Case: United City Merchants (Investments) Limited v Royal Bank of Canada [1983] 1 AC 168
Outcome: referred to
In United City Merchants (Investments) Limited v Royal Bank of Canada [1983] 1 AC 168 the plaintiffs sued the defendants under a letter of credit. Lord Diplock, with whom the other law Lords agreed, discussed the autonomy principle and the reasons for it. Although a lengthy passage, I set it out in full. Lord Diplock said (at 182-183): "It is trite law that there are four autonomous though interconnected contractual relationships involved. (1) The underlying contract for the sale of goods, to which the only parties are the buyer and the seller; (2) the contract between the buyer and the issuing bank under which the latter agrees to issue the credit and either itself or through a confirming bank to notify the credit to the seller and to make payments to or to the order of the seller (or to pay, accept or negotiate bills of exchange drawn by the seller) against presentation of stipulated documents; and the buyer agrees to reimburse the issuing bank for payments made under the credit. For such reimbursement the stipulated documents, if they include a document of title such as a bill of lading, constitute a security available to the issuing bank; (3) if payment is to be made through a confirming bank the contract between the issuing bank and the confirming bank authorising and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit; (4) the contract between the confirming bank and the seller under which the confirming bank undertakes to pay to the seller (or to accept or negotiate without recourse to drawer bills of exchange drawn by him) up to the amount of the credit against presentation of the stipulated documents. Again, it is trite law that in contract (4), with which alone the instant appeal is directly concerned, the parties to it, the seller and the confirming bank, 'deal in documents and not in goods,' as article 8 of the Uniform Customs puts it. If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods 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." 57 Lord Diplock said that there was one established exception to the general statement of principle as to the contractual obligations of the confirming bank to the seller and that was where the seller, "for the purpose of drawing on the credit, fraudulently presents to the confirming bank's documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue" (at 183). Capital Steel accepts that there are two other exceptions and they are breach of a negative stipulation and unconscionable conduct within s 51AA of the TPA. That concession by Capital Steel appears to be correct having regard to the authorities. 58 In view of Capital Steel's concession, the real issue in this case is whether Orrcon has established a serious question to be tried that Capital Steel has been guilty of unconscionable conduct. 59 Orrcon submits that there was unconscionable conduct in this case because Capital Steel was purporting to exercise a legal right, namely, the right to claim payment under the letters of credit in circumstances in which the purported exercise of that right is harsh or oppressive or unreasonable and in bad faith.