3PLR – MANSOURI V SINGH

POLICY, PRACTICE AND PUBLISHING, 3PLR, LAW REPORTS

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MANSOURI

V

SINGH

COURT OF APPEAL

CIVIL DIVISION

[1986] 2 All E.R. 619

4 DECEMBER 1985, 12 FEBRUARY 1986

3PLR/1985/55 (CA-E)

 

BEFORE THEIR LORDSHIPS

MAY,

SLADE AND

NEILL LJJ

 

REPRESENTATION

Augustus Ullstein – for the plaintiff

Richard Methuen – for the defendant

 

MAIN ISSUES

BANKING AND FINANCE: INTERNATIONAL; Other International

Currency control – Exchange control – Foreign exchange control – Bretton Woods Agreements – Exchange contract – Enforceability – Exchange contracts involving currency of member of International Monetary Fund and contrary to exchange control regulations of that member – Contract for sale of airline tickets – Iranian resident buying tickets in Iran and selling them to defendant in England for sterling at double usual exchange rate – Payment of sterling cheque as part of transaction – Cheque stopped by defendant – Whether court ought to uphold payment of cheque – Whether cheque part of unenforceable exchange contract – Bretton Woods Agreements Order in Council 1946, Sch, Pt I, art VIII, s 2(b).

The plaintiff was an Iranian national who had settled in England in 1979 following a revolution in Iran. Being unable to get his personal wealth out of Iran because of Iranian exchange control regulations, and as a means of circumventing those regulations, he arranged with the defendant, a travel agent operating in England, to purchase airline tickets in Iran and forward them to the defendant in England to be exchanged for sterling at double the normal rate of exchange. Under international travel arrangements airline tickets could, by means of claiming a refund, be exchanged for cash anywhere in the world. A cheque for £33,334 drawn by the defendant and made payable to the plaintiff as part of the agreement was stopped by the defendant before it was paid. The plaintiff sued on the cheque. The judge refused to uphold the cheque on the ground that the agreement between the plaintiff and the defendant amounted to an exchange contract and that to enforce such a contract would be contrary to the Bretton Woods Agreements Order in Council 1946, which gave effect to s 2(b) of art VIII of the Bretton Woods Agreement. The plaintiff appealed to the Court of Appeal, contending, inter alia, that the obligation to make payment on the cheque was quite separate from any obligations which might exist under any underlying or associated transaction.

 

MAIN JUDGEMENT

Held –

Although there were compelling reasons for treating the rights and obligations which arose from commercial documents, such as bills of exchange, as being autonomous and unaffected by rights and obligations arising from associated transactions the court had a duty to refuse to enforce any monetary transaction, whether concealed by a cheque or bill of exchange or not, which constituted an exchange contract contrary to the Bretton Woods Agreement, and to refuse to enforce any linked transaction or contract which if enforced would give effect to the monetary transaction. Accordingly, since the parties to the English cheque were the same parties as the parties to the exchange contract, since it was intended that the cheque would be issued by the defendant to give effect to, and to carry out, his obligations under the exchange contract and since the exchange contract was contrary to the Bretton Woods Agreement, enforcement of payment of the cheque would be refused. However, the case would be sent back to the judge for retrial on that part of the case involving the defence that the Bretton Woods Agreement did not in fact apply.

Wilson Smithett & Cope Ltd v Terruzzi [1976] 1 All ER 817 and United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 All ER 720 applied.

Sharif v Azad [1966] 3 All ER 785 distinguished.

Appeal

12 February 1986. The following judgments were delivered.

NEILL LJ (delivering the first judgment at the invitation of May LJ). This is an appeal by the plaintiff, Mr Ahmed Mansouri, against the decision of Beldam J rejecting Mr Mansouri’s claim to recover the sum of £33,334 on a cheque drawn by the defendant, Mr P R Singh, on a branch of the Midland Bank in Harrow. The cheque was a postdated cheque dated 1 July 1980. The Midland Bank received instructions to stop payment on 30 June 1980.

On 3 December 1980 the plaintiff issued a writ claiming £33,334 together with interest. On 19 December 1980 the defendant served a defence asserting, inter alia, that no consideration had been given for the cheque or, in the alternative, that the consideration had wholly failed. On 7 May 1982 this defence was amended to raise some new contentions with which it is not necessary for me to deal; in addition a counterclaim was added.

