This decision of the Privy Council confirms that the contractual arrangements between two parties are separate and distinct from any contractual arrangement between their respective banks and it is impossible for the law to recognise tortious duties outside of those contracts.

The Facts
The Claimant contracted to buy shirts from Mauri Garments (“MG”). The contract between the Claimant and MG provided for the issue of a bank guarantee of up to FF5m. Accordingly, as security for the payment of goods, a letter of indemnity was issued by the Claimant’s bank (“Warburgs”) in favour of MG’s bank, Mauritius Commercial Bank Limited (the “Defendant”).

The underlying sales contract between the Claimant and MG completed. However, MCB subsequently made a claim under the letter of indemnity on the basis that it had not received payment, in the sum of FF6,734,152.17, for goods supplied to the Claimant by MG. Warburgs duly paid. However, the Claimant submitted that the actual sum due, as confirmed in a statement of account from receivers, was only FF2,536,386 (the difference arising because the Claimant offset sums due from MG).

The Claimant argued that it had a claim against the Defendant in tort for having claimed more from Warburgs than it knew to be actually due, with the result that MCB unduly obtained and/or enriched itself by soliciting and obtaining money to the Claimant’s detriment.

The Decision
The Privy Council held that Warburgs obligation to pay under the letter of indemnity was independent from the underlying sales contract between the Claimant and MG and as such any adjustment that was required to be made was a matter for the Claimant and MG themselves and of no concern to the respective banks. It held “where parties have…entered into carefully structured contractual arrangements, involving two separate and autonomous contracts each between different parties to the other, it is impossible for the law to recognise tortious duties outside and cutting across the terms and performance of those contracts”. Accordingly, it was decided that the Defendant’s knowledge of the state of the parties’ accounts was irrelevant.

Referring to the decision of R D Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146 the Privy Council confirmed that “Banks are not concerned with the rights or wrongs of the underlying dispute but only with the performance of the obligations which they themselves have confirmed”. Therefore, in this case, the Claimant had committed themselves to a situation in which their bank may have to pay MG’s bank up to FF5million under an on demand letter of indemnity. As a result, providing that the terms of the letter of indemnity were complied with, the Claimant could have no claim against either its own bank, or the Defendant. The Claimant’s remedy for set off was against MG and the fact that remedy may be valueless was irrelevant.

It was held that to allow a party, such as the Claimant, to assert a tortious duty owed to it by another party’s bank would undermine and conflict with the deliberate and familiar contractual scheme agreed between the parties.

This decision of the Privy Council is good news for banks seeking to rely on letters of indemnity. Depending on the precise nature of the contractual arrangements between the parties and their banks, it confirms that a bank’s knowledge of their respective customer’s state of account should not preclude it from relying on a separately arranged letter of indemnity.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.