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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 [ISP98], and [stated] that any matter not governed by ISP98 should be governed by English law”.

As explained in the opinion, clause 4 of the standby providedthat “upon the [Issuer] receiving a written demand from the [Beneficiary] in the form set out at annex 1 to the standby letters of credit, the issuer 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 USD $34m is due and owing to us by the Contractor [i.e. Applicant].” Issuer refused to honor,claiming that the sums claimed and damages were not payable unless they were liquidated or awarded by a court.

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, Commercial Court, Knowles, J., decided that it, the English Courts, 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 appealed.The Court of Appeals (Civil Division), Longmore, L.J., affirmed the Beneficiary’s summary judgement motion.

Issuer argued that (i) the judge applied an incorrect test of serious arguability when he should have asked himself whether the Issuer had a real prospect of establishing its defense; (ii) that the Issuer could establish the prospect that Beneficiary did not believe in the validity of its claim because a claim for unliquidated damage for premature abandonment of the construction contract was not in law a claim that money was “due and owing”; (iii) the factual evidence relied on by the Issuer demonstrated that Beneficiary had no genuine belief that money was due and owing from Applicant; and (iv) the claim under the standby letters of credit could only be in respect to the certified retention (amount of construction payments withheld by the Beneficiary), and at the time of the demand the certified retention was only USD 31 million and it was therefore wrong to claim an amount of USD 34 million in respect of the retention security.

Although opining that the high court judge applied the wrong test, the appellate opinion concludedIssuer did not have a real prospect of establishing thatBeneficiary had a lack of belief in the validity of its claim. The opinion noted that “it is the beneficiary’s belief in the validity of its demands [that are] relevant, not whether the demands are correct as a matter of law.” Moreover, the AppellateJudge noted that the provision in clause 4.2(D) of the construction contract contemplated that any demand stated in the LC should state that a sum was “due and owing,” following Applicant’s repudiation by abandoning the work. This provision enabled the Beneficiary to include sums it was entitled to on any alleged contractual termination.

With regards to the argument by Issuer that Beneficiary had not demonstrated any genuine belief that money was due and owing from the Applicant, the appellate Judge reasoned that statements made by Beneficiary’s president and letters casting doubt on the believability of the Beneficiary were dubious.The statement that Beneficiary’s President gave was before the LC’sexpiry date (entitling the Beneficiary to make a demand), and the testimony that Beneficiary’s President gavebefore Trinidad’s Enterprises Committee was regarding the financial position between the Beneficiary and the Applicant before the LC’s expiry date as well. In addition, the letters from the Beneficiary’s president dated June 21 and July 6, 2016 did not give any more proof of fraud by the Beneficiary.

Finally, the appellate court rejected Issuer’s argument that Beneficiary could only demand USD 31million under the certified retention because the letter that it used to support its argument stated that “[t]otal amount of Retention covered by standby LC equals USD $35,359,590.56.” The appellate court noted that even though this amount covers both the amount owed under the retention LC and the cash retention, there doesnot have to be a difference in treatment.

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