PT Pan Indonesia Bank Ltd TBK v Marconi Communications International Ltd

This is the judgment of the Court. It is divided into two parts for the reasons set out in paragraph 4 below.

The defendants, PT Pan Indonesia Bank Ltd (“Panin Bank”) appeal from the decision of Mr Justice David Steel on 4 February 2004 whereby he dismissed their application to set aside (1) the order of Andrew Smith J dated 16 May 2003 permitting the claimants (“Marconi”) to serve the claim form on Panin Bank out of the jurisdiction; (2) the order of David Steel J dated 12 June 2003 permitting Marconi to serve the claim form on Panin Bank at the London offices of their solicitors Messrs Thomas Cooper and Stibbard; (3) service of the claim form on Panin Bank pursuant to that order. Panin Bank also applied for, and was refused, a declaration that, in all the circumstances of the case, the court has no jurisdiction over Panin Bank in respect of the subject matter of the action.

The claim of Marconi is for damages for breach of contract in respect of the failure of Panin Bank to honour its obligations as confirmer of a letter of credit, pursuant to which Marconi drew various drafts and presented them to Panin Bank under the terms of the credit and which Panin Bank failed to accept. The appeal principally concerns the proper application of Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations (“The Rome Convention), incorporated into English law by the Contracts (Applicable Law) Act 1990.

At the hearing of this appeal, we first heard argument upon that principal point. At the end of the argument we indicated that we proposed to dismiss the appeal in a judgment to be delivered later and, in those circumstances, we did not hear argument on the further grounds. We subsequently indicated, however, that we thought it right to complete the argument upon the remaining grounds. Because of the difficulty of reconvening the court at a convenient time the parties indicated their consent that the resumed hearing should continue before only two of our number. Part I (paragraphs 5-68) of the judgment set out below is therefore the judgment of all three members of the court; Part II (paragraphs 69-78) is the judgment of Potter LJ and Hooper LJ.

Marconi manufactures and sells telephone equipment. Pursuant to a sale contract concluded in 1996, Marconi agreed to supply telephone equipment and services to an Indonesian company PT Prismasentra Agung (“the buyers”). The total contract price was $14,221, 972.60 fob UK port, to be shipped from a UK airport or seaport to Singapore. The price was expressed to be payable by means of letters of credit, 60 days from date of shipment, such credits to be established two weeks prior to the commencement of deliveries for the subsequent 3 month period.

The sale contract further provided that such letters of credit

“shall be established and advised through Standard Chartered Bank, 25 New London Bridge House, London SE1 9TB (“SCB”) to GPT upon contract signature.”

The payment for the equipment was to be

“upon presentation of … documents at the counters of the advising bank.”

Clause 23 of the sale contract stipulated that its “validity constitution and performance … shall be governed by English law.”

In accordance with the terms of the sale contract, the buyers established various letters of credit, including two relating to the final call-off of 7,500 units. The first, which related to 3,000 units, was paid. The second, and final, letter of credit was issued in respect of the remaining 4,500 units of the call-off. It is this second and final letter of credit (“the L/C”) which is the subject of these proceedings.

The L/C was issued by Hastin Bank, another Indonesian Bank, on the application of the buyers. At the direction of Hastin Bank, it was advised to Marconi (then called GPT International Ltd) in England by SCB London by telex dated 27 March 1997. The relevant terms of the L/C were as follows:

Panin Bank added their confirmation (in accordance with the first of the ‘Other Conditions’ set out above) by telex dated 1 April 1997 addressed to SCB with the request:

“PLEASE ADVISE BENEFICIARY ACCORDINGLY.”

and by a further telex of the same date Hastin Bank notified SCB of an amendment to provide that Marconi’s draft should be drawn on Panin Bank in Jakarta (rather than on Hastin Bank) and that the documents were to be sent to Panin Bank in Jakarta.

The first and second shipments of 1000 and 500 units respectively of telephone equipment under the final call-off were shipped by Marconi by sea to Singapore for delivery to the buyers. Marconi drew two drafts on Panin Bank which together with the other documents stipulated in the credit were presented on Marconi’s behalf to Panin by SCB as Marconi’s collecting agent. The documents were sent on 23 December 1997 and 16 January 1998 respectively and received by Panin Bank in Indonesia a few days later.

On receipt of those documents, Panin Bank passed them on to Hastin Bank which rejected them as not conforming to the documents required by the credit. In turn, Panin Bank also refused to take up the documents or accept the two drafts drawn upon it, adopting the reasons for rejection advanced by Hastin Bank. The reasons were of a technical nature and it is accepted that they were at least arguably unjustified and immaterial discrepancies.