On 9 June 1982, however, a routine application in the action came before Hirst J. The judge drew the attention of counsel to the possible relevance of the Bretton Woods Agreements and, after a short hearing, he made an order in the following terms:

`… that the Solicitors for the Parties do make enquiries in writing of the Treasury as to whether Iran were in 1979 and/or 1980 members of the International Monetary Fund or parties to the Bretton Woods agreement or whether Iranian Exchange Control regulations prohibited the export of funds from that country.’

As a result of this order inquiries were made and on 1 March 1983 the defendant served a reamended defence.

I shall have to refer to certain parts of the reamended pleading a little later, but first I should outline as briefly as possible the circumstances in which the cheque sued on was issued.

The plaintiff is an Iranian national. Before the overthrow of the Shah he was a man of position and wealth in Iran. Following the revolution, however, he and his wife decided to leave Iran and come to this country, to which Mrs Mansouri had been a frequent visitor for extended periods since about 1955.

Mrs Mansouri preceded her husband to England, arriving at about the end of 1978. The plaintiff reached England about a year later on 18 December 1979.

It seems that, from the outset, the plaintiff experienced difficulty in transferring funds from Iran to England. After Mrs Mansouri had been in England for a time, however, she was introduced through friends to the defendant, Mr Singh.

It will be convenient if I quote from the judgment of Beldam J to describe the arrangement which Mrs Mansouri reached with the defendant:

`[The defendant] is a travel agent with extensive business interests in the Middle and Near East. In the course of his business as a travel agent he had a use for air tickets. One way in which money could be got out of Iran was by buying air tickets in Iran for they could be exchanged for cash anywhere in the world under the international air travel arrangements by claiming a refund. [The defendant] had assisted other refugees from Iran in a similar way. Accordingly, Mrs Mansouri arranged with [the defendant] that, if her husband in Teheran deposited a sum in rials with a travel agent in Teheran nominated by [the defendant], he would give her the sterling equivalent of the sum in rials so deposited at an exchange rate considerably in excess of that officially recognised in Teheran. In general terms the rate of exchange which [the defendant] allowed was approximately double the official rate of exchange. Having made this agreement in England, Mrs Mansouri would then telephone her husband in Teheran. He would deposit the appropriate sum in rials with [the defendant’s] agent in Teheran. The agent in Teheran would notify [the defendant] in London that the sum had been deposited and would arrange for air tickets of equivalent value to be forwarded to [the defendant] in London. On receipt of the air tickets, [the defendant] would pay the agreed rate of exchange in sterling to Mrs Mansouri.’

Following the making of this arrangement, the plaintiff made the first deposit of 5m rials with a travel firm in Teheran on 10 October 1979. A few weeks later, after the air tickets had arrived, the defendant gave Mrs Mansouri a sterling cheque for £25,000 drawn on one of his travel companies, the cheque being calculated at the agreed exchange rate of 200 rials to the pound.

There then followed some further transactions of a similar nature to which it is not necessary for me to make any detailed reference. I need only observe that the agreed exchange rate for the later transactions in 1979 varied between 257·5 rials to the pound and 259 rials to the pound.

In February 1980, however, payments amounting to 17·5m rials were made in Teheran to Mr Cassidy, an employee of the defendant who had been sent out to Iran to make some investigations on the defendant’s behalf.

By this date the plaintiff had already arrived in England so the payments to Mr Cassidy were made by the relatives of the defendant who were still living in Teheran.

In the present case, we are concerned with two of these payments amounting to 10m rials. It was in exchange for these payments that the defendant gave the plaintiff the postdated cheque for £33,334 which is the basis of the plaintiff’s claim. For this transaction, the agreed exchange rate was 300 rials to the pound. Payment of the cheque was stopped on 30 June. The plaintiff presented the cheque on 30 September 1980, when it was dishonoured and notice of dishonour was given by the plaintiff’s solicitor a few days later.

