The New South Wales Supreme Court of Appeal recently had occasion to consider the construction of letters of credit issued by ICICI Bank Limited in favour of Griffin Energy Group Pty Limited (Deed Administrators Appointed) in the case of Griffin Energy Group Pty Ltd (subject to Deed of Company Arrangement) v ICICI Bank Limited  NSWCA 29. While the case did not present any significant issue of legal principle, it demonstrated that:
- Very careful consideration must be given, at a practical level, to the expiry date accepted by the beneficiary of a letter of credit;
- Strict compliance with the terms of the letter of credit instrument is required to invoke the issuing bank's commitment to make payment under the letter of credit; and
- Construction of the letter of credit instrument is paramount.
It was accepted that regard was not to be had to the underlying agreement in construing the letter of credit which had been provided.
Briefly, 3 letters of credit were provided in accordance with a sale agreement on behalf of the purchaser to secure payment to the vendor of the final instalment of purchase price due by the purchaser on 1 March 2015.
Clause 6.1 of the sale agreement provided that deferred purchase consideration of $150million was payable "on the earlier of: (i) four years from the Completion Date; and (ii) the date of first export of coal produced by GCMC via the newly constructed facilities and/or berth at the Port of Bunbury." The Completion Date was 28 February 2011. The date of the first export of coal was not ultimately relevant to the payment obligation. The sale agreement also contained a standard boilerplate provision at clause 1(g) which provided that "if the date on or by which any act must be done under this document is not a Business Day, the act must be done on or by the next Business Day...". It was accepted that the date which was four years from the Completion Date was either Saturday, 28 February 2015 or Sunday, 1 March 2015 (nothing turns on whether it was the Saturday or the Sunday).
Each of the letters of credit provided, among other things:
- that delivery of the letter of credit to the relevant Bank was to be accompanied with a declaration stating that "the amount claimed is due and payable (emphasis added) to the Beneficiary by the Account Party" (Clause 2);
- the letter of credit was subject to the International Standby Practices - ISP98 which set out various matters in relation to the credits including that:
- a standby is an irrevocable independent documentary (emphasis added) and binding undertaking when it issued and need not so state;
- because the standby is irrevocable and Issuers obligations under standby cannot be amended or cancelled by the Issuer except as provided in the standby or as consented to by the person against whom the amendment or cancellation is asserted;
- because a standby is documentary an Issuer's obligations depend on the presentation of documents and an examination of required documents on their face (emphasis added);
- if the last date for presentation stated in the standby (whether stated to be the expiration date or the date by which the documents must be received) is not a business day of the Issuer or nominated person where presentation is to be made, then presentation made there on the first following business day shall be deemed timely (emphasis added).
Despite ISP98, the issuer of the letters of credit, ICICI Bank, contended that the beneficiary under the letters could not demand payment because the final instalment was not yet due and payable under the sale agreement and that would not occur until 3 March 2015 by which time the letters of credit would have expired.
The issue of construction arose for 3 particular reasons:
- The scheduled date for payment of the last instalment of purchase price was agreed to be either Saturday, 28 February 2015 or Sunday, 1 March 2015, neither of which was a business day;
- The letters of credit were expressed to expire on Sunday, 1 March 2015;
- Monday, 2 March 2015 was a public holiday in Western Australia (which was the jurisdiction the parties had submitted to in the sale agreement).
The vendor initially commenced proceedings in the Supreme Court to seek a declaration that presentation of the letters of credit could be made by 1.30pm Singapore time on 3 March 2015 and the issuer would be liable to make payment under the letters. Justice Hammerschlag made the following findings:
- All types of letters of credit require the beneficiary to comply strictly with the terms of the letter of credit in order to invoke the issuing Bank's commitment. In this instance that meant compliance strictly with the requirements set out in clause 2 of each of the letters of credit.
- The effect of the sale agreement was to provide that the final instalment must be paid on 3 March 2015 which was the next business day in Western Australia after 28 February because of the operation of the boilerplate provision at clause 1(g) in the sale agreement.
- The final date by which the letter of credit could be presented when taking into account the expiry date of the letters of credit and the impact of International Standby Practice ISP98 was 2 March 2015.
- The final instalment amount under the sale agreement only becomes due and payable on 3 March 2015 and that the vendor would not be able to provide a declaration on 2 March 2015 that such amount was due and payable.
The vendor submitted that the final payment obligation was still due and payable on the due date (ie 28 February or 1 March 2015) and that clause 1.2(g) of the sale agreement did not displace that obligation but merely operated to shield the buyer from the consequences of not paying on that day itself. This argument was not accepted by the Primary Judge.
Conclusions of the Court of Appeal
The Court of Appeal confirmed the decision of the Primary Judge.
The Court of Appeal confirmed, and the parties accepted, that the letters of credit are stand alone instruments and that the obligations of the issuing bank to pay under them were not to be determined by reference to any provision of the sale agreement. This principle is founded on the importance of a letter of credit being the equivalent of a cash payment.
The Court of Appeal indicated, among other things, that because the letters of credit required the vendor to declare that the amount claimed was due and payable to it, it would be necessary to look at the terms of the sale agreement to determine whether, on a particular day, the amount claimed can properly be said to be due and payable. The Court of Appeal concluded that the final instalment, instead of being payable on 28 February 2015 or 1 March 2015, was now payable on 3 March 2015, which was the next business day in Western Australia after 28 February and that prior to that date the vendor had no legal entitlement to maintain an action to recover that amount. The Court of Appeal concluded that each letter of credit would expire no later than 2 March 2015 and therefore dismissed the appeal. The consequence, which is severe, was that the issuing bank was not required to pay to the vendor the final amount that was due to it under the sale agreement.
The decision reinforces the importance of:
- allowing sufficient time for a beneficiary to comply strictly with the terms of a letter of credit prior to its expiry; and
- reconciling the obligations of a party in respect of the underlying transaction document with the mechanism for payment of the credit given in respect of those obligations.
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.