Worldwide: High Court Refuses Swiss Bank's Jurisdiction Challenge Over Declarations Of Enforceability Of Standby Letters Of Credit

In the context of a claim seeking declarations as to the claimant's entitlement to enforce two standby letters of credit (SBLCs) issued by the defendant Swiss bank and governed by English law, the High Court has dismissed the defendant's application contesting the jurisdiction of the English court: Macquarie Bank Limited v Banque Cantonale Vaudoise [2024] EWHC 114 (Comm).

In the present case, the defendant bank challenged jurisdiction on the basis of the doctrine of forum non conveniens, as laid down by the House of Lords in the well-known case of Spiliada Maritime Corp v Cansulex [1987] AC 460. Under this doctrine, the English court may decline jurisdiction on the ground that there is a court in another jurisdiction which is clearly a more suitable forum for the trial of the action, in the interests of all the parties and the justice of the case. The defendant relied on close links with Switzerland and ongoing parallel Swiss civil and criminal proceedings. The High Court dismissed the defendant's application, finding that England and Wales was the most appropriate forum for the dispute and that the current and future course of the Swiss proceedings would prevent attempts to enforce the SBLCs, which conflicted with the claimant's substantive rights under the SBLCs as a matter of their (English) governing law.

The court's decision provides valuable insights into the application of the principles of documentary credits in cross-border disputes and determining the most appropriate forum for a dispute. The judgment confirms that where the parties have chosen English law as the governing law of a SBLC, the transaction will benefit from the protection of certain substantive characteristics (such as an absolute obligation on the banker to pay, irrespective of any wider dispute between the parties, save for exceptional circumstances). These substantive characteristics have important procedural consequences, which are intended to prevent the payee's substantive rights being circumvented by procedural means. The outcome in this case demonstrates that the English court is well-placed and willing to protect these legal characteristics and implications, to avoid the risk of undermining the certainty and reliability of such instruments in international trade.

It is worth noting that the analysis above will not be impacted by the  Berne Financial Services Agreement  between the UK and Switzerland, which was signed in December 2023. The trade deal aims to ensure that the financial regulations and supervisory practices of each country are recognised and accepted by the other, but does not seek to override the determination of governing jurisdiction under standard form trade agreements.

We consider the decision in more detail below.

Background

Between 2019 and 2020, the claimant entered into agreements with a UAE company called Phoenix Global DMCC (Phoenix) to purchase coal. These agreements required the claimants to make advance payments secured by SBLCs. The defendant bank issued two SBLCs, which were stated to be subject to: (i) the ICC Uniform Customs and Practice for Documentary Credits 600 (UCP 600); and (ii) English law.

Phoenix failed to deliver the coal. The claimant considered this to be an event of default under the agreements and issued default notices to Phoenix calling for the repayment of the advance payments within 5 business days. No payments were made. A week later, the claimant demanded payment under the SBLCs. Under Article 14(b) of UCP 600, the defendant was entitled to 5 business days to consider whether, on their face, the payment requests constituted compliant presentations, and under Article 16(d) of UCP 600, if rejecting the requests, the defendant was required to give notice to the claimant no later than the fifth banking day following the day of presentation. A few days later, the defendant requested additional information on the shipment of the goods under the sales contract between the claimant and Phoenix, which the claimant provided. However, the defendant did not identify any discrepancies in the payment requests within the 5 business days or at all, nor did it give notice that was refusing to honour the SBLCs.

The claimant subsequently commenced proceedings against the defendant in the Swiss civil court. The defendant filed a criminal complaint with the Swiss Public Prosecutor's Office against an unknown person for fraud and forgery, alleging that Phoenix presented fictious/falsified contracts to the defendant in order to obtain the SBLCs. The defendant also sought a stay of the Swiss civil proceedings pending the outcome of the Swiss criminal proceedings; this was granted and any attempts by the claimant to appeal this were unsuccessful.

The claimant consequently issued proceedings against the defendant in England seeking declarations as to its entitlement to enforce the two SBLCs issued by the defendant. In response, the defendant filed an application contesting the jurisdiction of the English court (in light of the ongoing parallel Swiss civil and criminal proceedings).

High Court Decision

The court dismissed the defendant's application contesting jurisdiction, finding that it was satisfied that England and Wales was the most appropriate forum for the determination of the dispute. In reaching this conclusion, the court focused its analysis on two key areas, each of which is considered below.