It will be remembered that in his original defence the defendant raised the defence that the plaintiff had given no consideration for the cheque. The suggested basis for this defence was that on various dates before 1 July 1980 the defendant had made a series of payments equivalent to the £33,334 represented by the cheque. Beldam J decided, however, that these payments were in respect of interest and not of capital and accordingly the defence failed.

I must turn therefore to the second defence raised by the defendant, which was introduced by way of the reamended pleading served on 1 March 1983 and which succeeded before Beldam J.

The relevant parts of the reamended defence were in these terms:

`(i)    At all material times Iran was a member of the International Monetary Fund, and a party to the Bretton Woods Agreement. (ii) At all material times the exchange control regulations of Iran prohibited the export of currency from Iran and prohibited any person in Iran or a resident of Iran from making any payment to or for the credit of any person as consideration for or in association with the receipt by any person of a payment outside Iran. (iii) At all material times the Plaintiff was in Iran and/or a resident of Iran. (iv) The purpose of the agreement pleaded … was to realise in England assets held by or on behalf of the Plaintiff in Iran. (v) The means … devised and agreed between the parties to achieve the said purpose were designed to circumvent the said exchange control regulations and were contrary to the said regulations. (vi) By reason of the matters aforesaid and by virtue of article VIII Section 2(B) of the Bretton Woods Agreement the agreement between the parties and the series of transactions and dealings thereunder (of which the issue of the cheque the subject matter of this action was part) are unenforceable and the Defendant contends that payment under the cheque is unenforceable.’

In his amended reply, the plaintiff contended that the export of airline tickets from Iran was neither illegal nor contrary to the law of Iran, that the agreement was not contrary to the exchange control regulations of Iran and that in the alternative it was not in contravention of the Bretton Woods Agreements. In addition, the plaintiff relied on the fact that at the material time both he and the defendant were ordinarily resident in England and that the payment of the cheque was to take place in England. In the further alternative, the plaintiff claimed that the provisions of the Bretton Woods Agreements had no application to an agreement entered into by a political refugee who was unable to obtain permission to remove money or assets from the country from which he had been compelled to flee.

At the trial, Beldam J identified the issues raised by what I may call the Bretton Woods defence as follows. (1) Was the agreement between the plaintiff and the defendant an exchange contract? (2) If so, was it contrary to the exchange control regulations of Iran? (3) Were such regulations maintained or imposed consistently with the Bretton Woods Agreements? (4) If the court allows the plaintiff to recover on the cheque, will the court be enforcing the agreement between the parties?

These issues were formulated in the light of art VIII, s 2(b) of the Bretton Woods Agreements. Article VIII, s 2(b), which has been incorporated into English law by the Bretton Woods Agreements Act 1945 and the Bretton Woods Agreements Order in Council 1946, SR & O 1946/36, made under the 1945 Act provides:

`Exchange contracts which involve the currency of any Member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member … ‘

Beldam J decided each of these four issues in favour of the defendant.

Having decided that the contract was an exchange contract, he considered that he had sufficient evidence to determine the second and third issues in favour of the defendant and then went on to determine that, if the plaintiff were permitted to recover on the cheque, the court would be enforcing an exchange contract contrary to art VIII, s 2(b) of the Bretton Woods Agreements.

It does not appear that he dealt separately with the contention that the Bretton Woods Agreements had no application to agreements entered into by a political refugee.

In this court, the argument by counsel was confined to submissions on the second, third and fourth issues formulated by Beldam J. Counsel for the plaintiff submitted that the judge did not have sufficient evidence to determine the second and third issues in favour of the defendant, but that, even if there were sufficient evidence, payment of the cheque should be enforced because it was drawn on a bank in England and was to be paid in England in sterling.

It is therefore convenient to turn at once to the fourth issue, because it is common ground that, if the plaintiff is entitled to succeed on the basis that payment of the cheque can be enforced irrespective of the correctness of the decision on the second and third issues, it will be unnecessary to examine the state of the evidence as to the exchange control regulations of Iran.

