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Note: In July 2007, Melli Bank PLC (Buyer/ Bank), a subsidiary of Bank Melli Iran, agreed to enter a Discount Facility Agreement (Agreement) with Holbud Ltd (Customer) to purchase letters of credit and other financial instruments of which Customer was the beneficiary. The Agreement defined "Facility" as "the discounted non-recourse facility granted by the Bank to the Customer in relation to the Instruments of the Customer under which the Bank agrees to purchase all the right, benefit, title and interest in, and the right to receive the proceeds from time to time payable, or becoming payable under the Instruments from the Customer at a discount." The Agreement was intended to allow Customer to receive payment, albeit at a discount, before payment was due to Customer under the letters of credit and other instruments.

The Agreement provided a basic framework for the transactions between Buyer/Bank and Customer, but the Agreement called for the specific terms to be set for each facility by a separate "pricing letter" expressly incorporated into the Agreement. The pricing letters, "which shall set out the terms and conditions of each Facility in which the Bank agrees to purchase all the Rights under the Instruments from the Customer", were created by Buyer/Bank at Customer's initiation, based upon Buyer/Bank's valuation and assessment of risk of each proposed transaction.

By letter dated 22 April 2008, Customer requested Buyer/Bank to assign its rights under an unnumbered deferred payment letter of credit in the amount of EUR 22 million. The following day, Buyer/ Bank issued a pricing letter (Pricing Letter) which set the facility's availability expiry as 30 June 2008. The Pricing Letter set the commitment fees as "50 bp per month of the Facility Agreement, minimum 1 month or EUR 70.00 whichever is the greater, payable from the date of this Letter to the Facility expiry date." The Pricing Letter also included a clause defining the parties' obligations in the event that the facility was either fully or partially unutilized. This clause stated: "Should the facility remain fully or partially unutilized on the facility expiry date, or cancelled prior to that date, a commitment fee shall be payable on the unutilized balance at the time of expiry/cancellation, or from the previous drawdown (if applicable) to the date of expiry/cancellation." Finally, the Pricing Letter required Customer provide Buyer/Bank with a notice of assignment addressed to the issuing bank and an acknowledgment of notice of assignment. Customer agreed to and countersigned the Pricing Letter on 25 April 2008, and Buyer/Bank made available a facility (Facility) to Customer to purchase the rights of the LC from Customer by 30 June 2008.

The opinion indicates that the LC apparently never came into existence. The required notice of assignment and acknowledgment under the Pricing Letter were never provided to Buyer/Bank, making the commitment fees due under the unutilized Facility.

One week prior to the expiry of the Facility on 24 June 2008, Buyer/Bank was designated under Council Decision 2008/475/EC, subjecting Buyer/Bank to an asset freeze implemented by the Iran (European Community Financial Sanctions) Regulations 2007 (Regulations). The Regulations prohibited the dealing in funds or economic resources owned, held, or controlled by a designated person or entity, unless done so under the grant of a license granted by the Treasury which may specifically exempt certain acts from prohibition under the Regulations.

When Customer did not pay the commitment fees according to the terms of the Pricing Letter, Buyer/ Bank sued for payment of the fees under the terms of the Agreement and Pricing Letter. Buyer/Bank moved for summary judgment, which the High Court of Justice, Queen's Bench Division Commercial Court, Knowles, J., granted.

Customer advanced two arguments against paying the commitment fees, namely that the Regulations frustrated the purpose of the contract or, in the alternative, the asset freeze made Buyer/Bank unable to purchase the LC due to illegality or lack of funds, thus creating a repudiatory breach. Customer argued that "it would have been 'commercially disastrous to have so proceeded given the designation and the very little time left before the Pricing Letter expired'."

The Judge defined the well-recognized principle of frustration as occurring "whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract." According to the Judge, two factors weighed against a finding of frustration. First, the designation did not occur until there were only seven days left before the Facility expired. Prior to the designation, the Customer had not used the Facility for reasons wholly unrelated with the designation. Second, the Regulations and a supplement to the Regulations issued by the English Treasury, exempted prior contracts including LCs from the Regulations, so long as a license was obtained. Customer never attempted to obtain such a license, and there was no evidence showing that had a license been applied for, it would have been denied. The Agreement provided that "it was for the Customer to do what was necessary or take what action was required" to effect the sale of the letter of credit. According to the Judge, "designation of the Bank did not render obligations under the Facility Agreement and the Pricing Letter incapable of performance where, as here, a licence could be sought and, on the evidence, could be expected to be forthcoming."

Next, the Judge looked to Customer's repudiation claim, finding that there was no evidence presented showing that Buyer/Bank lacked the funds to perform under the Facility. In addition, because the supplement to the Regulations specifically exempted prior LCs from the Regulations, the contract between Customer and Buyer/Bank was not made illegal. The Judge found no evidence of any attempted repudiation by Buyer/Bank or any acceptance of such a repudiation from Customer. As found by the court, "the Bank received no communication whatsoever from the Customer until 12 August 2008 when, following a demand by the Bank for payment of commitment fees, . . . Customer sent an email stating that the contract had been frustrated due to the imposition of the sanctions regime." This email was too late to serve as an acceptance of any repudiation before the Facility had expired.

[MJB]

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