Governing law of the SBLCs

First, the court considered the consequences of the parties' choice of English law as the governing law of the SBLCs and underlined that the legal effects of a letter of credit governed by English law are clear. In particular, the court highlighted the following legal principles:

• Absolute obligation on bank to pay. The opening of a confirmed letter of credit constitutes a bargain between the bank and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods meet the contract's terms or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character and it would be wrong to interfere with the established practice (as per Edward Owen Engineering Ltd v Barclays Bank International Ltd [1979] QB 159).
• No set off or counterclaim available. By opening the letter of credit in favour of the seller, the buyer implicitly agrees that they will not raise any set off or counterclaim such as to delay or resist payment. The buyer has contracted under the terms of the Uniform Customs and Practice by which they promise that the bank will pay without regard to any set off or counterclaim; and implicitly that they will not seek an attachment order (as per Power Curber International Ltd v National Bank of Kuwait Sak  [1981] 1 WLR 1233). Even where the courts of the bank's domicile have granted an injunction seeking to prevent a bank from paying out under a letter of credit, that will not provide it with a basis for refusing to do so.

The court also emphasised that the substantive characteristics of a letter of credit have important procedural implications, which are intended to prevent the payee's substantive rights being circumvented by procedural means. For example:

• Enhanced Merits Test. When a party seeks to prevent the bank paying on the grounds of fraud of the beneficiary, or the bank itself seeks to resist payment on that basis, a heightened evidential requirement applies: the fraud must be “established or obvious fraud” (as per Edward Owen) or fraud that was “very clearly established” (as per Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31).
• No stay of judgment. The court will not stay the enforcement of a judgment under a letter of credit. To do otherwise would defeat the whole commercial purpose of the transaction, be out of touch with business realities and keep the bank waiting for a payment (as per Continental Illinois v National Bank Trust Company of Chicago [1986] 2 Lloyd's Rep 441).

Against this background, the court said it was immediately apparent that the course and state of the Swiss civil proceedings had failed to give effect to the substantive characteristics of the SBLCs under their applicable law as the defendant had been able to:

• Prevent the claimant from enforcing the SBLCs whilst third party investigations into a potential fraud was taking place, when the defendant was not even in a position to present an arguable case of fraud against the claimant, or evidence of the claimant's knowledge of the fraud.
• Use Swiss procedural law as a basis for not performing its substantive obligations under the SBLCs.

Forum conveniens

Second, the court said it was necessary to consider whether the English or foreign courts were the most appropriate forum for the dispute to be suitably tried in the interests of all the parties and for the ends of justice, referring to the established test in Spiliada Maritime Corp v Cansulex Ltd  [1987] 1 AC 560.

The court noted that the current and future course of the Swiss civil proceedings would prevent attempts to enforce the SBLCs while investigations were undertaken which might, or might not, provide a defence. This conflicted with the claimant's substantive rights under the SBLCs as a matter of their (English) governing law.

In the court's view, this provided a strong basis for concluding that England and Wales (where the court's procedure will be applied in a manner compatible with those substantive rights) is the forum in which the case can most suitably be tried for all the interests of all the parties and for the ends of justice. In particular:

• While there will be many cases in which the applicable law will be of only limited weight in determining the most appropriate forum, the court commented that “the law applicable to letters of credit and equivalent financial instruments has a number of important and technical consequences”.
• The extent to which English law gives effect to the autonomous nature of a documentary credit and the status of such instruments as “akin to cash” is one of the principal reasons why it is often chosen as the governing law of such instruments.

The court underlined that such matters outweighed the links with Switzerland identified by the defendant – ie the defendant's domicile, and the (related) fact that Switzerland was identified in the SBLCs as the place of expiry, payment and where presentation would take place.

Finally, the court rejected the other key submissions advanced by the defendant:

• Initiator: The claimant itself had commenced the Swiss civil proceedings. The court pointed out that at the time it did so, the Lugano Convention 2007 was in force and it could not have brought proceedings against the defendant elsewhere.
• Comity: Allowing the English proceedings would cut across considerations of comity so as far as the Swiss courts were concerned. The court said there had been no substantive progress in the Swiss civil proceedings and that this was not a case in which the party had permitted the foreign proceedings to advance to any considerable extent before seeking to bring them to an end.
• Conflict: There was a risk of irreconcilable judgments arising from the inherently vexatious nature of a party bringing two sets of proceedings in two different jurisdictions at the same time and for the same claim. The court noted that if the defendant's jurisdiction challenge was dismissed, the claimant was willing to undertake to use its best endeavours to discontinue the Swiss proceedings.

Accordingly, the court dismissed the defendant's application contesting jurisdiction.

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