Factual Summary: Buyer and Seller contracted for the sale and delivery of iron ore fines over three years. The contract, which was later amended, required monthly shipments from Mexico or Chile to China over the first 15 months, with a standard shipment size valued at USD 24.8 million. The total value of the contract was approximately USD 720 million. Shortly after the contract was signed, there was a "dramatic" fall in the market price of the goods which led to problems between the parties.

Clause 6 of the contract, set out in full below, required that Buyer open a commercial LC in favor of Seller 15 working days after signing the contract as well as a standby LC worth USD 20 million (one month's shipment). The contract provided that the standby LC must not expire earlier than 45 days after the last shipment and that the Buyer must establish the commercial LC 30 days before the date of each shipment. Seller reserved the right not to load if Buyer did not tender the commercial LC. If Buyer failed to produce the commercial LC and the standby LC within 48 hours after the expired due date (15 days of signing the contract), Buyer was to make a telegraphic payment in advance for the shipment upon the demand of Seller without protest as a contract breach.

The contract also contained a "Force Majeure" clause covering any extraneous or unforeseeable events that should occur delaying shipment or payment such as war, famine, etc. It provided that if a force majeure event renders performance impossible in whole or in part beyond 3 months, either party can refuse further performance which will deprive either party from the right to claim damages.

Both the commercial LC and the standby LC were issued. Due to changed supply arrangements, the parties agreed to amend the standby LC in a November 2011 memorandum. The standby was in the form of a Counter Standby issued by Issuer's Shandong branch (Counter Issuer) in China in favour of Issuer's Sydney branch (Local Bank) in Australia. According to the opinion, the standby required the following statements: "(1) the number and date of the standby LC; (2) the amount claimed; (3) that [Buyer/Applicant] is in breach of its obligations under the contract; (4) the respect in which Buyer/Applicant is in breach; and (5) that [Seller/Beneficiary] has fulfilled its obligations under the contract such that [Buyer/Applicant] cannot ascribe its breach to [Seller/Beneficiary] or exempt itself from its obligations." The text of the standby is reprinted at the end of this summary.

By December 2011, Seller/Beneficiary had not made its first three shipments, and the parties agreed to amend the contract further in order to adjust and "catch up" with future shipments. The first shipment was further delayed, however, by changes in Mexican governmental iron ore restrictions and Seller/Beneficiary claimed that a force majeure event had occurred due to "acts of Government". Seller/Beneficiary proposed an alternative supplier of iron ore fines to Buyer/Applicant in order to continue the contract. Seller/Beneficiary issued a default notice to Buyer/Applicant for not "attempt[ing] to allow measures to allow the contract to continue" as stipulated by the force majeure clause in the contract. Seller/Beneficiary then drew on the standby LC in July 2012 but Local Bank rejected the drawing due to unnamed discrepancies. Seller/Beneficiary re-presented an apparently complying presentation, causing Issuer to make a reimbursement demand on Buyer/Applicant for USD 20 million plus its issuance fee. As a result, Buyer/Applicant instructed its solicitors to seek an injunction restraining payment and they obtained an ex parte order preventing payment.

Both parties also undertook further negotiations regarding the contract. In July 2012, the parties produced an addendum that required an amendment to the standby LC and provided that Buyer/Applicant must deposit USD 2 million in Seller/Beneficiary's account for Seller/Beneficiary to apply as it wished pending further performance of the contract. Under the addendum, Seller/Beneficiary withdrew its demand on the standby LC. It was agreed that Issuer would issue an amended standby LC to replace the original.

An amended Standby LC was never issued. Issuer stated that Buyer/Applicant's application to amend the standby LC was conditional on Seller/Beneficiary's withdrawal of the demand under the original standby LC. On 25 July 2012, Seller/Beneficiary agreed to withdraw its demand. On 1 August 2012, the amended standby LC had still not been issued, and on that day Seller/Beneficiary issued another notice of default to Buyer/Applicant. Buyer/Applicant responded that it had instructed Issuer to issue the amended standby LC. The Judge stated that the amended standby LC was not issued due to Issuer's concerns that, by its terms permitting standby LC "to be negotiable, assignable and transferable in whole or in part by the beneficiary without presentation to the issuing bank" and without the payment of any transfer fees, the standby LC would be divided and add up to claims against it greater than its whole. "Nor was it prepared to accept the risk of the standby LC being assigned to multiple parties whose identities were unknown to it."

