Article

Factual Summary: Beneficiary was an English seller which contracted to supply telephone equipment and services to an Indonesian Buyer. The contract price was expressed to be payable by means of LCs, established and advised through Advising Bank. The sales contract also provided that payment under the LCs was to be made upon presentation of the documents at the counters of Advising Bank.

In accordance with the terms of the sales contract, Buyer established a credit available by negotiation which was issued by an Indonesian bank, confirmed by another Indonesian bank and advised to Beneficiary by an English bank. The LC required the drafts to be drawn on Confirming Bank in Jakarta. There was no express governing law clause in the LC.

Beneficiary later drew those two drafts on Confirming Bank and presented the documents to Advising Bank. However, the documents were not negotiated by Advising Bank. Instead, Advising Bank checked and forwarded the documents to Confirming Bank as collecting agent with a request that payment be effected in London.

On receipt, Confirming Bank passed the documents to Issuer which rejected them on the basis of discrepancies described by the court as "at least arguably unjustified and immaterial". Advising Bank on Beneficiary's behalf rejected the discrepancies as unjustified but Confirming Bank still refused to pay. Meanwhile Issuer became insolvent.

Beneficiary, having been paid by its credit insurers, brought subrogated proceedings for the latter's benefit. The action was against Confirming Bank's alleged breach of contract by its failure to honour its obligations as a confirming bank of the LC. As Confirming Bank had no presence in England, Beneficiary applied to the court for permission to serve the claim out of the jurisdiction. Beneficiary subsequently applied for and obtained an order that service be effected on Confirming Bank's English lawyers. These applications were granted and service of proceedings was effected. Confirming Bank then applied to have the orders set aside and for a declaration that the English Courts had no jurisdiction over it. The orders were affirmed and the application was denied. Confirming Bank appealed to the Court of Appeal which affirmed them.

Legal Analysis:

1. Service Out of the Jurisdiction - Claim in Relation to Contract - Governing Law - Art. 4 of the Rome Convention

Section 6.20 of the English Court's Civil Procedure Rules provides that where a claim is made in respect of a contract which is governed by English law, a claim may be served out of the jurisdiction with the permission of the court. As the LC did not contain an express governing law clause, the governing law of the credit was to be determined by reference to Art. 4 of the Rome Convention, a choice of law statute applicable to EU nations by treaty, which provides that a contract will be governed by the law of the country with which it is most closely connected. Art. 4(2) states that a contract is presumed to be 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, where applicable, its habitual residence or central administration. However, under Art. 4(5), this presumption can be rebutted where it appears from all the circumstances taken as a whole that the contract is more closely connected with another country. The question, therefore, relates to the weight to be accorded to the presumption in relation to a LC transaction.

2. Governing Law - Art. 4(2) and (5) of the Rome Convention

The appellate court ruled that in the circumstances of this case, rather than simply applying the presumption in Art. 4(2), Art. 4(5) should be applied to the contracts between Beneficiary and Issuer and Confirming Bank respectively.

The appellate court observed that the presumption contained in Art. 4(2) is a blanket provision which falls to be applied across the entire field of contract law. The application of Art. 4(2) assumes that one can identify a single party charged with the single performance characteristic of the contract. A credit is not susceptible of such treatment. It is the source of a number of autonomous bilateral contracts arising successively between the parties and/or banks involved, each of which, considered separately, has a separate characteristic performance and therefore potentially a different governing law. The court recognised that as a matter of policy and certainty it is desirable but not essential that each of the contractual relationships arising in the course of the transaction have the same governing law.

The correct approach for the purposes of identifying the governing law is to look at how the contract was intended by its terms to operate at the time it was made, rather than to look at what in fact occurred. In this case, the appellate court looked at the contract between Beneficiary and Confirming Bank in its application of Art. 4 and observed that in the context of the overall purpose of a LC transaction, when considering the contracts arising between Seller/ Beneficiary and the issuing or confirming bank, the geographical location of the factors which, absent the presumption contained in Article 4(2), are of most obvious significance when considering the closest connection with a particular country, are the place where the documents necessary to procure payment to Seller/Beneficiary are to be presented and checked, and the place where payment to Seller/Beneficiary is to be made against those documents.

By being 'available for negotiation', the LC, inter alia, acted as an invitation and authority to the negotiating bank to give value for the draft against the promise of Issuer/confirming bank to pay in accordance with the terms of the credit on presentation of the documents. Such negotiation constitutes final payment to Seller/Beneficiary against presentation of documents, the later presentation by the negotiating bank to the Issuer/confirming bank being the machinery of its reimbursement.

In the instant case, as found by the judge, there was valid reason and commercial logic why, rather than simply applying the presumption in Article 4(2) of the Convention, Article 4(5) should be applied to the contracts between Beneficiary as Seller/ Beneficiary and Issuer and Confirming Bank respectively, in circumstances where the LC was opened in London through Advising Bank and contemplated payment of the beneficiary in sterling in London by the Advising Bank as negotiating bank authorised to make payment to Beneficiary against the conforming documents specified in the credit. In those circumstances, not only was the contemplated place of payment England but, for the purposes of negotiation, the documents would be submitted and checked in England before such payment was made. Upon that basis there was similarly good reason to apply Article 4(5) to any putative contract between Advising/Negotiating Bank and Confirming Bank. Hence it followed that the credit was governed by English law.

Comments by Philip YOUNG:

1. One of the pecularities of credits as contrasted with other facilities and instruments issued by banks is that historically they have been issued without a governing law and/or jurisdiction clause. As this judgment again demonstrates, by leaving the credit silent on both matters, issuing and confirming banks risk finding themselves being sued in unfamiliar jurisdictions and subject to unfamiliar law.

2. Most banks assume that where the credit is silent on its governing law, the issuance or confirmation will be governed by the law of the place of the issuer's or confirmer's domicile. This approach is appropriate for independent undertakings and supported by the conflict of laws provisions in the Uniform Commercial Code applicable in the US and in the ICC's Uniform Rules for Demand Guarantees, but may not be applied in all courts, chiefly because courts typically apply local conflict of laws rules and those rules may treat independent undertakings like ordinary contracts or guarantees.. On the other hand, beneficiaries may too lightly assume that they can locally sue an overseas issuer and forego the protection of obtaining a local bank's confirmation to address both credit and country risk attributable to the overseas issuer.

3. The appellate court's emphasis on England as the place of presentation of the documents and the place where payment to Seller/Beneficiary is to be made against those documents as determining the governing law might be welcomed as it might be thought that both places are likely to be the country of the beneficiary's domicile. It might be argued that it does make commercial sense and that it accords with business efficacy if the beneficiary can sue the issuer and/or confirmer in its own courts under its own law. However, on closer analysis, there are obvious problems with the court's formulation. For example, the place of presentation of the documents will not always be the same as the place of payment. Moreover, shrewdly advised beneficiaries might be able to engage in forum shopping where, for example, the credit is available for negotiation at any bank - a beneficiary may chose to present the documents to a bank in another country to get the perceived benefit of a more advantageous law and/or jurisdiction in that country. Finally, even if the documents were "checked" and value given for them by a negotiating bank in England, those activities are insignificant because they would not bind the issuing or confirming bank, each of which conditions its obligation on its own examination of the documents (in Indonesia) under UCP500 Article 14.

* Philip YOUNG is an Attorney with Baker & McKenzie, LLP based in their London office.

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