Standby letters of credit: fraud allegation repelled.

Robust common sense from the Court of Appeal today in Petrosaudi Oil Services Ltd v Novo Banco SA & Others [2017] EWCA Civ 9 on standby letters of credit, where  Christopher Clarke LJ satisfactorily took legal technicality in his stride to make sure the right side won.
PDVSA, a Venezuelan state oil company, signed up Petrosaudi to do some drilling work: Petrosaudi sensibly insisted on PDVSA providing a standby letter of credit from Novo Banco to cover sums which Petrosaudi certified PDVSA were “obligated” to pay them. The drilling contract stated that payments were due 30 days after being invoiced, with a “pay now, argue later” term applying in the absence of a notice within ten days that the sums stated due were disputed. A cool $129 million was invoiced to PDVSA. After 30 days it had been neither paid nor disputed, and Petrosaudi claimed from Novo Banco. At this point PDVSA intervened. They said, correctly, that the bill was disputed; that certain provisions of Venezuelan law (which admittedly applied to the contract) invalidated the “pay now, argue later” clause, and also provided, for good measure, official approval was required before any bill could be paid; and all these facts had been known to TB, the executive of Petrosaudi who certified that PDVSA was obligated to pay the $129 million. PDVSA persuaded HHJ Waksman that for that reason TB’s calling in the SLC for a sum he knew couldn’t be sued for was fraud, which meant payment from the bank wasn’t due and could be enjoined. Petrosaudi appealed. The Court of Appeal agreed with Petrosaudi: a debt could perfectly well exist (and hence be called something the debtor was obligated to pay) even if it wasn’t exigible in court yet. It followed that TB had been perfectly entitled, since he thought PDVSA’s challenge to the amount payable was baseless, to say that PDVSA was obligated to pay the full sum.

In our view, quite rightly so. One reason you demand a performance bond (which is essentially what a SLC is) rather than a simple bank guarantee of a co-contractor’s obligations is precisely to assure yourself of cash-flow by shutting out snivelling arguments that the principal debt is disputed or not payable yet, or payable subject to a set-off, or whatever. A worrying feature of the first instance decision in Petrosaudi was precisely that it dangerously extended fraud and left the beneficiary with the prospect of an undeserved hole amounting to well over $100 million in its balance sheet: not a prospect that even Petrosaudi would view with equanimity.

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Professor Andrew Tettenborn

Professor Andrew Tettenborn joined Swansea Law School and the Institute of International Shipping and Trade Law in 2010 having previously taught at the universities of Exeter (Bracton Professor of Law 1996-2010), Nottingham and Cambridge. Professor Tettenborn is a well-known scholar both in common law and continental jurisdictions. He has held visiting positions at Melbourne University, the University of Connecticut and at Case Law School, Cheveland, Ohio. He is author and co-author of books on torts, damages and maritime law, and of numerous articles and chapters on aspects of common law, commercial law and restitution.

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