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Note: To secure funding for a high value infrastructure construction project in Trinidad and Tobago, Construtora OAS (Applicant), a construction and engineering company, obtained standby letters of credit from Banco Santander S.A. (Issuer) in favor of the National Infrastructure Development Company Limited (Beneficiary). The standbys were “subject to [ISP 98], and [stated] that any matter not governed by ISP 98 should be governed by English law. They gave jurisdiction to the English courts.”

The opinion stated that “[t]he standby letters of credit provided, by clause 4, that upon the defendant receiving a written demand from the claimant in the form set out at annex 1 to the standby letters of credit, the defendant would pay the amount demanded. Clause 1(B) of the standby letters of credit identified the type of security in each case, for example, retention security or performance security. This clause was followed by the word ‘accordingly’ before further terms followed.”

When Applicant abandoned the construction project, Beneficiary presented written demands to Issuer stating “[w]e hereby notify you that the amount of [the relevant USD sum is given] is due and owing to us by the Contractor [i.e. OAS].” Issuer refused to honor because it insisted that the sums claimed and damages were not payable unless they were liquidated or awarded by a court: “[t]he presentation of a Demand shall be conclusive evidence that the amount claimed is due and owing to you by the Contractor.”

Beneficiary sued Issuer for wrongful dishonor in the English courts and moved for summary judgment against Issuer. In response, Issuer sought an injunction against enforcement of the standby in a Brazilian court, which was granted. The High Court of Justice Queen’s Bench Division, Commerical Court, Knowles, J., decided that it, not the Brazilian court, had jurisdiction over the case, and granted summary judgment in favor of Beneficiary, concluding that the sums claimed should be paid by Issuer.

Issuer argued that Beneficiary made its demand falsely, or at least recklessly, citing Beneficiary’s president’s statement that neither party owed each other, the claimed debts were not mentioned in a letter terminating the contract, and that the letter “was expressly divided between separate consideration of debts in respect of advance payment that were described as due, and other sums which were indicated to require quantification and refinement in due course.” Beneficiary counter-argued that it was entitled to the sums that they honestly believed were due and owing, even if the sums were not subject to final determination by the court.

Beneficiary argued that if it had an honest belief that it was entitled to draw, the demanded amounts were due and owing by Issuer. Beneficiary further argued that it was still entitled to potential overpayment now to be held in trust, and that Issuer should be reimbursed later if a court found that there was overpayment. Beneficiary contended that its losses were in excess of the maximum amount assured under the standbys. Issuer argued that the law of Trinidad and Tobago should govern “whether an amount is due and owing.” The Judge observed, however, that “what really matters is not the law of England but the law of Trinidad and Tobago when it comes to assessing whether an amount is due and owing. I have been shown, and have considered, a legal opinion on this question by Mr. Armour SC of the Trinidad Bar. However, in my view, what really matters is not the law of England, nor the law of Trinidad, but the belief of the claimant. It may or may not prove to be correct under English law or the law of Trinidad and Tobago that these sums claimed are due and owing. It may not ultimately be held in the arbitration or otherwise that the view that these sums are due and owing was correct, but that is not the question here.”

The Judge stated: “I am not prepared to conclude that it is seriously arguable that the claimant did not and does not honestly believe in the validity of the demands; that it did not and does not believe that sums are due and owing.”

Applicant argued that Beneficiary “knowingly or recklessly” overclaimed in its drawing. Although an overdrawing was admitted by Beneficiary, the Judge looked at “the particular context of what was happening in this case and in relation to what was happening under the construction contract, and the future of the construction contract,” in stating an unwillingness to conclude that there was no honesty in the claim.

Applicant also argued “that the law should develop to recognise a different approach to standby letters of credit used to settle performance obligations from the approach to letters of credit used to settle primary payment obligations. It is argued that such a development in the law is especially suited to the construction industry context and where parties to the contract in dispute were already in arbitration. The effect would, it is suggested, be to admit an exception for unconscionable conduct alongside the existing, recognised, fraud exception.” The Judge declined to follow this approach, noting that “what weighs with me particularly heavily is that this is a context in which if I postpone I positively undermine the element of time that was an important part of this type of transaction.” The Judge stated “[w]hether described as ‘the life blood of commerce’ or as ‘equivalent to cash’ or as in the nature of a secure payment, or for some in the present context as the equivalent of retention money, standby letters of credit must work in accordance with their terms, and that includes working on time.”

“Those foundations need to be appropriately strong or this would be the call in many cases, and authority shows the importance of rigour where standby letters of credit are involved.”

In seeking a stay of execution, Applicant argued that it faced untoward financial consequences if it violated the Brazilian injunction. The Judge noted that there may be consequences for Applicant if the Judge had ruled contrary to the injunction granted in the Brazilian court, but concluded that this was part of the risk that Applicant had accepted when it entered into the construction contract with Beneficiary. The Judge reasoned that the injunction would “undo the straightforwardness for which the parties…bargained.” Standbys, the Judge insisted, “must work in accordance with their terms.”

The Judge concluded that “these three individuals and the claimant are, in my judgment, entitled to rest with what was said in the demand. I see nothing to warrant an inference being drawn against what the defendant would characterise as their silence.”

[JWC/ZLK/CEF]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.