The arguments on this issue put forward on behalf of the appellant can be summarised as follows: (a) that the obligation to make payment on a cheque is quite separate from any obligations which may exist under any underlying or associated transaction; (b) that the word `unenforceable’ in s 2(b) of art VIII of the Bretton Woods Agreements is not the equivalent of illegal; (c) that once the issue as to consideration had been resolved in favour of the plaintiff, payment of the cheque could and should be enforced unless the obligation to pay was tainted by illegality; (d) that the obligation to pay was not tainted by illegality: the fact that the parties might have concluded an unenforceable exchange contract did not taint with illegality the separate obligation to make payment on the cheque; (e) that the case was in its essentials indistinguishable from the decision of the Court of Appeal in Sharif v Azad [1966] 3 All ER 785, [1967] 1 QB 605.

In deciding the fourth issue in favour of the defendant (who seems to have had authority to draw the cheque on his cousin’s account) the judge in effect rejected these arguments. He decided that the true ratio decidendi of Sharif v Azad was that the relevant cheque did not offend the Pakistani exchange control regulations because the parties to it were resident in England and that, contrary to the submission put forward by counsel then appearing for the plaintiff, there was no second ratio decidendi in Sharif v Azad which required him to decide the matter in favour of the plaintiff.

The judge continued as follows:

`I have no doubt in the present case that to allow the plaintiff to recover on the cheque would be enforcing an exchange contract. It would be enforcing the performance of the defendant’s obligation under an exchange contract and it seems to me that there is no distinction between enforcing the contract and the obligations of the parties under it. To hold otherwise when the contract in performance of which the cheque was given was an unenforceable exchange contract would be to render the Bretton Woods Agreements ineffective. Moreover, the argument of the plaintiffs before the Court of Appeal in United City Merchants (Investments) Ltd v Royal Bank of Canada [1981] 3 All ER 142, [1982] QB 208 was repeated on appeal to the House of Lords ([1982] 2 All ER 720, [1983] 1 AC 168) (see the arguments of the appellants, [1983] 1 AC 168 at 173) but was rejected in the result because the House held that, to the extent that the letter of credit concealed a monetary transaction which was an exchange contract which infringed the control regulations of Peru, it was unenforceable.’

In the course of the argument in the present appeal, we were referred by counsel to passages in the judgments in four reported cases in which s 2(b) of art VIII has been considered in the English courts: Sharif v Azad; Wilson Smithett & Cope Ltd v Terruzzi [1975] 2 All ER 649, [1976] QB 683, Kerr J; [1976] 1 All ER 817, [1976] QB 683, CA; Batra v Ebrahim (1977) [1982] 2 Lloyd’s Rep 11; and United City Merchants (Investments) Ltd v Royal Bank of Canada (Mocatta J ([1979] 2 Lloyd’s Rep 498), Court of Appeal, House of Lords). In view, however, of the fact that the effect of s 2(b) on a transaction involving a letter of credit has been recently considered in the House of Lords in United City Merchants (Investments) Ltd v Royal Bank of Canada, I propose to turn at once to the speech of Lord Diplock in that case, with which the remainder of their Lordships expressed their agreement.

I should refer as briefly as possible to the facts. The second plaintiffs in the Royal Bank of Canada case sold some plant for the manufacture of glass fibre to a Peruvian company. The original quotation for the plant was $US256,043, but it was agreed between the buyers and the sellers that the invoice price should be shown at an inflated figure so as to enable the buyers to obtain a fund of US dollars in the United States.

Payment was to be in London by confirmed irrevocable transferable letter of credit for the invoice price plus freight, payable as to 20% of the invoice price on the opening of the credit, as to 70% of the invoice price and 100% of the freight on presentation of shipping documents and as to the balance of 10% of the invoice price on completion of erection of the plant in Peru.

The sellers agreed that within ten days of drawing on the documentary credit for cash of the three instalments of the invoice price they would remit one-half of the amount so drawn to the dollar account in Miami of an American corporation controlled by the buyers.

In March 1976 a letter of credit was issued in Peru and confirmed by the Royal Bank of Canada (the bank). In December 1976 the plant was loaded at Felixstowe for shipment to Peru, but when the shipping documents were presented to the bank for payment the bank refused to pay.

United City Merchants (Investments) Ltd, to whom the sellers’ rights under the letter of credit had been assigned in July 1976, then brought proceedings against the bank. At that stage the bank were relying on the contention that they were entitled to reject the documents because the loading brokers had fraudulently inserted a false date on a notation stamped on the bill of lading.

