Banking law

Fraudulent representation

A director can be personally liable for making fraudulent representations on behalf of his company - and contributory negligence is not a defence to a claim for fraudulent misrepresentation.

In Standard Chartered Bank v Pakistan National Shipping Corporation [2002] UKHL 43, the House of Lords had to determine two issues: firstly, whether a director can be personally liable for fraudulent misrepresentations which he made on behalf of his company, and secondly whether contributory negligence can be raised, so as to reduce an award of damages in a claim for fraudulent misrepresentation.

Arvind Mehra was the managing director of Oakprime, which was the beneficiary under a letter of credit issued by Incombank and confirmed by Standard Chartered Bank (SCB).

The letter of credit was issued in relation to an international sale of bitumen.

The bitumen was required to be shipped not later than 25 October 1993 as a condition of the credit.

Contrary to the condition in the credit, the bitumen was not shipped before 25 October.

However, the shipping agents and ship owners, the Pakistan National Shipping Corporation (PNSC) agreed with Mr Mehra to issue a bill of lading dated 25 October 1993.

The backdated bill of lading was issued on 8 November before the shipment of the goods had been effected.

On 9 November, Oakprime presented the bill of lading and other documents to SCB.

The documents were presented along with a letter from Oakprime signed by Mr Mehra.

The letter stated that with one omission the documents were all those required by the credit.

Mr Mehra clearly knew this statement to be false having participated in the agreement to backdate the bill of lading.

The false statement was made to obtain payment under the letter of credit.

If SCB had known that the bill of lading had been falsely dated, it would not have made payment against the letter of credit.

Oakprime presented the omitted document and re-submitted other documents that had been found to be discrepant after the date for the negotiation of the credit had passed.

Despite knowledge that the documents had been presented late, SCB waived the late presentation and paid out $1,155,000.

Thereafter, SCB made its claim for reimbursement against Incombank.

SCB sent a standard form letter that, among other matters, stated that the relevant documents had been presented before the expiry date of the credit.

A relevant employee of SCB knew this statement to be false.

Incombank, which was unaware of Mr Mehra's false backdating on the bill of lading and of the falsity of SCB's statement that the documents had been presented in time, nevertheless rejected the documents on the grounds of other discrepancies that SCB had not noticed.

SCB sued Mr Mehra, Oakprime and PNSC for deceit and succeeded at first instance.

PNSC brought an unsuccessful appeal to the Court of Appeal on the ground that the loss suffered by SCB ought to be reduced under the Law Reform (Contributory Negligence) Act 1945 to such extent as the court thought just and equitable.

Mr Mehra successfully appealed to the Court of Appeal on the ground that he made the fraudulent representation on Oakprime's behalf, not personally.

SCB appealed to the House of Lords on the grounds that Mr Mehra should be held personally liable.

He denied personal liability, but claimed that if he was held to be personally liable the damages should be reduced as a consequence of the contributory negligence of SCB.

The PNSC settled the claim against it by paying SCB $1.7 million, and was given leave to withdraw its appeal.

Lord Hoffmann delivered the leading judgment.

He considered that conduct by a claimant cannot be 'fault' within the meaning of section 4 of the Act - and thus triggering the potential reduction of damages under section 1(1) of the Act - unless it gives rise to a defence of contributory negligence at common law.

Lord Hoffmann went on to hold that SCB's conduct was negligent in respect of the loss it suffered.

SCB was 'careless in making payment against documents which, as it knew or ought to have known, did not comply with the terms of the credit, on the assumption that it could successfully conceal these matters from Incombank'.

In these circumstances, SCB's conduct would not amount to a defence to its claim for deceit.

'If a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known it was false, it does not matter that he also held some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either'.

Consequently, their Lordships upheld the decision of the Court of Appeal in that in cases of fraudulent misrepresentation there is no common law defence of contributory negligence.

In relation to the second issue on appeal, Lord Hoffmann thought it irrelevant that Mr Mehra had made the representation on behalf of Oakprime and that the representation had been relied upon as a representation made on behalf of Oakprime.

Mr Mehra was not being sued for Oakprime's tort.

Mr Mehra was being sued on behalf of his own tortious actions, all the elements of which had been made out.

The fact that the same acts would give also give rise to liability against Oakprime was not the point.

Therefore, their Lordships allowed the appeal against M.

This case has several important consequences, all of which will assist a bank in the position of an innocent party to a fraud.

Firstly, banks that suffer as a consequence of a fraudulent misrepresentation made on behalf of a company will be able now to pursue both the company and the maker of the fraudulent representation.

Where a company is potentially unable to satisfy any judgment against it, the possibility of recovery against a director is now an attractive proposition.

Secondly, banks will hope that as the consequences of the judgment spread, directors will be less inclined to make fraudulent representations to banks due to knowledge that they will be unable to hide behind the corporate veil.

Thirdly, banks will not suffer a reduction in any award of damages for fraudulent misrepresentation as a consequence of any contributory negligence.

By Simon Sugar, barrister, 36 Bedford Row, London