UK: When Good Security Is Paramount And The Courts Are Hands Off

Last Updated: 23 January 2017
Article by Simon Tolson

The law on letters of credit has been upheld in two cases; banks cannot refuse to pay a demand meeting the requirements of a letter of credit unless it would involve fraud.

The strict approach of English law in enforcing payment under standby letters of credit has been reinforced in two judgments (National Infrastructure Development Company Limited (NIDCO) vs BNP Paribas and NIDCO vs Banco Santander SA). Once a demand has been made in accordance with the requirements of a letter of credit, a bank can only refuse to pay is if it is on notice of fraud at the time of the call or where payment would be fraudulent.

Letters of credit are used internationally as performance securities for major construction contracts and the law on demands made in respect of them is essentially the same as for on-demand bonds.

In both cases, Fenwick Elliott acted for NIDCO, a company set up by the government in Trinidad and Tobago to deliver infrastructure projects. BNP Paribas (BNP) and Santander both provided securities at the request of a Brazilian contractor (Construtora) for the construction of a highway project. The letters of credit were subject to English law and the jurisdiction of the English courts.

Disputes arose, and a termination notice was served in June 2016. By then, Construtora had gone into the Brazilian equivalent of administration. A London Court of International Arbitration process was started and is ongoing. NIDCO served demands in respect of the letters of credit. The letters of credit had been provided by banks in Europe. However, their Brazilian subsidiaries (which had given counter-guarantees to their European counterparts) were injuncted by the Brazilian courts from paying NIDCO and these courts extended the injunction to cover the European banks. Both banks declined to pay, noting that a substantial fine would be payable if they did.

It would be wrong in principle to use a stay of execution to subvert the principles of law that provide very limited defences to claims to enforce letters of credit

NIDCO applied for summary judgment over about $58m (£47m) against BNP and $38m (£31m) against Santander. The BNP case came before the Commercial Court on 26 September, and the Santander hearing in November.

At the BNP hearing, the issue was whether the Brazilian injunction gave BNP Paribas any grounds not to pay under English law. The judge emphasised that letters of credit have a status equivalent to cash and should be paid out unless very limited exceptions apply.

The judget noted:

"Whilst it is said that the facts of the present case are extraordinary, I suspect they would become commonplace if a party who had opened a letter of credit could defeat the bank's payment obligation to pay by obtaining an injunction against the bank in its home jurisdiction."

The judge granted summary judgment and added it would be

"wrong in principle to use a stay of execution to subvert the principles of substantive law which provide very limited defences indeed to claims to enforce letters of credit"

Santander argued the fraud exception applied. This was mainly because the amounts due had not been determined by the arbitration, so NIDCO could not have an honest belief in its demands. It also argued that English law should be extended to include a doctrine of "unconscionability", as in other jurisdictions. Santander said that, given the Brazilian injunction and NIDCO's alleged financial status, it would be unconscionable to order payment.

Making an employer wait until a claim is determined before calling on on-demand securities after a termination would undermine the purpose of on-demand securities

Its arguments were rejected. Mr Justice Knowles noted the case of J Murphy and Sons vs Beckton Energy Ltd in which Mrs Justice Carr held:

"The trigger for a performance bond is a belief on the part of the drawing party in its entitlement, not such entitlement having been subject to a final determination."

There was no serious case that NIDCO did not believe its demands were valid so payment had to be made. The parties had chosen English law, which did not recognise unconscionability.

Permission was denied for a stay pending the release of the Brazilian injunction, the arbitral decision or any application to appeal; letters of credit must work within their terms, including those on time.

While Santander may appeal, the decision protects the securities system. Making an employer wait until a claim is determined before calling on on-demand securities after a termination would undermine the purpose of on-demand securities. To start with, the security may have expired by the time a dispute is resolved.

If an employer is facing a hefty bill to complete works, on-demand securities provide the monies to do so pending resolution. If the parties expressly say they cannot be called until a determination has been made, that is different.

The courts have upheld one of the greatest achievements of uniformity in international law relating to letters of credit and the importance of treating them like cash unless there is fraud.

This article was co-written with Claire King,Partner, Fenwick Elliott and first appeared in Building Magazine 2 December 2016.

International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.

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

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

Simon Tolson
In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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