Australia: Certainty of drafting letters of credit - Lessons for surety

A recent decision of the New South Wales Supreme Court of Appeal (Griffin Energy Group Pty Ltd (subject to Deed of Company Arrangement) v ICICI Bank Limited [2015] NSWCA 29), although relating very much to Letters of Credit (LC's) nevertheless should also provide comfort to issuers of similar instruments such as surety bonds. Specifically the decision highlights the willingness of courts to ensure strict compliance with the wording of financial instruments.

Surety bond providers should take heart from the decision because it demonstrated that construction of such instruments is paramount and that

  1. Very careful consideration must be given, at a practical level, to the expiry date accepted by the beneficiary of a letter of credit;
  2. Strict compliance with the terms of the instrument is required to invoke the issuing bank's commitment to make payment under the instrument; and


The facts of the case are quite crucial to the outcome and therefore bear being set out in some detail.

  • ICICI Bank Limited issued 3 LC's in favour of Griffin Energy Group Pty Limited (Deed Administrators Appointed)
  • The LC's were provided in accordance with a sale agreement on behalf of the purchaser to secure payment to the vendor (Griffin Energy Group) of the final instalment of purchase price due by the purchaser on 1 March 2015.
  • Clause 6.1 of the sale agreement provided that the deferred purchase consideration of $150 million 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." (Payment Date)
  • 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...".
  • The Payment 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 LC's provided, among other things:
    1. that delivery of the LC to ICICI 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);
    2. the LC was subject to the International Standby Practices - ISP98 which set out various matters in relation to the credits including that:
      1. a standby is an irrevocable independent documentary (emphasis added) and binding undertaking when issued and need not so state;
      2. because the standby is irrevocable , Issuers obligations under the 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;
      3. 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);
      4. 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 LC's, 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 reasons:

  1. 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;
  2. The letters of credit were expressed to expire on Sunday, 1 March 2015;
  3. Monday, 2 March 2015 was a public holiday in Western Australia (which was the jurisdiction the parties had submitted to in the sale agreement).

1. Initial Judgement

The vendor initially commenced proceedings in the Supreme Court to seek a declaration that presentation of the LC's could be made by 1.30pm Singapore time on 3 March 2015 and the issuer would be liable to make payment under the LC's. Justice Hammerschlag made the following findings:

  1. All types of LC's require the beneficiary to comply strictly with the terms of the LC's 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 LC's.
  2. The effect of the sale agreement was to provide that the final instalment must be paid on 3 March 2015. This was the next business day in Western Australia after 28 February. This was a function of the operation of the boilerplate provision at clause 1(g) in the sale agreement.
  3. The final date by which the LC's could be presented when taking into account the expiry date and the impact of ISP98 was 2 March 2015.
  4. The final instalment amount under the sale agreement only became due and payable on 3 March 2015. Accordingly, 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 (i.e. 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.

2. Conclusions of the Court of Appeal

The Court of Appeal confirmed the decision of the Primary Judge.

The Court of Appeal confirmed that LC's are stand alone instruments and that the obligations of the issuing bank to pay under them are not to be determined by reference to any provision of the sale agreement.

The Court of Appeal indicated, among other things, that because the LC's 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 could 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 right to be paid the final instalment of the purchase price. The Court of Appeal concluded that each LC 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:

  1. allowing sufficient time for a beneficiary to comply strictly with the terms of a letter of credit prior to its expiry; and
  2. 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.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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