Alleging breach of contract by Buyer/Applicant for failure to offer the standby LC, on 6 September 2012, Seller/Beneficiary gave Buyer/Applicant notice of termination of contract and renewed its drawing on the standby LC for breach of contract by Buyer/Applicant. Seller/Beneficiary specifically referred to the Buyer/Applicant's noncompliance "to give instructions to the Issuing Bank to amend the standby letter of credit".

Following the re-presentation, Buyer/Applicant then sued Issuer to enjoin payment and Seller/Beneficiary to enjoin its 6 September 2012 drawing on the standby LC or to require this payment of the proceeds with the registry of the court pending resolution of the arbitration. Subsequently, the parties requested a ruling on a final rather than an interlocutory basis. The opinion noted that Issuer "appeared through counsel to see that its interest was protected but indicated that it did not otherwise seek to intervene and would co-operate with whichever course the Court ordered". The Judge refused to issue an injunction.

Legal Analysis:

1. Autonomy Principle, Exceptions, and Negative Stipulations:

Buyer/Applicant argued that the contract did not give Seller/Beneficiary "an unconditional or unqualified right to make demand on the standby LC", but only allowed Seller/Beneficiary to draw on the standby LC in connection with a failure to pay for shipment of the ore fines. Since there were no shipments, Buyer/Applicant urged that the drawing was improper. Seller/Beneficiary responded that it was entitled to draw on the standby LC whenever Buyer/Applicant was in breach of its contractual obligations.

In resolving the dispute the Judge referred to what he characterized as "the Autonomy Principle", explained by the principle that "Documentary credits such as letters of credit and performance guarantees are considered as independent of the underlying contracts that give rise to them . . . . Express statements in bank guarantees, bank undertakings and letters of credit that they are 'unconditional' should not be qualified by implied conditions in those instruments that the demand on the bank must conform to the requirements of the contract between the parties; to allow otherwise would deprive these bank guarantees of their commercial currency".

The Judge then observed "[b]ut the question is always one of construction of the parties' agreement, which in conformity with principle requires consideration of the language used, the surrounding circumstances known to the parties and the purpose of the transaction and the objects it was intended to secure".

The Judge recognized that there were what he described as "limited exceptions to this approach to the construction of bank guarantees and letters of credit" with respect to fraud, unconscionable conduct, and where a beneficiary "threatens breach of a promise not to call upon the performance guarantee. The breach of that contractual promise is enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts: [citation omitted]. Enforcement of the negative stipulation in these circumstances is not strictly an exception to the 'autonomy principle'. The negative stipulation in the contract is used to prevent the beneficiary from claiming under the documentary credit, rather than the Court interfering with a payment which would otherwise be made under the instrument."

In explaining the concept of negative stipulations, the Judge stated:

A contractual negative stipulation exists, where a condition, if not satisfied, will operate to prevent the making of a claim under the documentary credit. The unsatisfied condition is a basis for the Court to enjoin the beneficiary from proceeding with a demand against the bank. It is now well established that the Equity Court intervenes to grant an injunction to enforce a negative contractual provision in Equity's auxiliary jurisdiction on the basis of the inadequacy of the legal remedy . . . .

Buyer/Applicant claimed that there was a negative stipulation in the contract which was violated by the drawing. Admitting the proposition that an injunction would be proper to prevent a drawing that was in breach of the contract,

The Judge ruled stated that in order to decide whether a negative stipulation existed and justified an injunction,

Resolution of this issue is a matter of construction of the relevant contractual provisions, especially Contract clause 6 and Addendum clause 3. These provisions must be construed in the context of the whole Contract giving proper weight to the commercial purpose of [Buyer/Applicant] and [Seller/Beneficiary] to be inferred from the contract.