Though this aspect of United City Merchants (Investments) Ltd v Royal Bank of Canada is not directly relevant to the instant case, it may be noted that the bank’s contention failed on the ground that the plaintiffs were innocent of the brokers’ fraud and that therefore the bank could not reject the documents which were in order on their face.

It may also be noted that in the House of Lords Lord Diplock treated as trite law the proposition that, where the international sale of goods is financed by a confirmed irrevocable documentary credit, there are four autonomous though interconnected contractual relationships involved, including (where payment is to be made through the confirming bank) the contract between the confirming bank and the seller under which the confirming bank undertakes to pay the seller up to the amount of the credit against presentation of the stipulated documents (see [1982] 2 All ER 720 at 724-725, [1983] 1 AC 168 at 182-183).

A little later, Lord Diplock used these words to emphasise the autonomous nature of the contract between the confirming bank and the sellers ([1982] 2 All ER 720 at 725, [1983] 1 AC 168 at 183):

`The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give the seller an assured right to be paid before he parts with control of the goods and that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.’

The further defences raising questions of illegality and unenforceability and involving the exchange control regulations of Peru and the Bretton Woods Agreements were introduced into the case by way of amendments which were allowed by Mocatta J when the case came on for trial in May 1978 (see [1979] 1 Lloyd’s Rep 267) and were the subject matter of a separate judgment which was delivered in March 1979.

Mocatta J upheld the defence based on the Bretton Woods Agreements holding that, as the sale contract could be described as an exchange contract as being a monetary transaction in disguise, any payment by the bank under the letter of credit would be giving effect to some extent to the exchange contract in a manner contrary to the Peruvian regulations and that, in view of the very strong words of the Bretton Woods Agreements Order in Council 1946, the court should not enforce the letter of credit because to do so would enable the Order in Council to be avoided.

The plaintiffs appealed to the Court of Appeal and thereafter to the House of Lords. The final result was that the plaintiffs were held to be entitled to enforce the letter of credit so as to enable them to receive payment for the true cost of the plant and for the freight, but the part of the letter of credit which was intended to give effect to the monetary transaction which infringed the Peruvian exchange control regulations was held to be unenforceable.

I shall have to cite one or two passages from the speech of Lord Diplock a little later in the course of my summary of the relevant parts of the decision of the House of Lords in the Royal Bank of Canada case. From that decision I would venture to extract the following guidance germane to a case such as the present.

(1)     The term `exchange contracts’ in s 2(b) of art VIII is to be interpreted narrowly. The term is confined to contracts to exchange the currency of one country for the currency of another: it does not include contracts entered into in connection with sales of goods which require the conversion by the buyer of one currency into another in order to enable him to pay the purchase price. The House of Lords approved the interpretation based on the term by the Court of Appeal in Wilson Smithett & Cope Ltd v Terruzzi [1976] 1 All ER 817, [1976] QB 683. The acceptance of this narrow interpretation has been criticised: see, for example, Gold ` “Exchange Contracts”, Exchange Control and the IMF Article of Agreement’ (1984) 33 ICLQ 777, but as the law stands at present an important limitation is imposed on the scope of s 2(b) in English law.

(2)     The word `unenforceable’ in s 2(b) means that the relevant exchange contract cannot be enforced by the courts. The contract is not rendered `illegal’ by English law nor are acts undertaken in this country in performance of such a contract rendered unlawful, but, on the other hand, an English court must decline to enforce an exchange contract which appears to the court to be unenforceable by reason of s 2(b) even though the parties themselves have failed to raise the point. The House of Lords approved the statement by Lord Denning MR in Basra v Ebrahim [1982] 2 Lloyds 11 at 13 (cited by Ackner LJ in United City Merchants (Investments) Ltd v Royal Bank of Canada [1981] 3 All ER 142 at 166, [1982] QB 208 at 241-242) as to the effect which should be given by English courts to the word `unenforceable’.

(3)     The court should be aware of the fact that men of business may seek to avoid s 2(b) by various artifices (see Wilson Smithett & Cope Ltd v Terruzzi [1976] 1 All ER 817 at 827, [1976] QB 683 at 714) and should therefore look at the substance of the contract and not at the form. Accordingly, it should not enforce a contract that is a `mere monetary transaction in disguise’.

