Article

Note: To assure repayment of a loan, Olympic Resources & Services plc (Borrower) contracted with Mr. & Mrs. Theodossiades (Applicant) who procured a standby letter of credit for GB£500,000 subject to UCP500 from Barclays (Issuer) in favor of National Westminster Bank plc (Lender/ Beneficiary).

The standby subsequently expired without being drawn, leaving Beneficiary with £500,000 of unsecured exposure. Beneficiary then recovered £75,000 from Borrower, and obtained a personal guarantee for the remaining £425,000 from Mr. Kotonou, Borrower's director and majority shareholder (Director). When Borrower became insolvent, Beneficiary sued Director on his personal guarantee. The High Court of England Chancery Division, Sher, QC., issued reserved judgment in favor of Director on grounds that a guarantee induced by misrepresentation is not enforceable.

Director then, in his own name and on behalf of Borrower, sued Beneficiary for breach of contract, common law duty of care, and fiduciary duty.

The High Court of England, Chancery Division, Master Teverson, ordered, pursuant to CPR Pt 3.4(2)(b), that the Particulars of Claim be struck out, and adjourned Beneficiary's application for summary judgment to be heard on appeal. On appeal, the High Court of England, Chancery Division, Morgan J., affirmed, refusing Borrower's request to amend, and granting Beneficiary summary judgment.

Director alleged that the standby was effectively equivalent to cash, that the relationship between Beneficiary and Borrower was that of a bailee and bailor of cash. Consequently, Beneficiary owed a duty of care to Borrower to draw on the standby LC or else to secure its extension.

Beneficiary argued that the standby was analogous to a guarantee and referred to the wording of the standby LC, which required that the amount claimed had come due and had not been paid:

AVAILABLE BY PAYMENT AT SIGHT UPON RECEIPT OF YOUR TESTED TELEX OR AUTHENTICATED SWIFT CONFIRMING TO US THAT THE AMOUNT CLAIMED UNDER THIS IRREVOCABLE STANDBY LETTER OF CREDIT NO: ST LC HAS BECOME DUE TO YOU BY OLYMPIC RESOURCES AND SERVICES PLC, 8 LLOYDS AVENUE, LONDON AND REMAINS UNPAID.

The appellate court ruled that the standby LC was not the same as cash or bank notes, but represented "a security for payment of the underlying debt due from [Borrower] to [Beneficiary]." As such, Beneficiary had the option, but not the obligation to draw on the standby to secure the debt. The court ruled that "in the ordinary case, a creditor will not owe a duty to a debtor as to when and whether he chooses to exercise any powers the creditor may have in relation to securities given to the creditor for the payment of the debt." Therefore, Beneficiary personally had no duty of care toward Borrower or Director in relation to a draw on the standby LC.

[JEB/sdc]

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