SCB on Marconi’s behalf rejected the various discrepancies as unjustified but Panin Bank maintained its refusal to pay the drafts. Hastin Bank became insolvent.

SCB asserted on Marconi’s behalf that Panin Bank, as the confirming bank, was responsible for communicating discrepancies under UCP Article 14(G)(i) to SCB from whom it had received the documents. An opinion supporting this interpretation of Panin Bank’s obligations as confirming bank was given by the ICC UK Committee on 7 June 1999. However, Panin Bank refused to accept this opinion. Marconi, having been paid for its two consignments by its Credit Insurers brings these proceedings for the benefit of such insurers.

Following correspondence and discussions which failed to resolve the situation, Marconi issued a statutory demand against Panin Bank in this country and, following its failure to comply, a winding up petition was presented against it. Panin Bank disputed the jurisdiction of the Companies Court to wind it up and retained Messrs Thomas Cooper and Stibbard for that purpose. Thereafter, as Marconi allege, Panin Bank removed its only asset, a credit balance with HSBC, from the jurisdiction. The petition was dismissed by consent in March 2003 and, following such dismissal, this action was commenced, the total claim being for £1,102,500 plus statutory interest.

The basis of the successful application to serve proceedings out of the jurisdiction pursuant to CPR 6.20 was formulated as follows:

“(a)

The contract between Panin Bank as confirming bank and Marconi as beneficiary was made within the jurisdiction;

(b)

The contract was made by SCB London which, in this context, was Panin Bank’s agent for the purpose of advising the confirmation to Marconi;

(c)

The L/C was governed by English law;

(d)

The failure to honour the L/C constituted a breach of contract committed within the jurisdiction.”

So far as ground (c) was concerned, Panin Bank’s case was that the L/C, containing no choice of law or jurisdiction clause, was not governed by English law but by Indonesian law as “the country where the party who is to effect the performance which is characteristic of the contract”, i.e. payment, was situated: see Article 4(2) of the Rome Convention and Dicey and Morris: The Conflict of Laws (13^th ed) para 33-304. On a proper application of Indonesian law, as to which there was some evidence before the court, it was said that grounds (a), (b) and (d) could not be made out. It was also denied that England was the appropriate forum.

The judge first addressed his judgment to ground (c).

Because the argument as to the governing law before David Steel J and in this court has turned largely upon the role of SCB as originally contemplated and as carried out, the following is to be noted before turning to the judgment below.

The L/C was a negotiation credit within the meaning of UCP Article 2iii. It was available by negotiation of Marconi’s drafts on Panin Bank accompanied by the specified documents (“upon receipt of documents … in full compliance with the credit terms and conditions at maturity date, we shall remit the proceeds in accordance with negotiations (sic) bank’s instructions”). Although the L/C did not expressly so require, it was common ground, as contemplated by the beneficiary (Marconi), the issuing bank (Hastin) and the confirming bank (Panin)) that the credit was to be operated in favour of Marconi through SCB as the negotiating bank. Under UCP Article 10(b)(i) and (d), SCB was authorised by Hastin and Panin (though not obliged – as SCB was not a confirming bank) to negotiate i.e. give value for Marconi’s drafts drawn on Panin against compliant documents and entitled to claim reimbursement from Panin by payment of the draft upon maturity. Thus, London was the place where, had the L/C been operated according to its terms, Marconi was entitled to receive payment (in pounds sterling) by SCB which would then obtain reimbursement from Panin. As acknowledged in the skeleton argument of Panin Bank:

“Had the credit been operated in this way, drafts would have been drawn on Panin Bank under the credit; and Marconi would have negotiated such drafts with SCB London and would have received payment from SCB, thus mirroring the terms of the sale contract.” (see paragraphs 3 to 5 above)

It is alleged that, in the event, SCB did not negotiate the credit but held the documents as agent for Marconi as the beneficiary of the L/C and acted as Marconi’s agent for collection from Panin Bank, requesting payment to be made to SCB in this country on Marconi’s behalf.

In dealing first with ground (c), the judge referred to Article 4 of the Rome Convention, to paragraph 33-304 of Dicey & Morris, to the decision of Mance J in Bank of Baroda v Vysya Bank [1994] 2 Lloyds’ Rep 87 and to earlier authorities on the position at common law. Having done so, he rejected the submission of Panin Bank that the presumption contained in Article 4(2) of the Rome Convention applied. He disregarded the presumption on the grounds that it appeared from the circumstances as a whole that the contract was more closely connected with England (see Article 4(5)). He regarded the position as analogous to that in the Bank of Baroda case. Although in that case, the relevant letter of credit was issued by an Indian bank (Vysya) and confirmed by the London office of the Bank of Baroda, and thus differed in a material respect from the position in this case, the judge held that the logic underlying the decision, and in particular an obiter passage in the judgment of Mance J at p.93, was applicable to this case (see further below).