(4)     The question whether and to what extent a contract is unenforceable by reason of s 2(b)-

`because it is a monetary transaction in disguise is not a question of construction of the contract but a question of the substance of the transaction to which enforcement of the contract will give effect.’

(See per Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 All ER 720 at 730, [1983] 1 AC 168 at 189; his emphasis.)

In relation to the enforceability of the letter of credit, Lord Diplock continued as follows ([1982] 2 All ER 720 at 730, [1983] 1 AC 168 at 189-190):

`If the matter were to be determined simply as a question of construction, the contract between the sellers and the confirming bank constituted by the documentary credit fell altogether outside the Bretton Woods Agreements it was not a contract to exchange one currency for another currency but a contract to pay currency for documents which included documents of title to goods. On the contrary, the task on which the court is engaged is to penetrate any disguise presented by the actual words the parties have used, to identify any monetary transaction (in the narrow sense of that expression as used in the Terruzzi case) which those words were intended to conceal and to refuse to enforce the contract to the extent that to do so would give effect to the monetary transaction. In the instant case there is no difficulty in identifying the monetary transaction that was sought to be concealed by the actual words used in the documentary credit and in the underlying contract of sale. It was to exchange Peruvian currency provided by the buyer in Peru for $US331,043 to be made available to it in Florida; and to do this was contrary to the exchange control regulations of Peru.’

(5)     It seems to me to follow from the passage from Lord Diplock’s speech cited above that where the court can identify a monetary transaction which is an exchange contract within s 2(b) it should refuse to enforce that transaction even though such refusal may involve the court in declining to give effect in whole or in part to an autonomous contract constituted by a letter of credit.

In the Royal Bank of Canada case the letter of credit was enforced in part, but as Griffiths LJ observed in the Court of Appeal in that case `it would not be difficult to envisage the use of a completely spurious sale contract to disguise the exchange contract’ (see [1981] 3 All ER 142 at 173, [1982] QB 208 at 250).

How, then, should this guidance be applied to the facts of the instant case where the autonomous obligations arise not under a documentary credit, but under a sterling cheque drawn by the defendant on an English bank and of which the plaintiff is the payee?

The judge identified the underlying exchange contract in these words:

`I have no doubt that this was an exchange contract. [The plaintiff] wanted to exchange rials which he had in Teheran but could not export to England for sterling in England. [The defendant], who had sterling in England, wanted to buy rials in Teheran, albeit at an inflated rate of exchange, so he could purchase air tickets there.’

Accordingly, if the parties had adopted some stratagem involving a letter of credit in order to make sterling available to the plaintiff in London in exchange for rials paid to the defendant in Teheran, it seems clear that, assuming that the second and third issues had been satisfactorily resolved in the defendant’s favour, payment under the letter of credit could not have been enforced in so far as such enforcement would have been giving effect to the underlying and offending monetary transaction.

Is the position materially different because the plaintiff is suing on a cheque and not as the beneficiary of a letter of credit? In support of the proposition that the decision in the Royal Bank of Scotland case is distinguishable the following arguments can be advanced.

(a)     In Sharif v Azad both Diplock and Russell LJJ appear to have treated the autonomous obligation under the English cheque as being unaffected by the underlying and associated exchange contract. Diplock LJ said ([1966] 3 All ER 785 at 790, [1967] 1 QB 605 at 619):

`The plaintiff is not suing on [the exchange] contract, however, whether it was bi-partite or tri-partite. He is suing on the cheque which was issued by the defendant in performance of this contract. A cheque issued in performance of an agreement which is merely unenforceable is not “affected by illegality” … ‘

And Russell LJ said ([1966] 3 All ER 785 at 790-791, [1967] 1 QB 605 at 609):

`An English resident sues an English resident on two sterling cheques totalling £300 drawn in favour of the former by the latter in England on an English bank. To defend such an action the defendant must show either that there was no consideration for the cheque or that it was tainted by illegality in English law … The provisions of the Bretton Woods Agreements Order in Council, 1946, made under the Bretton Woods Agreements Act, 1945, go no further than to make certain exchange contracts unenforceable. It says nothing about an action such as this on the cheque.’

