National Infrastructure Development Company Ltd v Banco Santander S.A.
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Christopher Clarke |
| Judgment Date | 26 January 2017 |
| Neutral Citation | [2017] EWCA Civ 27 |
| Docket Number | Case No: A3/2016/4363 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 January 2017 |
[2017] EWCA Civ 27
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE KNOWLES CBE
Royal Courts of Justice
Strand, London, WC2A 2LL
The Right Honourable Lord Justice Longmore
and
The Right Honourable Lord Justice Christopher Clarke
Case No: A3/2016/4363
Mr Jonathan Russen QC and Mr J Kinman (instructed by Thomas Cooper LLP) for the Appellant
Ms Anneliese Day QC and Mr H Saunders (instructed by Fenwick Elliott LLP) for the Respondent
Hearing date: 12 January 2017
Introduction
This is an appeal from Knowles J who, sitting in the Commercial Court, gave judgment against the appellant bank ("the bank") and in favour of the beneficiary of four letters of credit, National Infrastructure Development Company Limited ("NIDCO"). NIDCO is a corporate vehicle used by the government of Trinidad and Tobago to effect public infrastructure works.
On 4 th July 2011 NIDCO entered into a contract with Constructora OAS Ltda ("OAS"), a Brazilian contractor, to construct an important public highway in the south of Trinidad. The construction contract was governed by the law of Trinidad and Tobago and disputes were to be resolved by arbitration with a seat in Port of Spain under the auspices of the London Court of International Arbitration ("LCIA").
OAS wrote to the main engineer on the project on 19 th October 2015 stating that NIDCO had defaulted on payment and that it was giving notice under clause 16.1 of the construction contract. Construction work subsequently ceased (the reasons for which are disputed between NIDCO and OAS). On 21 st June 2016 NIDCO issued a termination notice on the basis that OAS had abandoned the project. OAS's case was (and is) that they had stopped working because of non-payment by NIDCO.
OAS filed an arbitration request with LCIA on 1 st August 2016 and the dispute between NIDCO and OAS is currently subject to ongoing arbitration.
The dispute between NIDCO and the bank has arisen because OAS, pursuant to the construction contract, procured standby letters of credit in NIDCO's favour. On 15 th September 2016 NIDCO issued proceedings to enforce these letters of credit after the bank had refused on four separate occasions to honour them. The letters of credit are governed by International Standby Practices 98 (ISP 98). Any matter not governed by ISP 98 is governed by English law and the parties conferred jurisdiction on the English Courts in respect of any dispute arising under the letters of credit.
The Letters of Credit
On the 28 th day of each month OAS would submit to the engineer a statement about work done. NIDCO would then pay for the value of the work if certified by the engineer, subtracting amounts previously paid. The contract entitled NIDCO to withhold an amount of "retention money" in accordance with clause 14.3(c) of the contract. OAS could, however, instead provide "retention security" in lieu of retention money. OAS provided such retention security by procuring standby letters of credit in NIDCO's favour. As the total retention money increased, OAS would procure from time to time new letters of credit to increase the retention security.
OAS also procured letters of credit in favour of NIDCO by way of "performance security" in accordance with clause 4.2 of the contract. The level of security represented a percentage value of each phase of work.
Clause 4 of the letters of credit required demands made under them to be in accordance with an annex. The required form was to contain the following statement:-
"We hereby notify you that the amount of USD XXXXXXX is due and owing to us by the contractor and demand immediate payment under the letter of credit of that amount."
Further relevant clauses of the letters of credit provided:-
"7. The presentation of a demand shall be conclusive evidence that the amount claimed is due and owing to you by the contractor.
8. Demands made hereunder may be made during the period from the date of issue of this letter of credit until close of business on [August 30 th 2016] (the "expiry date").
…
11. We will pay amounts due to you under this letter of credit in full without set-off or counterclaim.
…"
Relevant provisions of ISP 98 include:-
"1.06(d) Because a standby is documentary, an issuer's obligations depends on the presentation of documents and an examination of required documents on their face."
There is no dispute that the written demands in the present case were made in the form set out at annex 1 to the standby letters of credit. In them NIDCO stated:-
"We hereby notify you that the amount of [the relevant USD sum is given] is due and owing to us by the Contractor [i.e. OAS]."
On 6 th July 2016, a fortnight after NIDCO issued their termination notice, OAS, on appeal, persuaded a Brazilian court to issue a temporary injunction preventing the bank from paying out on any demand under these letters of credit, pending the determination of that court as to its jurisdiction. No determination has yet been made.
