Article

Note: To assure payment of invoices for oil rig drilling services provided to PDVSA Servicos S.A. (Contractor), a related Dutch company, PDVSA Services (Applicant), obtained a standby letter of credit issued by Novo Banco SA (Issuer) in favor of Petrosaudi Oil Services (Venezuela) Ltd. (Subcontractor/Beneficiary), a Barbados company.

The standby* was for USD 140 million and required, among other documents, presentation of a “written demand in the form of attachment A to this SBLC written demand duly completed and purportedly signed by the beneficiary.” Exhibit A provided "[w]e the beneficiaries of the SBLC hereby demand payment of USD…not exceeding US$ 130m. We certify that the applicant is obligated to the beneficiary to pay the amount demanded under the drilling contract executed among the beneficiary and [Contractor].”

The services were covered by an International Daywork Drilling Contract (Contract) subject to Venezuelan law between Subcontractor/Beneficiary and Contractor. After providing the services, Subcontractor/Beneficiary submitted an invoice for USD 129,877,699.54, which was not paid. The parties disagreed regarding whether the appropriate rate was USD 17,000,000 per month, known as the “operating or standby rate,” or UKP 500,000 per month, known as the “repair rate.”

Pursuant to the Contract, the parties commenced arbitration and Subcontractor/Beneficiary drew on the standby, making a demand in accordance with Attachment A of the standby. After receiving the drawing, Issuer notified Applicant that there had been a compliant presentation, and stated its intention to pay Subcontractor/Beneficiary on 26 September 2016.

Subcontractor/Beneficiary sued Contractor for full payment of outstanding amounts from Issuer. At an inter partes hearing on 23 September, Contractor sought to prevent Issuer’s payment on the basis that any demand for payment by Subcontractor/Beneficiary would be fraudulent, later requesting appropriate injunctive relief. The parties then agreed that Issuer would not pay until there was a final judicial decision.

At trial, the High Court of Justice, Queens Bench Division, Commercial Court, Waksman, J., issued an injunction preventing Issuer from making payment on the standby letter of credit.

In arguing for the injunction, Contractor contended that: “(1) [t]he true effect of the [partial rulings of the arbitral tribunal] is that under the Contract, [Contractor] is not presently obliged or obligated to make payment of the invoices at all; (2) [n]either Clause 803(3) or (4) alter the position since the arbitrators have found them to be void as a matter of Venezuelan law; (3) [a]ccordingly [Subcontractor/Beneficiary] could not have honestly certified in the presentation that [Contractor] was ‘obligated’; (4) [Issuer] by now, on any view, is aware of that; (5) [a]ccordingly, to have made the Presentation and/or to continue to seek payment of the LC thereunder, [Subcontractor/Beneficiary] was and is fraudulent…; (6) [a]lternatively [Subcontractor/Beneficiary] is constrained by the Contract itself from making the Presentation and/or taking payment thereunder by reference to a Good Faith principle enshrined in Venezuelan law; (7) [t]herefore [Subcontractor/Beneficiary] is not entitled to any payment under the Letter of Credit at this stage and [Issuer] is not entitled to make such payment.”

In response, Subcontractor/Beneficiary argued: “(1) [w]hatever the arbitrators decided (as to whether there is a dispute), the invoices have fallen ‘due’ or ‘due and payable’, which means that [Contractor] is obligated to pay them and accordingly the Presentation is compliant; (2) [e]ven if [Contractor] was not ‘obligated’ there has not been and is not any fraud on the part of [Contractor] or [Issuer]; (3) [n]or is there any separate argument that in the events which have happened the Contract itself prevented [Subcontractor/Beneficiary] from making demand under the LC or receiving payment thereunder due to the operation of the Good Faith principle; (4) [i]f [Subcontractor/Beneficiary] is right, then [Issuer] must pay out to it under the LC.”

The Judge first referenced the outcome of the arbitration: (1) the contract was governed by Venezuelan contracting law Article 141 which requires Contractor to “ascertain that invoices for services rendered are correct before paying them;” (2) Clause 803(4), on which Subcontractor/Beneficiary relied in demanding immediate payment, was inconsistent with Article 141, and therefore void; (3) “no debt was due under the Contract until and unless it was authorised by [Contractor] or awarded in arbitration;” (4) Contractor’s application for continued restraint on Subcontractor/Beneficiary to seek payment pending the arbitration was denied in deference to the English High Court’s jurisdiction on the matter. The Judge also ruled that the portion of Clause 803(4) requiring that invoices be considered irrevocably approved after “15 days of silence” was void, and that Contractor’s silence was not approval but should be treated as a dispute leading to arbitration.