These passages might suggest that an action on an English cheque, though issued `in performance of ` an offending exchange contract, cannot be defeated except on one of the grounds specified in s 30(2) of the Bills of Exchange Act 1882.

(b)     In the Royal Bank of Canada case [1981] 3 All ER 142 at 155, [1982] QB 208 at 227 in the Court of Appeal Stephenson LJ treated Sharif v Azad as depending `on its special facts and the law applicable to cheques’ and in an earlier passage he drew attention to the fact that the claim in Sharif‘s case was on a cheque and that a cheque was a negotiable instrument (see [1981] 3 All ER 142 at 154, [1982] QB 208 at 225). In the same case Ackner LJ also distinguished Sharif‘s case on the basis that the claim was based on a bill of exchange to which s 30 of the Bills of Exchange Act 1882 was relevant and added that, in contradistinction to the rights under a bill of exchange, `the autonomy of a banker’s letter of credit from the underlying sale contract is of a different character’ (see [1981] 3 All ER 142 at 168, [1982] QB 208 at 244).

Griffiths LJ, in addition, treated as a point of distinction the fact that in Sharif‘s case the action was `on an English bill of exchange which was not tainted by illegality in English law and for which consideration had been given’ (see [1981] 3 All ER 142 at 173, [1982] QB 208 at 251).

(c)     It was not suggested in the Royal Bank of Canada case in the House of Lords that the decision in Sharif‘s case was in any way affected by their Lordships’ ruling on the Bretton Woods point. Indeed, though cited in argument, Sharif‘s case was not referred to by Lord Diplock at any point in his speech. It might therefore be inferred that a decision concerning a letter of credit had no direct relevance to a case involving a bill of exchange.

These arguments merit careful consideration, but I am satisfied that they do not provide any satisfactory basis for distinguishing the decision of the House of Lords in the Royal Bank of Canada case.

In the first place, it seems clear that in Sharif‘s case the real basis of the decision was that the cheque drawn by the defendant on William Deacon’s Bank in Manchester in favour of the plaintiff did not offend against the currency regulations of Pakistan (see [1966] 3 All ER 785 at 787, 790, [1967] 1 QB 605 at 614, 618 per Lord Denning MR and Diplock LJ; for the purpose of the present judgment, I can ignore the fact that the two smaller cheques sued on were substituted for the £300 cheque).

Russell LJ did not expressly refer to s 5 of the Foreign Exchange Regulations Act 1947 of Pakistan in the context of the sterling cheque, but he was disposed to hold that, in the circumstances of the case, s 5 of the 1947 Act was excluded even in relation to the rupee cheque which had been drawn by a third party and had been given to the defendant as consideration for the sterling cheque for £300.

It is true that in his judgment Diplock LJ considered the possibility that the sterling cheque had been issued pursuant to a tripartite contract involving the drawer of the rupee cheque in addition to the plaintiff and the defendant and expressed the opinion that the sterling cheque would not have been affected by illegality even though the tripartite contract was unenforceable by reason of the Bretton Woods Agreements. But it is to be observed that Diplock LJ prefaced this part of his judgment by stating that the existence of such a tripartite contract was a matter for the defendant to prove and that the point was never investigated at the trial (see [1966] 3 All ER 785 at 790, [1967] 1 QB 605 at 618).

Accordingly, I do not consider that, even in the absence of the Royal Bank of Canada decision Sharif‘s case could be regarded as an authority binding on this court which would oblige us to hold that payment on a sterling cheque given in England in pursuance of an exchange contract which was unenforceable by reason of the Bretton Woods Agreements had nevertheless to be enforced by an English court.

In the second place, I can find no satisfactory basis for distinguishing the present case from the decision in the Royal Bank of Canada case. Clearly, there are strong and compelling reasons for treating the rights and obligations which arise from commercial documents such as bills of exchange, letters of credit and performance bonds as being autonomous and as having an existence of their own which is unaffected as far as possible by the rights and obligations which spring from associated transactions.

