Litigations Involving SBLC
Litigations Involving SBLC
Litigations Involving SBLC
Late 2016 saw three English court rulings on whether issuing banks were obliged to pay against
what, on their face, appeared to be complying demands under standby letters of credit (SBLCs).
These cases were:
National Infrastructure Development Co. Ltd. v. BNP Paribas [2016] EWHC 2508 (the BNPP
Case);
National Infrastructure Development Co. Ltd. v. Banco Santander S.A. [2016] EWHC 2990
(the Santander Case); and
Petrosaudi Oil Services (Venezuela) Ltd v. Novo Banco S.A. [2016] EWHC 2456 (the Novo
Banco Case).
This note looks at the key issues for trade finance practitioners.
Unlike ordinary documentary (commercial) letters of credit, which are payment instruments, SBLCs
are used mainly as credit support instruments. The issuer of an SBLC undertakes to pay the
beneficiary only if the applicant does not perform the underlying contract.
If a demand under an SBLC appears on its face to comply with the terms of the SBLC (and the
requirements of any ICC rules, such as the Uniform Customs and Practice for Documentary Credits
(UCP 600) or the International Standby Practices (ISP 98), to which the SBLC is expressed to be
subject), English law has only very limited exceptions to the rule that the issuing bank must pay
against an apparently compliant demand.
These exceptions include where there is:
illegality under local law in the place of payment under the SBLC; or
fraud in procuring the issue of the SBLC, or a fraudulent demand by the beneficiary.
Conclusions
The English law exceptions for restricting payment under letters of credit are just that – limited
departures from the fundamental principle that an issuing bank must honour a complying
presentation/demand. To allow these exceptions to be invoked too readily, or to broaden their scope
beyond the current narrow limits, risks greatly reducing the utility of letters of credit as "equivalent to
cash".
The decisions in the two NIDCO cases are therefore not unexpected. In particular, it is reassuring
that, in the Santander Case, the court dismissed the argument that English law should "admit an
exception for unconscionable conduct alongside the existing, recognised, fraud exception".
Singapore law recognises breach of faith or unscrupulous conduct by a beneficiary of a letter of
credit falling short of fraud as distinct grounds for an issuing bank withholding payment. However,
these concepts are, arguably, too broad and ill-defined to be applied with certainty and consistency.
The decision in the Novo Banco Case is less clear cut – the meaning of the term "obligated" in the
demand is ambiguous, and it is, arguably, not plainly obvious on the facts of the case that there was
fraud by the beneficiary in making the demand. What position the Court of Appeal takes in clarifying
the issues in this complex case will be of interest and practical significance.
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1
Affirmed by Court of Appeal, 26 January 2017 – National Infrastructure Development Co Ltd v.
Banco Santander S.A. [2017] EWCA Civ 27.
2
Note that at appeal, although affirming the summary judgment decision, the Court of Appeal agreed
that Knowles J had applied the incorrect test by referring to serious arguability. According to the
Court of Appeal, the correct test is that a defendant seeking to resist summary judgment in such
cases has to establish a "real prospect" that it could be established at trial that "the only realistic
inference is that the claimant could not honestly have believed in the validity of its demands".
3
Reversed by Court of Appeal, 25 January 2017 – Petrosaudi Oil Services (Venezuela) Ltd v. Novo
Banco S.A. [2017] EWCA Civ 9.