The Judge further noted that "[a]uthority confirms that clear words are required to support a construction which inhibits a beneficiary from calling on a performance guarantee, where a breach is alleged in good faith [citations omitted]."

Seller/Beneficiary argued that because the undertaking was a standby under which transport documents are not required, there should be no inference drawn from the lack of shipment of the goods. Buyer/Applicant responded that "whether the standby LC called for the transport documents or not as a condition of payment under the standby LC, they would still be required under the Contract." The Judge concluded, however, that this distinction did not determine resolution of the problem.

Buyer/Applicant argued that it was necessary for Seller/Beneficiary "first establish that it has a right to make a demand on the standby LC before it can do so" and that because the Contract did not specify any circumstances when a drawing the standby could be made and because the Contract does not "does not expressly provide that the right to make demand on the standby LC is unconditional or unqualified, that the parties cannot have intended that the right to make such demand was unconditional or unqualified." It concluded that Seller/Beneficiary was limited to drawing only in a circumstance where an iron ore shipment had not been paid for under the contract.

The Judge observed that in light of the reaffirmation of the contractual terms of the standby in the amendments to the contract that they intended the standby "to operate according to its terms, without qualification or restriction", pointing in considerable detail to the terms of the contract and amendments. The Judge concluded that it was the intention of the parties that "the standby LC would operate according to its terms", signifying that the beneficiary would only have to make the requisite statements without fraud or acting in an unconscionable manner.

The Judge concluded that "[t]he standby LC is only payable on presentation of claim related documents. This feature itself indicates that it is a means of allocating credit risk in the course of an unresolved dispute. Its operation in this way is clear here, irrespective of the absence of words commanding payment notwithstanding dispute. The five items of the beneficiary's statement in the standby LC do not require any dispute to be resolved before the Bank makes payment. The standby LC can be inferred to operate in circumstances where any existing dispute is unresolved."

Buyer/Applicant contended in the alternative hat there was an implied negative stipulation that he standby LC could be drawn on except for particular contractual breaches i.e. failure to pay for an iron ore shipment. The Judge stated that

"[i]n the absence of an express negative stipulation, an implied negative stipulation may qualify [Seller/Beneficiary]'s making of a demand under the standby LC. The usual requirements govern the implication of such a. term into a contract: (1) it must be reasonable and equitable; (2) it must be necessary to give Business efficacy to the Contract so that no term will be implied if the Contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract: [citation omitted]. To give business efficacy to an agreement, clear necessity is required to imply a term, such that it is not enough that it is reasonable to imply a term; it must be necessary: [citation omitted]."

The Judge ruled that Seller/Beneficiary was entitled to demand payment and that no negative stipulation restricting such a demand should be implied because: 1) such an implication is not necessary for the Contract to work; 2) making such an implication would contradict the express terms of the contract regarding the terms of the standby; and 3) the difficulties in framing the scope and nature of such an implied negative stipulation.

In dismissing the proceedings and refusing to stay the drawing, the Judge also noted that whether there was a breach of contract determining if payment is drawn by Seller/Beneficiary would be decided at arbitration under the contract terms."


Despite the court's initial affirmation of the independence principle and eventual conclusion that implication of negative stipulations into the underlying contract that would justify an injunction were not warranted, the effect of the opinion is chilling. It is telling that the Judge spent the bulk of the opinion addressing arguments that the contract terms regarding the standby affect when a drawing can be made rather than looking to the terms of the standby itself. If the independence doctrine means anything, it is that the standby letter of credit stands on its own without reference to the underlying contract.

To be sure, LC fraud or abuse is an exception and it may be necessary to look at the terms of the contract to determine whether there is LC fraud or abuse. However, where the beneficiary is able to make a demand under the terms of the standby without committing letter of credit fraud or abuse (which probably includes unconscionability), a court should not interrupt payment. Only an action utterly beyond the pale of the contract would justify such a result. Such fraud or abuse should not require a detailed explication of the contract terms but should be evident on a facial examination of the contract. In this case, it would be whether it was apparent from the terms of the contract that there could be no drawing on the standby where there was no shipment of the goods.