These reasons may be particularly obvious in the case of a cheque or bill of exchange which contains no reference on its face to any underlying or associated transaction and which has the characteristic of being negotiable. But it is to be remembered that, where s 2(b) applies, the court, by virtue of an international agreement, has an obligation not to enforce the exchange contract. Accordingly, once a s 2(b) point arises, either because the point is raised by one of the parties or because the point is perceived by the court itself, the court has two tasks to perform: (a) to identify any monetary transaction, whether concealed or not, which constitutes a relevant exchange contract; (b) to refuse to enforce the monetary transaction or any linked transaction or contract which if enforced would give effect to the monetary transaction.

If this be the right approach, it seems to me to follow that in the instant case, where the parties to the English cheque were the same parties as the parties to the exchange contract and where it was intended and contemplated that the cheque would be issued by the defendant to give effect to and to carry out his obligations under the exchange contract, the court is obliged to refuse to enforce payment of the cheque. Indeed, it might be said that to enforce the payment of this cheque in the circumstances of the instant case would be to do violence to the principles underlying the Bretton Woods Agreements.

Moreover, to my mind the question whether the enforcement of the cheque would give effect to the exchange contract between the plaintiff and the defendant is quite a different question from any question posed by s 30 of the 1882 Act.

I have not reached this conclusion without misgivings, because so much importance is rightly attached to the autonomous nature of a negotiable instrument. Furthermore, I would wish to keep open for consideration in some future case the question whether an obligation to make payment to an innocent third party to whom a cheque had been negotiated could be regarded as an obligation which, if performed, would give effect to the exchange contract. I would therefore uphold the judge’s decision on the fourth issue.

Accordingly, it becomes necessary to return to the second and third issues, for the resolution of which counsel for the plaintiff submitted that the judge had no sufficient evidence. I can deal with this matter quite shortly. In order to decide that the cheque was unenforceable under s 2(b) it was necessary for the judge to find (a) that the exchange contract was contrary to the exchange control regulations of Iran and (b) that these regulations were maintained or imposed consistently with the Bretton Woods Agreements.

It seems clear, however, that at the trial the defendant, on whom the onus lay, was unable to produce any evidence about the regulations and indeed at the conclusion of the hearing the judge said that he would not decide the second and third issues against the defendant without giving him an opportunity to call further evidence. In the result, the judge decided these issues in favour of the defendant on the basis of certain admissions made by the plaintiff and of certain assumptions which the judge considered he was entitled to make.

With the utmost respect to the judge, I do not think that this was a satisfactory manner of resolving these important issues. I have regretfully come to the conclusion that the case must be sent back for a retrial on that part of the case which involves the Bretton Woods defence. On the retrial, the following matters will be in issue: (a) the precise nature of the agreement between the plaintiff and the defendant; it does not seem to me that this is a matter which can be satisfactorily excluded from the retrial as the evidence, if any, about the Iranian regulations would have to be directed to the proved facts; (b) the exchange control regulations of Iran in force at the material time; and (c) whether these regulations were maintained or imposed consistently with the Bretton Woods Agreements.

It may be, however, that, before this appeal is finally disposed of, the court should give further directions as to the matters which are to be before the judge at the retrial.

SLADE LJ. I agree.

MAY LJ. I also agree.

Case remitted to Beldam J for retrial.

Solicitors: Clintons (for the plaintiff); Paul Gromett & Co (for the defendant).

Carolyn Toulmin Barrister.

Cases referred to in judgments

Batra v Ebrahim (1977) [1982] 2 Lloyd’s Rep 11, CA.

Sharif v Azad [1966] 3 All ER 785, [1967] 1 QB 605, [1966] 3 WLR 1285, CA.

United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 All ER 720, [1983] 1 AC 168, [1982] 2 WLR 1039, HL; rvsg [1981] 3 All ER 142, [1982] QB 208, [1981] 3 WLR 242, CA; affg [1979] 1 Lloyd’s Rep 267 and [1979] 2 Lloyd’s Rep 498.

Wilson Smithett & Cope Ltd v Terruzzi [1976] 1 All ER 817, [1976] QB 683, [1976] 2 WLR 418, CA; affg [1975] 2 All ER 649, [1976] QB 683, [1975] 2 WLR 1009.

Case also cited

Lamont (James) & Co Ltd v Hyland Ltd (No 1) [1950] 1 All ER 341, [1950] 1 KB 585.