UK: Letters Of Credit: Autonomy Principle Affirmed (Court Of Appeal)

In proceedings where Clyde & Co acted for the successful appellant, PetroSaudi, the Court of Appeal has held that a solicitor who signed demands under a standby letter of credit correctly understood the statement of law he was certifying. Overturning the High Court's decision that the signatory was fraudulent in his representation of law, Christopher Clarke LJ (with whom Lewison LJ agreed) held that the signatory's understanding not only was far from fraudulent but in fact was "the same conclusion as I have reached" and "consistent with commercial good sense".

Standby Letters of Credit

The commercial purpose of a standby letter of credit is to ensure that the beneficiary can obtain payment from a creditworthy bank of sums due under a principal contract, regardless of whether those sums are disputed or whether the counterparty is unable or disinclined to pay. Indeed in countries with a payment risk such as Venezuela, failure to procure or provide a letter of credit may prevent parties from concluding a contract in the first place, certainly where Contractors are negotiating contracts with state entities such as PDVSA.

Standby letters of credit are sometimes described as 'equivalent to cash' or 'the life-blood of international commerce'. English law provides that an issuing bank's obligation to pay out against a compliant demand is a sacrosanct and free-standing obligation, independent of the parties' performance of obligations under the principal contract. This 'autonomy principle' has only a handful of tightly circumscribed exceptions. One of these – the fraud exception – permits a bank to withhold payment where it is clearly established that there was fraud in procuring the letter of credit or where the presentation itself is clearly fraudulent.

The Background

In 2009 the appellant, PetroSaudi Oil Services (Venezuela) Ltd ("POS"), supplied a drill ship to PDVSA Servicios SA ("PDVSA"), a Venezuelan state entity, pursuant to a contract under Venezuelan law.  In light of what the judgment describes as "Venezuela's dilatory payment history", an autonomous standby letter of credit governed by English law and issued outside Venezuela was procured in favour of POS to provide security in respect of payments from PDVSA.

POS conducted drilling services and rendered invoices totalling some USD 129 million to PDVSA under the drilling contract. An agreed credit period elapsed without payment of any of these invoices. The dispute over payment of these and other invoices was referred to arbitration.

The drilling contract contained two terms intended to ensure payment by PDVSA of invoices before an arbitral award: a "pay now, argue later" clause and a clause for payment based on deemed acceptance of invoices. By its First and Second Partial Awards, however, the UNCITRAL arbitrators held that both these terms were rendered null and void by the effect of Article 141 of the Venezuelan Public Contracting Law, which prohibits payment by state entities before certain procedures of verifying and authorising payment of invoices are carried out.

The arbitrators initially restrained on an interlocutory basis POS from seeking payment of invoices under the letter of credit. Subsequently POS was permitted to call on the letter of credit in respect of operating expenses. Following the tribunal's decisions on the effect of Article 141, the tribunal ruled that it had procedural authority to protect the rights asserted by PDVSA if appropriate to do so, however in this case it was not appropriate: POS had free-standing payment rights under the letter of credit, which rights had been not only contemplated but signed up to by PDVSA, and those rights fell to be determined by the English courts. Consequently the arbitrators lifted the injunction. The significance and effect of the arbitrators' decision was itself a matter of dispute between the parties.

The Presentation

Following the removal of the injunction, POS issued proceedings in the English High Court seeking a declaration that an intended presentation would be compliant with the terms of the letter of credit and that the issuing bank would be liable to pay the full amount of the demands.

The following day POS made its presentation to the issuing bank. The POS company director, who was also its General Counsel, certified the representation required by the letter of credit that PDVSA was "obligated to [POS]... to pay the amount demanded under the Drilling Contract".

On receipt of the demands, the issuing bank gave notice that it considered there had been a compliant presentation and stated its intention to pay the proceeds to POS. Before the bank could do so, however, PDVSA sought an injunction restraining the bank from paying out and requiring POS to withdraw the demands. The trial of the matter was listed by consent for an expedited hearing; remarkably between the issuing of the Claim Form and completion of the final trial there were just 11 days.

First Instance

The High Court considered the meaning of the words in the certificate that PDVSA was "obligated to [POS]... to pay the amount demanded under the drilling contract". In evidence the signatory asserted that PDVSA had an underlying payment obligation in respect of invoices duly submitted under the drilling contract which Article 141 of the Venezuelan Public Contracting Law prevented it from discharging at present; accordingly the representation in the certificate was true as a matter of law and of his honest belief.

