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Note: To cover an advance payment for a high value infrastructure construction project in Trinidad and Tobago, Construtora OAS (Subcontractor/Applicant), a construction and engineering company located in Brazil, was required to provide a standby letter of credit. Accordingly, Subcontractor/Applicant obtained a counter standby (described by the Court as a “counter-guarantee”) issued by BNPP Brazil (Counter Standby Issuer), a subsidiary of BNP Paribas, in favor of BNP Paribas (Local Bank). Local Bank issued its local undertaking in the form of two standby LCs (Local Standbys) in favor of Contractor/Beneficiary. The Local Standbys were subject to English law with exclusive English jurisdiction.

The opinion described the Local Standbys as follows: “they are irrevocable letters of credit carrying an obligation to pay on demand, which must be honoured by direct payment to the account of [Contractor/Beneficiary]. The credit payment demand was itself to be conclusive evidence that the sums claimed were due and owing and [Local Bank] promised to make payment in full without set-off, counterclaim or withholding. The letters of credit incorporated international standby letters of credit practices as set out in the ICC publication ISP 98. The place of demand was [Local Bank’s] operation centre in Paris.”

When Contractor/Beneficiary served a termination notice under the construction contract on 21 June 2016, Subcontractor/Applicant initiated arbitration proceedings in Port of Spain, Trinidad and Tobago, pursuant to the arbitration clause in the construction contract. On 11 July 2016, Contractor/Beneficiary also demanded payment under both Local Standbys. Local Bank dishonored both presentations.

Subsequently, at the request of Subcontractor/Applicant, a Brazilian court enjoined Counter Standby Issuer from making payment under the standbys. The order was addressed to Counter Standby Issuer, but when Subcontractor/Applicant forwarded a copy of the local standby to Local Bank, Subcontractor/Applicant asserted that the order also enjoined it from making payment under the Local Standby. Upon inquiry by Counter Standby Issuer, the Brazilian court originally ruled that the injunction did not extend to Local Bank. Following a later application in a different case by Santander Brazil (another bank that had extended a different standby letter of credit), the Brazilian court ruled that an injunction against Santander’s regional subsidiary did have effect against Santander Madrid. Counter Standby Issuer then made a further request as to whether its position should be likened to that of Santander, and in response the court reversed itself to rule that the injunction did apply to Local Bank.

In a separate action in England related to the instant case, Contractor/Beneficiary sued Local Bank for wrongful dishonor, seeking the amount due under both Local Standbys, a sum of USD 58,786,765. In this action, Contractor/Beneficiary moved for summary judgment, and counsel for Local Bank requested a stay of execution should it be granted. The High Court of Justice, Queen’s Bench Division, Commercial Court, Foxton, J., granted summary judgment in favor of Contractor/Beneficiary and denied Local Bank’s request for stay of execution.

The English Judge found that there was an arguable case that the Brazilian court had jurisdiction and that its order applied to Local Bank. The English Judge also observed that, if Local Bank paid the counter standby under the injunction, Local Bank was exposed to a penalty of ten percent of the letter of credit amount under Brazilian law. Further, the Judge ruled that the substantial disputes between Contractor/Beneficiary and Subcontractor/Applicant should be resolved in their chosen forum of arbitration, but that these disputes did not provide Local Bank with a defense under the Local Standby or a reason for not paying. Finally, the Judge ruled that Local Bank’s arguable defenses or grounds for resisting payment did not fall under any of the narrow categories of defense recognized by English law for an independent undertaking.

The English Judge noted the decision in Power Curber v. National Bank of Kuwait [1981] 2 Lloyd's Rep 394, in which the court held that it would “strike at the heart of international trade if a letter of credit were not to be honoured by reason of an injunction that had been obtained,” and stating that: “[i]t would undermine the important principle of English law protecting the sanctity of standby letters of credit if the payment could be subverted by procedural means”.

The Judge was not persuaded by Local Bank’s argument that the court should stay or adjourn the application for summary judgment until the outcome of the Brazil proceedings was known, nor by Local Bank’s reliance on impending penalties imposed by the Brazilian court as a reason the instant case should go to trial.

Further, the court rejected Contractor/Beneficiary’s argument that the Judge should not recognize the Brazilian court injunction because it had been granted in breach of an agreement for arbitration. The Judge ruled that Local Bank had no grounds for resisting summary judgment, and denied a stay of execution on the principle of protecting the sanctity of standby letters of credit.

[ZLK]

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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.