Fraud is rarely proved in practice. So a High Court decision in 2016 which prevented payment under a standby letter of credit (the "SBLC") on the basis that the demand presented under the SBLC was untrue and fraudulent caused much and excited comment. It has now been overturned by the Court of Appeal.
The Court of Appeal's decision in Petrosaudi Oil Services (Venezuela) Ltd ("POS"). v Novo Banco S.A. and others1 reaffirmed the longheld position that, in the absence of fraud, the payment obligations under a credit should be upheld irrespective of any underlying disputes between the parties.
The essential question on appeal was whether the High Court had been correct in finding that a certificate, required to be presented under the SBLC, certifying that PDVSA Servicios S.A. ("PDVSA") was "obligated to pay" was provided fraudulently.
As set out in our previous client alert on the first instance decision Judge Waksman QC considered that, due to a contradiction with Article 141 of the Venezuelan Public Contracting Law which required PDVSA, as a Venezuelan state entity, to approve the invoices, a certification that PDVSA was "obligated to pay" the issued invoice could not have been honestly believed.
In the Court of Appeal Christopher Clarke LJ held that the High Court judge was wrong to conclude that (i) PDVSA was under no obligation to pay the invoices submitted by POS and (ii) that the POS director was not entitled to certify that PDVSA was obligated to pay POS the amount of those invoices.
This decision was primarily reached on the basis that, despite the Article 141 procedure, a debt can be due and payable despite some restriction on the discharge of that obligation by the debtor. Although due to Article 141 PDVSA could not be compelled to discharge that debt obligation, this did not mean that such debt obligation was not, at the time of the certification, due and payable. Accordingly the POS director held an honest belief that the debt was due and payable and had not acted fraudulently in making the certification.
Christopher Clarke LJ did not consider whether the first instance judge was entitled to find that the director was fraudulent in signing the certificate which, had he instead concluded that PDVSA had no obligation to pay, would have been necessary. However he did go on to say that "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 Mr Buckland 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)".
The Court of Appeal judgment in the Petrosaudi case, combined with another recent decision of Christopher Clarke LJ in the very similar appeal decision of National Infrastructure Development Co. Ltd. v. Banco Santander S.A.2 , reinforces the position that the fraud exception should only be applicable in the most exceptional cases and that a high evidential threshold exists for the fraud exception to be relied on. These decisions will no doubt go some way to re-assuring persons often required under a letter of credit to certify that, the typically very significant amounts being claimed are due, or that an event of default has occurred which permits drawing under the letter of credit. Accordingly, so long as there is a strongly arguable case that the certification was correct or that the person certifying held that honest belief the fraud exception will not apply and the independent payment obligation of the issuing bank will be upheld by the courts.
The Court of Appeal decision re-affirms the importance of the "autonomy principle" of letters of credit (i.e. that the obligations of the parties to the credit are totally independent of the terms of the underlying commercial transaction). Indeed Christopher Clarke LJ's judgment expressly references the commercial background which included that prompt and regular payments under remote drilling contracts are essential to a contractor's cash flow and the parties' intention was that there should be a steady stream of such payments, that PDVSA had a long-established reputation for late payment, or even non-payment and that given the history the agreement to provide a SBLC was an essential precondition to POS and its financiers' willingness to enter into the drilling contract. The Judge further emphasised the underlying purpose of a letter of credit, namely, to ensure that the beneficiary can obtain from a bank sums due under the main contract regardless of the fact that there is a dispute between the parties, and its function, to reverse the risk of non-payment from the payee to the payor.
- This case re-inforce the fact that significant consequences can turn on the terms and precise wording of a LC or a SBLC.
- A key issue under any credit is the documents required and circumstances in which they are required to be presented for payment under a credit.
- Best practice for the beneficiary is therefore to keep any documentary requirements clear, simple and able to be objectively assessed (i.e. the presentation of an invoice).
- Alternatively, where there is some form of certification required, consider whether, as beneficiary, it is in your interests to introduce wording allowing for a "reasonable" assessment. In the circumstances of this case had the wording been along the lines of "reasonably is of the view that the amount is owing", the beneficiary may have been better placed to make the certification.
- A further issue to consider is the jurisdiction of the bank. In some countries the applicant could become unwittingly drawn into lengthy, time consuming and costly injunctive proceedings commenced by the paying party to delay and avoid payment out by the bank. As seen in this case, the English Court has the ability to deal with such cases relatively swiftly. However, this is not the case for every jurisdiction.
- If you are the party agreeing to provide a SBLC, be aware of the near impossibility of preventing a call on that SBLC / preventing the bank from making payment. Assess therefore whether you are prepared to give the SBLC and (importantly) what your options are for reclaiming amounts paid under a (wrongful) call on the SBLC.
- In short, a detailed review of the precise terms of the LC or SBLC and pre-contract due diligence on the bank's jurisdiction is best practice.
1. 2017] EWCA Civ 9
2.  EWCA Civ 27
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