud alleged by the defender in the present case is not fraud in making the demand, but fraud inducing the defender to enter into the underlying contract with Lloyd's. The use which the defender seeks to make of the fraud exception thus appears to be unprecedented. It is an open question whether fraud inducing the underlying contract will "infect" the claim for payment, enabling the customer to resist the bank's claim for reimbursement on the ground of that fraud provided the bank was furnished with adequate material evidencing that fraud before it met the beneficiary's demand. My initial impression was that fraud at that earlier stage would not support the fraud exception, but on reflection it seems to me that it might do so. If the defender was induced to become a name by fraud on the part of Lloyd's, it might be said that a subsequent demand by Lloyd's under the guarantees was in a derivative sense also fraudulent. The issue seems to me to be potentially complex, and it was not very fully argued at the debate. Had that been the only point of relevancy taken by the pursuers, I would have been inclined to allow a proof before answer, reserving the issue for decision after the facts had been ascertained. In these circumstances, I wish expressly to reserve my opinion on whether the fraud exception can be founded on fraud which induced the customer to enter into the underlying contract with the beneficiary, as well as on fraud in the making or vouching of the beneficiary's demand under the guarantee.

 

The issue thus comes to be whether the defender has pled the fraud exception with sufficient specification. I am in no doubt that Professor McBryde is correct in stating that it is settled law that there must be specific averments of fraud. That is amply borne out by the authorities cited in the course of the debate. It is in my view essential for the party alleging fraud clearly and specifically to identify the act or representation founded upon, the occasion on which the act was committed or the representation made, and the circumstances relied on as yielding the inference that that act or representation was fraudulent. It is also, in my view, essential that the person who committed the fraudulent act or made the fraudulent misrepresentation be identified. Counsel for the defender suggested that what was said in Thomson & Co v Pattison, Elder & Co about the need to identify the individual was said in the context of partnership, where questions of relief between the innocent partners and the guilty partner might arise, and did not apply in other circumstances. It seems to me, however, that it will not do to say that a fraud has been perpetrated by Lloyd's, without further specification. The Society of Lloyd's, like a partnership or company or other corporate body, must, if it commits a fraud, do so through the medium of one or more individuals. It seems to me that the need to give fair notice of the identity of the alleged perpetrator is as great when the fraud is said to have been committed by Lloyd's as it is when the fraud is alleged against a partnership. There may be circumstances in which identification of the specific act founded on operates as sufficient identification of the perpetrator (for example, where a fraudulent statement is said to have been made in a specified letter), but in principle identification of the alleged perpetrator is in my view essential. I do not consider that counsel for the defenders was well founded in his attempt to distinguish the authorities about the need for specific pleadings of fraud on the basis that they were developed in cases in which the person allegedly responsible for the fraud was a party to the proceedings, whereas here Lloyd's are not a party to the present action. It is no doubt correct that that was the context in which the line of authority developed, but in my opinion the need for specification is present a fortiori in a case where the party against whom the fraud is pled as a defence to his claim is not the person alleged to have been responsible for the fraud. In such a situation the pursuers are in at least as much need of fair notice of precisely what is alleged against Lloyd's as Lloyd's would be if the point were pled directly against them. Finally, I am not persuaded that the changes in the law of evidence make any difference to the applicability of the rule requiring specific pleadings of fraud. I see no logic in thinking that, because fraud may now be proved by uncorroborated evidence, the person against whom it is pled has less need for fair notice of the allegation. Arguably the need is even greater. I am therefore satisfied that in judging the adequacy of the specification of the defender's averments of fraud on the part of Lloyd's, it is appropriate to apply the rigorous standards laid down in the authorities.

 

Before turning to examine the specification of the defender's pleadings, it is convenient to deal with the point taken with regard to the incorporation of the correspondence in the defences. Eadie Cairns is not, in my opinion, directly in point. There, although the reports in question were produced and referred to for their terms, it was not averred that they were incorporated in the pleadings. That was the ground on which reference to the reports in supplement of the specification contained in the pleadings was held to be illegitimate. I am of opinion, however, that what Lord Avonside said at p 780E must be read with the fact firmly in mind that there was in that case no incorporation of the reports into the pleadings. It is, in my view, in the absence of such incorporation that the rule is that no reference may be made to productions unless they are agreed. In my opinion, any document may be incorporated in the pleadings, and if that is done and it is produced reference may be made to it at debate as if it were part of the pleadings (as indeed it is, by virtue of the incorporation). There is, in my view, no need for an incorporated document to be agreed before it can be referred to at debate. Whether such incorporation is a satisfactory way of giving specification is another matter. That will depend on the nature of the case, and the nature of the incorporated material. In some cases in which there is need, as a matter of proper specification, to give a large amount of detailed technical information, the presentation of that information in the form of a documentary production referred to and incorporated in the pleadings brevitatis causa may be more satisfactory than an attempt to give the information in narrative form in the pleadings. On the other hand, the wholesale incorporation into the pleadings of a lengthy document, only parts of which are in any way relevant to the issues identified in the pleadings, is in general unsatisfactory, and may well be held not to give the specification required. In the present case the correspondence from the defender and his solicitors has been incorporated into the pleadings (counsel for the pursuers having accepted that the slightly unusual phrase used -- "referred to for its terms held repeated herein brevitatis causa" -- amounted to incorporation). The question to which I therefore turn is whether the defences and the incorporated material give adequate specification of the fraud alleged to have been committed by Lloyd's and of the notice and evidence of that fraud given to the pursuers before they met Lloyd's demands under the guarantees.