Determining whether there are negative stipulations in the contract, much less implied negative contractual stipulations, is a formula for litigation and discrediting the letter of credit. The credit was issued at the request of the applicant which must live with its terms. There is no need to look to the terms of the contract for provisions that should have been in the credit itself. Indeed, to do so is contrary to the entire notion of independence. The limited exception for LC fraud or abuse is just that, limited. In this case, the beneficiary had a colourable basis for drawing on the standby. It should not have taken 42 pages and painstaking construction of the underlying contract and amendments for the court to reach this result.

Incidentally, in referring to SWIFT, the court made a rather bizarre statement about MT700 messages: "The MT700 swift [sic] system is a secure system for the means of delivery of documentary letters of credit in soft copy form."


The Standby LC provided:

"We (the Issuing Bank) have been informed that ALYK (H.K.) LIMITED (hereinafter called 'the Principal') has entered into contract dated 2011- 8-18 with you ('the contract') for the supply of Iron ore fines. Furthermore, we understand that, according to the conditions of the contract, an irrevocable Standby Letter of Credit is required. At the request of YANKUANG ALUMINIUM INTERNATIONAL TRADE CO LTD, we hereby Irrevocably undertake to pay you an amount not exceeding in total of USD20,000,000.00 (SAY U.S. DOLLARS TWENTY MILLION ONLY) after receipt by us of your first demand in writing stating:

The number and date of our Standby Letter of Credit under which your claim is made and the amount you claim and that the principal is in breach of his obligation(s) under the contract conditions, and the respect in which the Principal is in breach and that you have fulfilled your obligations(s) in accordance with the contract and thus the Principal can neither ascribe the breach of his own obligations to the beneficiary nor exempt himself form the obligations thereof.

For the purpose of identification your written statement must be duly signed and presented through your local bank and your signature(s) on the demand in writing must be verified and authenticated by the presenting bank which must confirm to this effect through authenticated Swift message to us.

The Standby Letter of Credit shall expire on 2014-10-04.

Any demand for payment and documents required under this Standby Letter of Credit must be received by us before its expiry at our address stated above. Upon expiry please return the original Standby Letter of Credit to us. But this Standby Letter of Credit will become null and void upon expiry whether the original Standby Letter of Credit is returned to us or not.

This Standby Letter of Credit can be transferred to BQI MINING GROUP MEXICO SAPI DE CV with the consent of CHINA CONSTRUCTION BANK Shandong Branch through authenticated Swift message.

Multiple drawings are allowed.

This Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication Number 600 and this Standby Letter of Credit is subject to Laws of New South Wales, AU."

Clause 6 of the Contract which the Judge described as "a somewhat clunky provision" and "error-prone" provided:

"The Buyer shall open an Irrevocable Transferable Documentary Letter of Credit (LC) and acceptable, at sight letter of credit to the Seller within 15 working days after signing the contract from one prime World Top 25 Bank in favour of the Seller by way of SWIFT MT700 with the Seller as first beneficiary for an amount in US Dollar sufficient to cover 100% of contract value each, including 95% contract value of provisional payment and 5% for balance payment The buyer must provide within 10 working days of signing of this contract extra cover the LC, a transferable Stand By Letter of Credit (SBLC) in a format acceptable to the Seller for the value of $20,000,000 being 1 month's shipment of 160,000MT. The SBLC is not to expire earlier than 45 days after the last shipment. For each such shipment the Buyer shall 30 days before the date of each shipment establish the LC for each such shipment and Send a copy of the original by e-mail to the seller to comply with each shipment. The Seller reserves the right not to load in the even (sic) the Buyer does not produce the letter of Credit.

