Mauritius: The Privy Council Upholds The Court Of Appeal Of Mauritius On The Autonomy Of Letters Of Credit

Last Updated: 24 April 2015
Article by Sharmilla Bhima

In Mauri Garments Trading and Marketing Limited v The Mauritius Commercial Bank Limited [2015] UKPC 14 (Mauri Garments), the Judicial Committee of the Privy Council (Privy Council) reiterated the fundamental principle that "[b]anks are not concerned with the rights or wrongs of the underlying disputes [between parties] but only with the performance of the obligations which they themselves have confirmed."

In particular, it held that "[w]here 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, in Mauri Garments, the Privy Council took the view that "the knowledge which the [Privy Council] is prepared to assume that [the seller's bank] had of the state of account between [the purchaser and the manufacturer] is ... irrelevant."

Background of the Mauri Garments Case

The case of Mauri Garments concerned a contract that was entered into by two Mauritian entities on 25 November 1992 for the annual supply of an agreed number of garments (Contract). It was an express term of the Contract that the purchaser should provide a bank guarantee of FF 5 million to the manufacturer in order that the Contract bound the parties.

Accordingly, Banque S G Warburg Soditic SA of Zurich, in its capacity as the purchaser's bank, issued a letter of indemnity to the manufacturer's bank. Under the letter of indemnity, the purchaser's bank undertook "to pay [the manufacturer's bank] on first demand, irrespective of the validity and the effects of the [Contract] and waiving all rights of objection and defence arising from the [Contract], any amount up to FF 5,000,000 .../... [u]pon receipt of .../... your written confirmation that you have not received payment at maturity for the sum claimed under this letter of indemnity."

A dispute arose when the manufacturer's bank claimed, an amount FF 6.7 million under the letter of indemnity, in excess of the agreed aggregate amount of FF 5 million.

The purchaser sued the manufacturer's bank in a tortious action based on article 1382 of the Mauritius Civil Code "for unduly obtaining and/or enriching itself by soliciting and obtaining money to the [purchaser's] detriment". First, for the excess amount. Secondly, based on the information in a statement–of-affairs dated 6 May 1994 prepared by a receiver appointed by the manufacturer's bank confirming that the sum outstanding under the Contract was the lesser amount of FF 2,536,386.

Supreme Court of Mauritius Decision

A first instance, the Supreme Court of Mauritius (Supreme Court) dismissed the purchaser's claim. It rejected the purchaser's argument that the manufacturer's bank was bound by the terms of the Contract because the letter of indemnity was issued thereunder. The Supreme Court applied established authorities by which a letter of credit is autonomous from the underlying sales or other contract from which it derives its existence. In Mauri Garments, the principle applied to the letters of credits was extended to the letter of indemnity, which therefore, as a matter of law, constituted a separate and distinct contract of its own between banking institutions. Accordingly, in Mauri Garments, the terms and obligations of the purchaser's bank to pay the manufacturer's bank under the letter of indemnity were distinct from the terms and obligations of the purchaser under the Contract.

Court of Appeal of Mauritius Decision

On appeal, the Court of Appeal of Mauritius (Court of Appeal) dismissed the purchaser's appeal and upheld as correct the legal principle applied by the Supreme Court on letters of credit.

Privy Council Upholds the Court of Appeal of Mauritius Decision

On further appeal, the Privy Council dismissed the purchaser's appeal. It upheld as correct the interpretation that was made by both the Supreme Court and the Court of Appeal on the legal principle applicable to letters of credit. In the Mauri Garments, the principle applicable to letters of credit was extended to the letter of indemnity.

As mentioned earlier the Privy Council went further in its decision. Indeed, the Privy Council was not prepared to consider the level of knowledge that the manufacturer's bank may have had of the state of accounts between its client and the purchaser as it took the view that this was irrelevant.

Commercial Impact of the Privy Council Decision

The decision of the Privy Council in Mauri Garments augurs well for the future. Indeed, this decision comes at an important time as Mauritius continues to position itself as a jurisdiction of choice for international commerce.

Mauri Garments undeniably demonstrates an understanding by the Mauritian judicial system of the environment in which international commerce operates, and its willingness to ensure that its decisions are both consonant with international trends, and do not breach Mauritian law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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