 

The defences themselves contain nothing by way of specification (or even of bare assertion) of fraud on the part of Lloyd's. All that is said in the defences is that the defender and his solicitors made to the pursuers allegations that Lloyd's had been guilty of fraud, and provided certain unspecified material in support of those allegations. Beyond that, it is necessary to look to the incorporated correspondence. The defender's own correspondence seems to me to contribute only one piece to the jigsaw, namely the statement in the letter of 9 January 1996 that if he had been informed of certain matters at certain meetings he would not have joined Lloyd's. It is to the solicitors' letters that it is necessary to turn in the search for specification of the alleged fraud. The fact that these letters are lengthy, and that it is necessary to search through them for material that might be regarded as giving specification of the fraud alleged, suggests strongly that incorporation of them in the defences is not in this case a satisfactory method of pleading. The letters were not concerned directly to formulate the charge or charges of fraud. They were intended to persuade the pursuers that Lloyd's demands should not be met. They are therefore concerned partly with argument, partly with narrative of, or at least reference to, what is seen as evidential material, and partly with drawing analogies with other proceedings. Much of their content would, if repeated verbatim in the defences, have been clearly irrelevant; and it is no more relevant because it has been incorporated by reference rather than set out in full.

 

There is in my opinion nothing in the letter of 8 August 1995 which properly formulates an allegation of fraud. The letter seeks to formulate the allegation by reference to the litigations involving the Canadian name, Mr Mason, and the United States name, Mr Salonitis. The allegations, as expressed in the letter -- "that Lloyd's had acted fraudulently in its conduct of the Lloyd's insurance market and had made false representations to its members, the Names" -- are wholly inspecific, and consequently so too is the assertion that the defender's circumstances are the same in all material respects. It appears that the pleadings, including the further and better particulars, in the other litigations were supplied to the pursuers, but the contents of those pleadings are not incorporated in the defences in the present case. In my opinion the incorporation of the letter of 8 August wholly fails to introduce into this case proper specification of the charge of fraud laid against Lloyd's in respect of the defender. Nor does it properly identify what evidential material, if any, relating to that alleged fraud was laid before the pursuers at that time.

I turn therefore to the letter of 14 November. It is to be noted that it came too late to be capable of founding the fraud exception as a defence to the first or second conclusions, since they relate to demands by Lloyd's met on 4 September and 6 November 1995 respectively (United Trading Corporation SA v Allied Arab Bank Ltd, per Ackner LJ at p 560). That letter comes closer to identifying the alleged fraud of which the defender complains. In particular, the passage which I have quoted above from p 6 of the letter sets out in general terms the nature of the fraudulent representations alleged. That passage does not, however, in my view come near to satisfying the standard of specification required. It does not identify the individual representations alleged to have been made to the defender and to have induced him to become a name, or the occasions on which those specific representations were made, or the persons by whom they were made.

 

Counsel for the defender submitted that the defender was constrained in the way he could plead this case by the terms in which the allegation of fraud was intimated to the pursuers in 1995. In my opinion he greatly overestimated the effect of that constraint. It is no doubt right that, in putting forward the fraud exception as a defence to this action, the defender is confined to relying on that allegation of fraud of which he gave notice to the pursuers before they met Lloyd's demands under the guarantees. I do not see, however, why that should inhibit the defender from formulating precisely and clearly in his pleadings the respects in which, and occasions on which, identified representatives of Lloyd's made fraudulent misrepresentations to him. The letters and the material supplied with them or at the same time as they were sent no doubt define the material of which the pursuers were given notice, but the allegation of fraud, consistent with what that material is thought to vouch, should be capable of clear and precise formulation. In my opinion, the defender has wholly failed to give the degree of specification which the pursuers are entitled to have before the case can be remitted to inquiry.

 

In the course of the debate counsel for the defender made a motion to discharge the debate, part heard, and to allow the defender time within which to tender a minute of amendment. That motion was opposed. Counsel for the defender was unable to tell me even in outline what form the proposed amendment would take. In these circumstances I thought it appropriate to refuse the motion for time to lodge a minute of amendment, and the debate proceeded to its conclusion.

 

In the result therefore, since I have come to the conclusion that the defender's averments in support of the fraud exception are fundamentally lacking in specification, I shall sustain the pursuers' first plea in law and repel the defences, and thereafter sustain the pursuers' second plea in law and grant decree de plano in terms of the conclusions.

 

DISPOSITION: On 8 January 1999 the Lord Ordinary repelled the defences and granted decree de plano.

 

SOLICITORS: Paull & Williamsons; Alex Morison & Co WS.