Don’t Stop Me Now: English Letters of Credit and Foreign Law Interference | ZFZ Postcard Cases

Every now and then a commodities trade goes horribly wrong, the parties fall out and someone rings their lawyer to ask: ‘can we stop the letter of credit?’. Injunctions to stop letters of credit are rare as hens teeth in England or the US but more common in other jurisdictions, where civil law systems allow greater latitude.

The Commercial Court’s decision in Macquarie Bank Limited v Banque Cantonale Vaudoise [2024] EWHC 114 (Comm) sets out in crystal clear terms the English law view on attempts to do so and the enduring liability of the issuing bank.

Macquarie Bank Limited v Banque Cantonale Vaudoise [2024] EWHC 114 (Comm) 

What Happened:
Advance payments for shipments of coal were secured with standby letters of credit (SBLCs) issued by Seller’s bank, based in Switzerland. When the goods were not delivered, Buyer issued default notices, but Seller failed to make payments and went into liquidation.

Buyer sought to enforce the SBLC’s in Switzerland, but proceedings were stayed pending a criminal investigation. It transpired that Seller’s bank had made a criminal complaint, alleging Seller had presented it with falsified contracts, without which it would not have issued the SBLCs. Buyer tried again in the English Courts, where the Seller’s bank disputed the jurisdiction of English courts on the basis of forum non conveniens.

The Decision
Relying on the well-known decision in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1979] QB 159, 169 the Commercial Court hammered home that the English law position is clear: “Even where the courts of the bank’s domicile have granted an injunction seeking to prevent a bank from paying out under a letter of credit, that will not provide it with a basis for refusing to do so”.

The High Court determined the issue in two steps:

1. Governing Law
First, Foxton J looked to the governing law of the SBLCs, which was English law. Accordingly, the claimant was entitled to the clear substantive English law rights available under an SBLC, such as an absolute obligation on the bank to pay irrespective of any dispute and an implied agreement that the bank will not have regard to any set off or counterclaim.

2. Most appropriate forum to enforce substantive rights
Second, the Court held that the English jurisdiction was the most appropriate forum for the substantive rights to be given effect. The decision addressed both a favourable fact pattern and an underlying point of principle, which will ostensibly arise in all similar cases.

The central consideration appeared to be the position under English law, that SBLCs ought to be “akin to cash”, meaning readily enforceable. The Court also noted that the parallel Swiss proceedings would prevent attempts to enforce the SBLCs, so another forum was desirable. It ruled that when parties choose English law to govern letters of credit, it is because they have a particular expectation regarding the approach of English law to such financial instruments and they expect “judgment in a matter of months.”

This objective to quickly and reliably enforce substantive rights overrode numerous links to Swiss jurisdiction, including defendant’s domicile and nomination of Switzerland as the place of payment, presentation and expiry in the SBLC.

Areas of interest
For anyone seeking to injunct a bank or stop a letter of credit being paid out, this bold recitation of the relevant law clearly identifies the willingness of the English Courts to facilitate the enforcement of the SBLCs. In this case, the die was cast when the SBLC was issued under English Law. Though the Swiss courts heard evidence about applicable English principles, their decision made no mention of them. This provided no respite, as Buyer simply proceeded to a jurisdiction where those principles would be applied. Institutions issuing letters of credit must be acutely aware of the implications of the law selected to govern them, and may wish to consider jurisdictions with procedural safeguards prior to payment.

The case is clearly good news for buyers in possession of letters of credit governed by English law, who are now reassured that English Courts are keen to accept jurisdiction, even after other more closely linked jurisdictions have declined to enforce. Foxton J’s analysis certainly was not hindered by the difficulties with enforcement in Switzerland and indeed that fact appears to have pushed him in favour of accepting jurisdiction, as it was clear that Switzerland would not readily enforce the substantive rights recognised by the governing law.

For this reason, parties holding a letter of credit can feel confident seeking enforcement in their preferred jurisdiction and, if that fails, bringing evidence of this failure to the English Courts to support enforcement efforts there. Whether that means that, in practice, they can then enforce any judgment obtained in the English Courts remains a different matter.

Joe Gosden (Partner) and Jakub Mikulski (Paralegal)

To read the full decision, please click here