He concluded on this aspect:

“30.

I find that the claimants have made out a good arguable case that the contract between the confirming bank (Panin Bank) and the beneficiary (Marconi) was governed by English law since a chosen method of performance was by way of negotiation of the documents at the offices of the advising bank in London with payment in sterling. Any other conclusion would give rise to the very great inconvenience contemplated by Ackner J [in Offshore International SA v Banco Central SA [1976] 2 Lloyds Rep 402]. This conclusion cannot be affected by the fact that, in the event, the documents were not negotiated by the advising bank but were forwarded to the confirming bank as a collecting bank with the request that payment be effected in London.”

Because it was common ground that there was a serious issue to be tried in relation to the conformity of the documents and that, if the governing law was English law, then England was the appropriate forum for determining the issues, the judge observed that it was unnecessary to consider grounds (a), (b) and (d) under CPR 6.20. However, on the assumption that he was wrong, and that Indonesian law and not English law was the governing law of the contract, he dealt also with those other grounds, which he found were also established.

At this point it is necessary to refer to such evidence of Indonesian law as there was before the judge. It was contained in the form of a written opinion from Indonesian lawyers Remy & Darus, answering various specific questions raised by Rajah & Tan, Panin Bank’s Singapore lawyers instructing Thomas Cooper & Stibbard. That opinion followed a meeting at which oral replies were given by the Chairman (Dr Sjahdeini) and Senior Partner (Mr Soerjadi) of Remy & Darus, to questions put by Mr Dass of Rajah & Tan, a memorandum of which was also before the court.

In response to the question ‘What governing law applies to Letter of Credit?’ the opinion stated that ‘Since L/C has stated the clause “subject to the UCP 500”, therefore the rights and duties of all parties are ruled by UCP 500’. It went on to state that ‘For the matters not covered in UCP 500, General rules of … [the Indonesian Civil Code] … ‘regarding the obligations as a result of contract or agreement’ were applicable and that ‘every unclear matter has to [be] resolved according to the practice prevailing in a country or the place whereby the agreement is made’.

The opinion also stated that Indonesian law applies to all ‘legal actions taken in Indonesia’, it continued:

“Based upon Section 18 of … The General Rules of Legislation for Indonesia … it is clearly stated that:

‘Every legal act will be decided by the Court in accordance with the regulations of the country or place where the legal act is taken.’

The regulation above is a cornerstone in determining the connecting factor, namely the place whereby the legal act is taken determines which jurisdiction of the court has the right and which country’s governing law has to be applied if the contract does not clearly indicate the choice of law and choice of forum.”

Having stated that the relevant legal act or acts were the L/C application submitted by the buyers to Hastin Bank and the issue of the L/C by Hastin Bank, the opinion stated:

“Based upon Section 18AB and the fact that Hastin Bank issued an L/C in Indonesia, the valid governing law and jurisdiction of the court are Indonesian law and court in accordance with the principal of Domicile Forum …”

In response to the question “Where is the contract between the confirming bank and the beneficiary made?” the reply was that ‘There is no contract between the confirming bank and the beneficiary’. In support of this assertion the opinion recognised that the L/C has chosen ‘UCP 500 as its choice of law’ and that therefore ‘the law regulating the relationship between the Confirming Bank and the Beneficiary is Chapter 3 of the UCP, which states that, in principle, the L/C transaction is separate from the sale and purchase contract’. It continued:

“On this basis, it can be concluded that there are two categories of rights and obligations as follows:

•

with respect to disputes concerning the issue of non-conformative documents in accordance with the terms of the L/C, the rights and obligations of the Issuing Bank, Confirming Bank and Negotiating Bank are governed by the UCP 500.

•

whereas, in relation to disputes regarding payment, the rights and obligations of Marconi (Exporter) and [the buyers] are regulated by the terms and conditions of the sale and purchase contract.

applying the above principles to the facts, we can conclude that while there was no written agreement between the Confirming Bank and the Beneficiary, there is, however, a legal relationship in the form of a guarantee of payment by way of a confirmation from Panin Bank and conveyed by SCB to the Beneficiary as long as the terms and conditions in the L/C are satisfied. If the confirmation was not conveyed, then there is no legal relationship between the Confirming Bank and Beneficiary.

