Documentary Credit World

Topics: Advanced Payment; Choice of Law; Comity; Forum; Fraud; Jurisdiction; Notice; Standby LCs; UCP600 Articles 14(b), 16(d); Wrongful Dishonour

Parties:	Plaintiff/Buyer/Beneficiary – Macquarie Bank Ltd.
	Defendant/Issuer – Banque Cantonale Vaudoise
	Seller/Applicant – Phoenix Global DMCC

Underlying Transaction: Sale and purchase of 70,000 mt of coal (+/-) 10%.

LCs: Two UCP600 standby LCs for USD 4,340,000 and 4,410,000, both subject to English law.

Decision: The High Court of Justice of England and Wales, Foxton, J., rejected Issuer challenges to forum and jurisdiction of English courts for wrongful dishonour action.

Rationale: Where LCs issued subject to English law and UCP600, Beneficiary thereof entitled to enforce right to payment in English courts notwithstanding criminal proceedings (and stayed civil action) in Issuer ’s home jurisdiction that alleged fraud by Applicant, not Beneficiary.

Note: To support two advanced payments made by its buyer, Phoenix Global DMCC (Seller/ Applicant), a UAE company, applied for and caused Banque Cantonale Vaudoise (Issuer), based in Switzerland, to issue two UCP600 standby letters of credit for a combined USD 8.75 million in favour of Macquarie Bank Ltd. (Buyer/Beneficiary), an Australian bank. The LCs were subject to English law. The “Advance Payment and Supply Agreements”, executed January 2020, regarded cargo of 70,000mt of coal (+/- 10%). Claiming that Seller/Applicant failed to deliver the coal, Buyer/ Beneficiary first issued default notices to Seller/Applicant in March 2020. Buyer/Beneficiary later presented demands on the standbys to Issuer. As the Judgment notes, Issuer had five banking days to review documents for compliance under UCP600 Article 14(b); moreover, “under Article 16(d) of UCP 600, if rejecting the requests, [Issuer] was required to give notice to [Buyer/Beneficiary] no later than the fifth banking day following the day of presentation.” Instead, Issuer sent SWIFT messages in early April 2020 seeking further information regarding the underlying transaction, suspicious of its legitimacy. Issuer gave no notice of discrepancies nor whether it would dishonour.

Subsequently, Buyer/Beneficiary initiated civil proceedings in Switzerland in late April 2020.₁ After Buyer/Beneficiary received “authorisation to proceed”, it filed its formal action in November 2020. Separately, Issuer filed a criminal complaint with the local Swiss prosecutor “against an unknown person” for fraud. Issuer alleged that Seller/Applicant “presented documents to obtain the SBLCs which suggested that [Seller/Applicant] was buying the Cargo from [Buyer/Beneficiary], rather than the other way around.” Issuer claimed the underlying contracts were fictitious and, had it known the actual arrangement, it would not have issued the standbys in the form it did.

Issuer did not allege any fraud by Buyer/Beneficiary and Buyer/ Beneficiary denied any “dishonest actions.” Having filed the criminal complaint, Issuer later successfully received a stay of the Swiss civil proceedings pending resolution of the criminal matters. After the stay was upheld on intermediate appeal, Buyer/Beneficiary appealed to the Swiss Supreme Court. The Supreme Court dismissed the appeal in March 2022.₂ More than a year later, the Swiss court handling the civil proceedings requested an update from the parties regarding status of the criminal action. There was much back and forth between the parties, primarily regarding Buyer/Beneficiary’s request to lift the stay, Issuer ’s opposition, and the Swiss civil court’s decision to maintain the stay. Buyer/Beneficiary initiated this English action in August 2022 to enforce the standbys. In opposition, Issuer challenged both the English court’s jurisdiction and as being the “most appropriate forum” (forum non conveniens). The High Court of Justice of England and Wales, Foxton, J., dismissed Issuer ’s challenge.

The Judge was presented with expert opinion regarding the law of evidence and procedure in Switzerland to ascertain how long the criminal proceedings could persist and hinder the civil action. In sum, the Judge expressed: “I am satisfied that there is a very real risk of the Swiss Civil Proceedings remaining stymied for a period of several years, although I accept more favourable outcomes (measured in many months) are also possible.” (para.27).

Turning attention to the express choice of law of the standbys, the Judge reviewed English case law regarding LCs. Upon issuing a letter of credit, a bank makes an irrevocable undertaking to honour upon a timely presentation of complying documents. The only exception thereto is “established or obvious fraud to the knowledge of the bank.”₃ The substantive legal nature of letters of credit carry “important procedural implications, which are intended to prevent the payee’s substantive rights being circumvented by procedural means.” (para.30).

In this way, the Judge noted that the Swiss civil proceedings had improperly interfered with the “substantive characteristics of the SBLCs under their applicable law.” (para.33). Issuer effectively prevented Buyer/Beneficiary from enforcing its rights under the standbys while the Swiss prosecutor investigated an alleged fraud. Critically, the allegations were against Seller/Applicant as Issuer was “not even in a position to present an arguable case of fraud against” Buyer/Beneficiary. Counsel for Issuer accepted that Issuer had obtained procedural relief from the Swiss courts that it could not have received in England. As the Judge expressed: “That relief could not be obtained from this court not because of differences in the procedural regimes of the two jurisdictions, but because it would be inimical to the substantive law governing the SBLCs.” (para.34). Accordingly, the jurisdiction challenge was dismissed.

The forum non conveniens analysis under English law considers several factors, most “fundamental” being that the forum in question would be most “suitable” for all the parties and for the “ends of justice”.₄ In the instant action, involving service of process outside of England to Issuer, the claimant, Buyer/Beneficiary, was required to show that England and Wales was “clearly” the appropriate forum. Other factors such as governing law, location, language of relevant documents and witnesses, and delay are important, although delay alone is rarely determinative. The substantial delay caused by the stayed Swiss civil proceedings, however, while investigation into Seller/Applicant was ongoing clearly conflicted with Buyer/Beneficiary’s rights under the standbys “as a matter of their (English) governing law.”

By contrast, if [Issuer] has a defence to the claim to enforce the SBLCs as a matter of English law (and none has been suggested so far), then the English court will give effect to that defence. However, if there is no such defence, the English proceedings will proceed in a manner consistent with the substantive characteristics of the SBLCs under English law as instruments ‘akin to cash’, with judgment in a matter of months. [para.37].

The Judge noted that this forum analysis was not a “pure” delay case, but instead that of acknowledging the parties bargained choice of English law, a jurisdiction which gives strong legal and procedural “effect to the autonomous nature of a documentary credit”. These factors outweighed the fact that Switzerland was the place of presentation and expiry of the standbys. Moreover, the Judge accepted that were Issuer ’s challenges rejected, Buyer/Beneficiary would “use its best endeavours” to bring an end to the Swiss civil proceedings. In rejecting other considerations of comity advanced by Issuer, the Judge dismissed Issuer ’s challenge to England and Wales as the proper forum.

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