Article

Factual Summary: Indonesian Buyer contracted subject to English Law with English Seller for US$14.2 million sale of telephone equipment fob United Kingdom air or marine port for shipment to Singapore. Payment was to be by a series of LCs issued two weeks prior to each shipment and payable 60 days from shipment. One of the last LCs was issued by an Indonesian bank, confirmed by another Indonesian bank, and advised through an English bank. It was payable in British pounds, freely negotiable, and required drafts drawn on Confirmer. Although Advising Bank was requested to add is confirmation, it did not do so.

Beneficiary presented documents to Advising Bank, which forwarded them without negotiating them to Confirmer, which, in turn passed them on to Issuer, which refused to honor the documents. The court described the reasons for refusal as "arguably unjustified", giving as an example a difference between the name of the Beneficiary which in the LC was "GPT International Limited" at a certain address and in the documents was "GPT International Limited Payphone Systems" at the exact same address.

In the meantime, Issuer and Applicant became insolvent and Advising Bank pressed for payment by Confirmer which resisted. An opinion favorable to Beneficiary was obtained from the ICC UK LC Committee but rejected by the Confirmer.

Beneficiary was paid by credit insurers who brought the action in Beneficiary's name. Beneficiary moved against the Confirmer's assets in the United Kingdom, an account in a United Kingdom bank, but the account had been closed and the action was dismissed. Beneficiary then commenced the action in this case and petitioned for leave to serve proceedings out of the jurisdiction under English law. The application was granted and service was effected. Confirmer then applied to have the orders set aside and for a declaration that there is no jurisdiction over Confirmer. The orders were affirmed and the application denied.

Legal Analysis:

1. Law Applicable to Confirmer; Choice of Law; Conflict of Law: Beneficiary was granted leave to serve because the contract was made within the UK, the Advising Bank acted as the Confirmer's agent, the LC was governed by English law, and the breach of the credit obligation occurred in England. The court framed the issue as to whether there was a "good arguable case that the contract is governed by English law rather than Indonesian law (the only viable alternative)." The court began with the premise that "it is common ground that the same system of law must govern the coexisting contracts between the issuing bank and the beneficiary, between the issuing bank and the confirming bank and between the advising bank and the beneficiary."

Noting that neither the LC itself nor the UCP provided an applicable law, the court concluded that the applicable law would be determined by Article 4 of the Rome Convention. The court recited what were deemed to be the relevant parts of Article 4: "

1. To the extent that the law applicable to the contract has not been chosen ... the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

2. Subject to [paragraph 5] it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence ... . However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business ... .

5. Paragraph 3 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country."

Under Article 4(2), Confirmer argued that it was the party who was to effect the performance that was characteristic of the contract, and, being resident in Indonesia, that law was applicable.

While noting that Advising Bank did not add its confirmation, the court observed that both the issuance of the credit and an amendment adding Confirmer's undertaking were advised by Advising Bank. The court further noted that the LC was available by negotiation and the Advising Bank was at least one of the contemplated negotiating banks, and that there was an undertaking to reimburse the negotiating bank on due negotiation. The court stated:

"[I]t was contemplated that the credit would be communicated in [England] and become effective here, that the documents would be presented here and that payment would be here. It does not seem to me to be a matter of great significance in considering the application of Article 4 taken as a whole that [Advising Bank] did not add its confirmation. The availability of [Advising Bank] as a negotiating bank would give rise to the same closeness of connection with England. The performance characteristic in those circumstances would remain the provision of the banking service in the form of payment on presentation of non-discrepant documents. Given the availability of negotiation in that form it would be contrary to the requirement of avoiding the governing law being dependent on the mode of negotiation chosen to contemplate that a different law would govern in the event that negotiation did not take place."

The court concluded "there is a good arguable case in my judgment that the application of Article 4(5) would lead to a disregard of that presumption since the circumstances as a whole demonstrate that the contract was more closely connected with England." These circumstances were that "a chosen method of performance was by way of negotiation of the documents at the offices of the advising bank in London with payment in sterling. ... This conclusion cannot be affected by the fact that, in the event, the documents were not negotiated by the advising bank but were forwarded to the confirming bank as a collecting bank with the request that payment be effected in London." This conclusion was made despite the fact that the presumption of Article 4(2) would indicate a presumption that the law of Indonesia would apply. The court stated that such a result would "probably" be followed at common law as well.

2. Advising Bank: The court disregarded the opinion of an Indonesian lawyer that Advising Bank would not be regarded under Indonesian law as the agent of the Confirmer in advising the confirmation. Thus, the court concluded that service on the Advising Bank was service on the Confirmer.

3. Confirmer, Place of Obligation to Pay; Choice of Law: While recognizing that Confirmer was located in Indonesia, the court noted that "it does not follow ... that the breach did not occur in England." The court deemed it "extremely doubtful whether it was open to [Confirmer] to effect payment in Indonesia. "On the face of it, they were required to pay in London whether as a consequence of negotiation or, as here, as a consequence of the request of [Advising Bank] made for payment in London as, it is alleged, a collecting bank." The Court also noted testimony that it was usual for a case in Indonesia to exceed 10 years. Therefore, the court concluded that "even if Indonesian law governs the credit, it is not shown that Indonesia is distinctly the more appropriate forum for the determining issues relating to it."

Comments: This decision raises questions on several levels, and, if it is not reversed on appeal, will cause banks issuing LCs with any connection to England to consider a choice of law and forum clause if they do not wish to be in English courts under English law.

1. One would have thought that the threshold issue for the court would be whether and how it could exercise jurisdiction over the confirmer. It is the expectation of most banks that mere issuance or confirmation of a credit without any other activity in the forum does not give rise to jurisdiction. While it mentioned the possibility that England may not be an appropriate forum if Indonesian law were to be applied, the court did not address the issue of jurisdiction.

2. It is assumed by all banks and is the law in most countries that, absent the identification of another applicable law in the credit, the law of the Issuer would govern its obligation as to the Beneficiary. There is a similar understanding with respect to the Confirmer and other banks. The court is incorrect in its assumption that all of these obligations must be governed by the same law. They are separate obligations and the commercial expectation is that they are made subject to their own law. Therefore, in the absence of a choice of law provision in the confirmation or the credit, the Confirmer would expect its confirmation to be governed by its own law. This rule is reflected in the UN Convention on Independent Guarantees and Standby Letters of Credit Article, Chapter VI articles 24 and 25. This rule was understood by the Working Group drafting the Convention to be universal.

3. If a different result is compelled by the Rome Convention, many European banks will be surprised and dismayed. However, such a result need not follow. The party who is to effect the performance that is most characteristic of the confirmation is the Confirmer just as the party who is to effect the performance that is most characteristic of the issuance is the Issuer. Therefore, the presumption of Article 4(2) of the Rome Convention should be applicable. The nomination of banks located in another country to advise, to confirm, to pay, or to negotiate does not change the nature of this performance. The nomination merely adds other players who are independent of the Issuer or Confirmer. If they act pursuant to their nomination, they would expect to do so subject to their local law. While it can sometimes be an issue whether a dispute between an Issuer and nominated bank is subject to the law of the Issuer or the nominated bank, that issue is not present in the case at bar.

[JEB/hja]

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