In the event that the buyer fails to issue the 'Stand By Letter of Credit (SBLC)' and 'Letter of Credit (LC)', the payment, for the First (1) Shipment of 50,000 MT, then forty eight (48) hours after expired due date, the Buyer shall make payment via T/T (pay in advance) and via T/T at sight, of the rest shipment, if the buyer fails to issue the LC, upon demand by the seller without protest as a contract breach. Within 14 (days) banking days of receipt of buyer's swift MT700, the seller will issue the 5% CPB (Corporate Performance Bond) for non-delivery. The CPB is an irrevocable unconditional and guarantee to the buyer for all the shipment throught (sic) the Contract valid period. The buyer acknowledges that a claim under the performance bond will discharge the seller's obligations and will be adequate compensation against any loss or damage suffered by the buyer due to non-performance by the seller.

Provisional Payment

The first payment of 95% CIF shipment value, and FOB where applicable will be made on basis of loading port report both as per quantity and quality certificates issued by SGS accompanied with documents provided in clause 7A.

Final Payment

The balance of payment due to the Seller after provisional payment shall be affected under the same L/C against Seller's final invoice in five copies delivered through the Bank. The invoice is to be based on CIQ's certificates as provided in clause 7 and clause 8 issued within 80 (Eighty) days after completion of loading at the loading port."

The Contract Addendum of 21 July 2012 provided:

"The Buyer shall give instructions to the Issuing Bank to amend the Standby Letter of Credit Number SBLC20110101 dated 11 November 2011, copy of SWIFT MT799 from CCB Shandong to CCB Sydney requesting CCB Sydney to reissue the SBLC upon withdrawal of the demand, and that the SBLC is to be negotiable, assignable and transferable in whole or in part by the beneficiary without presentation to the issuing bank and without payment of any transfer fees. The SBLC is to be issued by China Construction Bank Sydney to Caprock or its nominee by MT760 and not just in hard copy."

The 6 September 2012 drawing statement recited: "the 11 November 2011 standby LC, the amount of its claim of US$20 million and that 'ALYK (HK) Ltd (the Principal) is in breach of his obligations in accordance with the contractual conditions' and, that it was not in breach of contract. The particulars of the respect in which the principal is in breach' as required by the standby LC (4) were stated in the 6 September demand:

In accordance with clause 6 of the Contract, ALYK (HK) Limited (the Principal) failed to issue a Documentary Letter of Credit at least thirty (30) days before the date of the first shipment, being 20th May, 2012. On 12 June 2012, Caprock Commodities Pty Ltd ATF SAFE Fund (the Beneficiary) issued to the Principal a Notice of Default complaining of the breach. As at the date of this Demand the breach by the Principal has not been rectified and the Principal remains in breach (the First Breach).

On 19 July 2012 the Beneficiary issued a First Demand in respect to the First Breach which was withdrawn on 25 July 2012 on the basis of an agreement between ALYK and Caprock Commodities Trading Pty Ltd (the 'Addendum') dated 21 July 2012. The terms of the Addendum have not been complied with."

Clause 3 of the Addendum requires the Principal:

"to give instructions to the Issuing Bank to amend the Standby Letter of Credit Number SBLC20110101 dated 11 November 2011, and copy of SWIFT MT799 from CCB Shandong to CCB Sydney requesting CCB Sydney to reissue the SBLC upon withdrawal of the demand, and that the SBLC be negotiable, assignable, and transferable in whole or in part by the beneficiary without presentation to the issuing bank and without payment of any transfer fees. The SBLC is to be issued by China Construction Bank Sydney to Caprock or its nominee by MT760 and not just in hard copy".

Clause 10 of the Addendum provides that the "Amended SBLC is to be issued to the Beneficiary by MT760 in exchange for the withdrawal of the demand". The First Demand was withdrawn on 25 July 2012 and the amended SBLC has not been issued to the Beneficiary.

On 1 August 2012 and 22 August 2012, the Beneficiary issued a two further Notices of Event of Default complaining of the breach. "As at the date of this First Demand the breach by the Principal has not been rectified and the Principal remains in breach."



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.