His Honour Judge Waksman QC, sitting as a judge of the Commercial Court, disagreed, holding that PDVSA was not obligated to pay POS for the sums claimed in the presentation, because any underlying liability arising from the invoices could not yet be enforced and PDVSA had no present obligation to pay. The judge found that the representation certified by the signatory was false.

The judge went on to consider whether the fraud exception to the autonomy principle was engaged. It was not alleged that the signatory believed the underlying invoices to be anything other than accurate. Nonetheless, the judge rejected the signatory's evidence that he actually and honestly believed in the legal construction he advanced in evidence. Accordingly the judge restrained the bank from paying out under the letter of credit.

The High Court also rejected, obiter, an argument from PDVSA that the certificate was a continuing representation which POS was obliged to withdraw or retract if the presentation had been honestly made but turned out to be incorrect. Finally, the High Court rejected PDVSA's argument that as a matter of Venezuelan law POS's demands were themselves made in breach of the Drilling Contract as it must be revised in light of Article 141.

POS appealed the judgment both as to the finding of deceit and as to the construction of the certificate as a matter of law. PDVSA submitted that the judge had been wrong to reject its argument as to the continuing representation, but did not appeal the point under Venezuelan law.

Judgment on Appeal

In allowing POS's appeal, the Court of Appeal held that Mr Buckland's understanding of the meaning of the certificate was entirely correct as a matter of law. A statement that PDVSA was obligated to pay meant that PDVSA had become liable to make the payment, even though precluded from discharging that liability until the Article 141 procedure had been complied with or an award made. Such a conclusion was consistent with the contractual award for interest, and would otherwise mean the Contractor had to continue performance with no enforceable right to payment or suspension.  

The judgment notes that there is nothing legalistically contrived in recognising different types of debt obligation. In Charter Reinsurance v Fagan [1997] AC 313, Lord Hoffmann acknowledged the elasticity of the word "pay", recognising that in some contexts it signified only that a liability has been incurred. Lord Hoffman gave the example of the question "What did you pay for the dress?" addressed to a wife who had purchased on credit. In that example the time for payment would not have occurred when the question was asked, but were the wife to answer "I have not paid anything yet" she would be giving the question an unnatural meaning.

In the present case, payment under the letter of credit had been wrongly restrained and the appellant was entitled to an order requiring the issuing bank to make full payment forthwith in settlement of the demands already presented. In light of its ruling on the construction of the certificate, the Court of Appeal was not required to determine PDVSA's submission that POS was under a continuing duty to withdraw or retract its presentation. It also made clear its disquiet at the approach taken by the judge in finding a General Counsel fraudulent in regard to a representation of law.

Discussion

Clearly the decision strongly vindicates the conduct, integrity and professionalism of PetroSaudi and its General Counsel, Mr Buckland, throwing out any suggestion that they or he acted in any way inappropriately in enforcing the rights given to them, let alone fraudulently.

The judgment is notable for the emphasis it places on the commercial function of letters of credit. Christopher Clarke LJ confirms that, in the absence of fraud, it is the function of a letter of credit to pay the amount called for on presentation of conforming documents. Disputes between the parties are not to affect liability thereunder. The construction contended for by the signatory was consistent with commercial good sense and, on that account, preferable to the rival one. The availability of the letter of credit was of critical importance to the Contractor and its financiers given PDVSA's payment history. Indeed, the fact Article 141 might well preclude POS from securing regular payment would, in itself, be good reason for requiring an independent and autonomous letter of credit governed by English law, issued by a body outside Venezuela.

Another notable aspect of the judgment is found in the passages dealing with the fraud exception to the autonomy principle. The Court of Appeal expressed disquiet at the first instance finding of fraud arising from the High Court's decision on the construction of the certificate. The following passage is significant and has potential to influence similar cases in the future:

"Whilst there is only one true construction of an instrument such as the certificate, different legal minds may obviously take different views on such a question. Had it been necessary to do so I would wish to have given anxious consideration to the question whether, despite the well-recognised advantages of a trial judge and the inhibition rightly felt by this court in overturning findings of fact, the judge was entitled to conclude that [the signatory] was fraudulent (i.e. conscious of the falsity of what he was saying or with no honest belief in, or a reckless indifference to, its truth) in holding the view that I currently hold, when making what was, in essence, a representation of law".

There is some suggestion here that the fraud exception (and perhaps the wider law of Deceit) is to be approached with care where the meaning of a representation is a matter of law, rather than fact. The judgment confirms that the courts alone decide the true meaning of legal propositions. At the same time, it offers a measure of comfort to anyone required to make a representation of law without the benefit of a judicial determination. The courts should not be quick to find deceit in circumstances where different legal minds take different views.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Rebecca Armstrong
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.