The Judge further ruled that “the certificate that [Contractor] was obligated to [Subcontractor/Beneficiary] for the sums claimed in the presentation under the LC under the Contract was false.” The Judge stated that what had to be certified was the amount sought by Subcontractor/Beneficiary under the standby which was due and payable, and the Judge found no evidence within the contract or standby to support the claim that any amount of the funds provided for by the standby were due immediately with or without a dispute.

Finally, the Judge ruled that the fraud exception applied, as counsel for Subcontractor/Beneficiary could not have honestly certified that Issuer was obligated to immediately pay out the amount due under the standby. Accordingly, the Judge found for Contractor, ruling that Issuer should be enjoined from honoring Subcontractor/Beneficiary’s presentation under the standby.

Texts:

The opinion contained the following excerpts from the contract:

Clause 803(4):

“In the event an amount as disputed, notwithstanding such dispute, [Contractor] shall pay [Subcontractor/Beneficiary] the disputed amount within the time limit applicable to the relevant invoice wherein such dispute arose. [Subcontractor/Beneficiary] shall refund said amount or part thereof with interest, calculated from the date falling thirty (30) days after [Subcontractor/Beneficiary]’s receipt of payment of the invoice relevant to the disputed amount until the date of refund, upon [Subcontractor/Beneficiary] accepting and agreeing to such disputed amount or part thereof or the mutual agreement of [Contractor] and [Subcontractor/Beneficiary] in respect of such disputed amount or part thereof, or [Contractor] proving [Subcontractor/Beneficiary] is not entitled to the same in accordance with paragraph 1304.”

Clause 805(1) provided:

“on the effective date [Contractor] would provide the [Subcontractor/Beneficiary] with a guarantee from Banco Espirito Santo in terms agreed between [Contractor], [Subcontractor/Beneficiary] and [Issuer] as set out in Appendix H in the amount of US$130m to secure payment to [Subcontractor/Beneficiary] under the Contract and to guarantee the performance thereof by [Contractor];”

By Clause 805(4)

“After each drawdown [Contractor] shall ensure the Payment Guarantee or Replacement Payment Guarantee shall be kept topped up at all times and without delay (and in any event no later than the earlier of 10 (ten) business days after draw-down and 15 (fifteen) days prior to the expiry of the Payment Guarantee or Replacement Payment Guarantee in the amount of US$130m, failing which Contractor shall be entitled to suspend or terminate the Contract without further notice and to call on the existing Payment Guarantee or any Replacement Payment Guarantee for all sums due under the Contract, including the Early Termination Fee, without prejudice to contractor's right to claim such amounts under Clause 207.”

“Attachment H contained the form of the security which was the LC and the bank concerned is in fact [Issuer]. Accordingly, if [Issuer] did pay up [Contractor] had ten days to replenish the LC funding.”

“Clause 1304 provided for arbitration in relation to any disputes arising out of or relating to the Contract, which would be conducted in accordance UNCITRAL Rules.”

The standby provided:

"The beneficiaries written demand in the form of attachment A to this SBLC written demand duly completed and purportedly signed by the beneficiary."

“We the beneficiaries of the SBLC hereby demand payment of USD…not exceeding US$ 130m. We certify that the applicant is obligated to the beneficiary to pay the amount demanded under the drilling contract executed among the beneficiary and [Contractor].”

[ZLK]

Decision overturned on appeal:

The subsequent appeal before the Court of Appeal (Civil Division) overturned the decision in January 2017 (Petrosaudi Oil Services (Venezuela) Ltd. v. Novo Banco S.A, PDVSA Servicos S.A., PDVSA Services B.V. [2017] EWCA Civ 9). Lewison and Clarke, LLJ., allowed the appeal of the Subcontractor/Beneficiary, and ordered that the Issuer pay USD 129, 877, 699.54 as per the invoice presented with the demand. Lord Justice Clarke stated: “In my judgment, the judge was wrong to conclude that [Contractor] was under no obligation under the drilling contract to pay any invoice submitted by [Subcontractor]; and that Mr Buckland on behalf of [Subcontractor] was not entitled to certify that [Contractor] was obligated to pay [Subcontractor] the amount of those invoices. It follows that in signing the certificate Mr Buckland was not fraudulent in any sense. On the contrary he was entitled to sign it. He was not dishonest.” [KCM]

* Although the full text of the case did not indicate if the standby LC was issued subject to governing rules, IIBLP has learned from an attorney familiar with the case that the SBLC was issued subject to ISP98 and, to the extent not inconsistent therewith, shall be governed by English law. Any dispute under the SBLC shall be submitted to the exclusive jurisdiction of the English Courts.

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