Letters Of Credit: Autonomy Principle Affirmed (Court Of Appeal)

In proceedings where Clyde & Co acted for the successful appellant, PetroSaudi, the Court of Appeal has held that a solicitor who signed demands under a standby letter of credit correctly understood the statement of law he was certifying. Overturning the High Court's decision that the signatory was fraudulent in his representation of law, Christopher Clarke LJ (with whom Lewison LJ agreed) held that the signatory's understanding not only was far from fraudulent but in fact was "the same conclusion as I have reached" and "consistent with commercial good sense".

Standby Letters of Credit

The commercial purpose of a standby letter of credit is to ensure that the beneficiary can obtain payment from a creditworthy bank of sums due under a principal contract, regardless of whether those sums are disputed or whether the counterparty is unable or disinclined to pay. Indeed in countries with a payment risk such as Venezuela, failure to procure or provide a letter of credit may prevent parties from concluding a contract in the first place, certainly where Contractors are negotiating contracts with state entities such as PDVSA.

Standby letters of credit are sometimes described as 'equivalent to cash' or 'the life-blood of international commerce'. English law provides that an issuing bank's obligation to pay out against a compliant demand is a sacrosanct and free-standing obligation, independent of the parties' performance of obligations under the principal contract. This 'autonomy principle' has only a handful of tightly circumscribed exceptions. One of these - the fraud exception - permits a bank to withhold payment where it is clearly established that there was fraud in procuring the letter of credit or where the presentation itself is clearly fraudulent.

The Background

In 2009 the appellant, PetroSaudi Oil Services (Venezuela) Ltd ("POS"), supplied a drill ship to PDVSA Servicios SA ("PDVSA"), a Venezuelan state entity, pursuant to a contract under Venezuelan law. In light of what the judgment describes as "Venezuela's dilatory payment history", an autonomous standby letter of credit governed by English law and issued outside Venezuela was procured in favour of POS to provide security in respect of payments from PDVSA.

POS conducted drilling services and rendered invoices totalling some USD 129 million to PDVSA under the drilling contract. An agreed credit period elapsed without payment of any of these invoices. The dispute over payment of these and other invoices was...