The decision of Knowles J
The issue for the judge was whether summary judgment ought to be granted in NIDCO's favour against the bank in respect of the sums stated to be due and owing. The bank resisted summary judgment on the following basis:-
i) That the sums claimed were not "due and owing" from OAS as stated in the drawing notice and NIDCO had no honest belief in the truth of its statement that they were "due and owing". NIDCO had therefore acted fraudulently in seeking to operate the letters of credit;
ii) NIDCO was claiming around US$35m retention scrutiny when in fact it was only entitled to US$31m in retention money and NIDCO was fully aware of this;
iii) There was potentially an equitable jurisdiction to prevent unconscionable demands under letters of credit, in addition to the fraud exception. This was said to be a developing area of law not suitable for summary judgment; and
iv) There ought to be a stay of execution pending further order because the bank was prohibited by Brazilian court order from paying the money, even though that order may soon fall away.
The judge rejected these arguments, granted summary judgment and ordered the bank to pay US$38,020,306.79 by 4pm on 23 rd November 2016. He refused permission to appeal and refused to grant a stay of execution. There is now an appeal for which, as it happens, I gave permission.
In support of the bank's case of fraud, three pieces of evidence were put forward:-
i) A statement by the president of the claimant made to the Public Accounts (Enterprises) Committee on 1 st June 2016 that OAS did not owe money to NIDCO;
ii) The lack of any mention of sums due in a letter from the claimant signed by its president in the letter terminating the contract on 21 st June 2016; and
iii) A letter dated 6 th July 2016 from the claimant, signed by its president, which divided sums up into debts described as due and debts which required quantification in due course.
The judge dismissed the first piece of evidence because the president's evidence predated termination and dealt only with "very large overall sums indeed". He did not regard the second piece of evidence as persuasive and said that the third matter "shows the way in which the claimant viewed their entitlement as a current entitlment in respect of all sums". He said that even if what was demanded was based on an estimate of future sums that did not mean that the claimant did not hold an honest belief that those sums were due and owing now.
The substantive law
The principles are well settled. In RD Harbottle v National Westminster Bank [1978] QB 146, 155 Kerr J said:-
"It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the lifeblood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in contracts."
That decision was approved in the Court of Appeal case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 where it was emphasised that the bank must honour a performance bond unless it has notice of clear fraud.
Edward Owen was itself approved by the House of Lords in United City Merchants v Royal Bank of Canada [1983] 1 A.C. 168 which concerned a letter of credit issued to a seller of goods who presented apparently conforming documents including falsely dated bills of lading which it (the seller) did not know were false. Having set out the obligations of the confirming bank to pay the seller Lord Diplock continued (page 183):-
"To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or "landmark" case is Sztejn v J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd v...
To continue reading
Request your trial
-
Macquarie Bank Ltd v Banque Cantonale Vaudoise
...should the court exercise its power to stay execution.” See also National Infrastructure Development Co Ltd v Banco Santander SA [2017] EWCA Civ 27, 33 Pausing there, it will be immediately apparent that the course and state of the Swiss Civil Proceedings has failed to give effect to the s......
-
Standby Letters Of Credit, Complying Demands And The Fraud Exception Court Of Appeal Restores Certainty And Commercial Common Sense
...v. Novo Banco S.A. [2017] EWCA Civ 9 (the Petrosaudi Appeal) and National Infrastructure Development Co. Ltd. v. Banco Santander S.A. [2017] EWCA Civ 27 (the Santander KEY PRINCIPLES SBLCs are used mainly to provide the beneficiary with credit support in the event of non-performance by its ......
-
Standby letters of credit, complying demands and the fraud exception – Court of Appeal restores certainty and commercial common sense
...v. Novo Banco S.A. [2017] EWCA Civ 9 (the Petrosaudi Appeal) and National Infrastructure Development Co. Ltd. v. Banco Santander S.A. [2017] EWCA Civ 27 (the Santander Key principles SBLCs are used mainly to provide the beneficiary with credit support in the event of non-performance by its ......
-
Letters Of Credit: What Is An Issuing Bank Entitled To Know Before Paying Out?
...are involved. Footnotes http://www.hfw.com/Commodities-Bulletin-March-2017 National Infrastructure Development Co Ltd v Banco Santander [2017] EWCA Civ 27; Petrosaudi Oil Services (Venezuela) Ltd v (1) Novo Banco SA (2) PDVSA Servicos SA (3) PDVSA Services BV [2017] EWCA Civ 9, [2017] All E......
-
Fraud and Performance Securities
...an entitlement. No such knowledge or belief existed here. NIDCO In National Infrastructure Development Co. Ltd. v. Banco Santander S.A. [2017] EWCA Civ 27, an employer and a contractor entered into a contract for the construction of a highway in Trinidad. Performance guarantees were procure......