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Standby Letters of Credit: The Court’s Approach to Enforcement

On 26 January 2017 the Court of Appeal handed down its Judgment in the case of National Infrastructure Development Company Ltd v Banco Santander SA [2017] EWCA Civ 27.

The case provides a useful illustration of the Court of Appeal’s approach to enforcement of standby letters of credit and reconfirmation of the test to be applied where a bank – relying on fraud – resists a summary judgment application to enforce a standby letter of credit.

Background to the Dispute

This was an appeal of a Commercial Court Judgment made against Banco Santander (“Santander”) in favour of National Infrastructure Development Company Ltd (“NIDCO”), the beneficiary of four standby letters of credit.

NIDCO, a corporate vehicle used by the government of Trinidad and Tobago, had entered into a construction contact with a Brazilian contractor to construct a major public Highway in Trinidad. Standby letters of credit were issued by Santander in favour of NIDCO for approximately US$ 38m.

The standby letters of credit provided that upon receiving a written request from NIDCO, Santander would pay the amount demanded. The form of the written request was:

We hereby notify you that the amount of [US$] is due and owing to us by the Contractor”

NIDCO terminated the construction contract claiming the Brazilian contractor had abandoned the project. NIDCO made demand under the standby letters of credit which Santander refused to honour. Santander then successfully applied for an injunction in the Brazilian courts requiring the standby letters of credit not to be honoured for the time being.

NIDCO sought summary judgment in the Commercial Court.

The Commercial Court Judgment

Santander claimed that false notification had been given by the written demands in that they were made recklessly in the sense of indifference as to what was “due and owing”. Santander also argued that a stay should be granted in light of the Brazilian injunction.

Knowles J held, on the facts, it was not “seriously arguable” that NIDCO did not honestly believe in the validity of the demand.

Knowles J refused to grant a stay and ordered for summary judgment to be granted in NIDCO’s favour in respect of the sums stated to be due under the standby letters of credit. Santander appealed.

The Court of Appeal Judgment

Santander argued on appeal that Knowles J had applied an incorrect test when considering an application for summary judgment. Santander also argued that the factual evidence demonstrated NIDCO had no genuine belief that money was “due and owing”.

Santander further submitted that the refusal to order a stay in light of a Brazilian injunction was wrong in principle.

Although the Court of Appeal dismissed the appeal, it decided that Knowles J had applied the wrong test to a summary judgment application. The test was not whether it was “seriously arguable” that NIDCO had not held an honest belief when making the demand. This was to set the bar too high.

The correct test was whether Santander had a “real prospect” of establishing that NIDCO had not held an honest belief. This is the test for summary judgment pursuant to CPR 24.

However, the Court of Appeal found that Santander failed to put forward evidence of fraud and did not meet even the “real prospect” test.

The Court of Appeal stated further that it would be inappropriate for a court to stay its judgment in a letter of credit case as letters of credit are part of the “lifeblood of commerce” and must be honoured in the absence of fraud on the part of the beneficiary.

Comment

The case reconfirms the test a bank must meet if – on the grounds of fraud – it seeks to resist a summary judgment application to enforce a standby letter of credit. A bank must show that it has a “real prospect” of establishing that the beneficiary did not have an honest belief in making a demand.

English courts will seek to enforce standby letters of credit save in very limited circumstances and even the existence of a foreign injunction requiring that the standby letters of credit be not honoured may not be a sufficient reason for an English court not to order enforcement.

If you would like to discuss any issues raised further please speak to your usual contact or Charles Spragge or Christopher Louth.

 

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