However, if we assume that there is a contract between the Confirming Bank and the Beneficiary then the place where the contract was made is in Indonesia in accordance with the General Rules of Legislation for Indonesia Chapter 18 which states that ‘the form of legal action decided by the court will be in accordance with the laws and legislation of the country or place where the legal act took place.’ In this instance, the place of issue, confirmation and payment is Indonesia.”

In response to the question “Does SCB act as Agent of Panin in issuing Panin confirmation to the beneficiary?” the answer was that in Indonesian law the relation between the confirming bank and the negotiating bank is not an agency relation because, under the relevant rule of the commercial code concerning agency “Agent is intermediary business man appointed by the President (Section 62) and Commissioner is the person running his own company by making agreements on his behalf. The negotiating bank does not meet the criteria as stated … According to Section 9(1) of Regulation of Bank Indonesia No.5/11/PBI/2003, relation between the Confirming Bank and the Negotiating Bank is only correspondent relation.”

In response to the question “If the refusal to pay out under the Letter of Credit amounted to a breach, was the breach committed in Indonesia or in England?” the answer was as follows:

“If there is a breach of contract by the issuing bank to the negotiating bank, then the breach takes place in Indonesia according to Section 18AB … for the following reasons:

- it is the responsibility of Panin Bank to pay, which is headquartered in Indonesia;

- denial of payment by Hastin Bank and Panin Bank took place in Indonesia.”

In the light of that evidence the judge dealt with grounds (a), (b) and (d) in support of service outside the jurisdiction as follows.

As regards (a) the question whether the contract was made within the jurisdiction, the judge first referred to Article 8 of the Rome Convention which provides in relation to the material validity of a contract:

“(i)The existence and validity of a contract, or of any term of a contract should be determined by the law which would govern it under this Convention if the contract or term were valid’.”

In this respect he expressed himself dissatisfied with the clarity or validity of the reasoning underlying the assertion that the contract was made as a matter of Indonesian law in Indonesia. He said:

“This is a somewhat surprising proposition given that the opinion expressly recognises that ‘a legal relationship’ is established if, but only if, the confirmation is conveyed to the beneficiary. For my part I have difficulty in understanding why, as the opinion goes on to assert, the ‘General Rule of Legislation for Indonesia’ Chapter 18 (which provides ‘the form of legal action decided by the court will be in accordance with the laws and legislation of the country or place where the legal act took place’) nonetheless leads to the conclusion that the contract is not made at the place where (and at the time when) the confirmation was duly conveyed. Thus, if it had been material, I would have accepted that there is a good arguable case that Indonesian law is no different from English law in this respect: see Jack: Documentary Credits (3^rd Ed.) para 2.11.”

As to the question whether the contract was made by SCB as an agent of Panin Bank in advising confirmation of the contract, the judge observed that this was well established as a matter of English law: see Bank Melli Iran v Barclays Bank [1951] 2 Lloyds Rep 362. He stated:

“The opinion of the defendants’ Indonesian lawyer seeks to draw distinction between a middleman (who is an agent) and a correspondent (who is not). The advising bank was categorised as a correspondent. The distinction is not enlarged upon. Again I regard it as very surprising that, as a matter of Indonesian law, SCB is to be treated as merely a conduit or post office if that be the concept leading to categorisation as a correspondent. I am not persuaded that Indonesian law is different from English law in this respect. In short, if material, I would have accepted that there remains a good arguable case for service out on this ground.”

Finally, as to (d), the judge was similarly unpersuaded by the short assertion in the opinion that the breach of contract occurred in Indonesia, with the implication that no breach was committed in England. He said this:

“ … The Indonesian lawyers emphasised that the obligation to pay was on Panin Bank who was resident in Indonesia and the decision to refuse to pay was taken in Indonesia. But it does not necessarily follow it seems to me that the breach did not occur in England. I agree with the claimants that it must be extremely doubtful whether it was open to Panin Bank to effect payment in Indonesia. On the face of it, they were required to pay in London whether as a consequence of negotiation or, as here, as a consequence of the request of SCB made for payment in London as, it is alleged, a collecting bank. These considerations are not dealt with in the opinion of the Indonesian lawyers and I conclude that there also remains a good arguable case for service out on this ground even if, contrary to my earlier finding, Indonesian law is the governing law.”

Finally, the judge dealt with the question of the appropriate forum on the assumption that Indonesian law was indeed the governing law. He stated as follows:

“36 … But the primary issues turn on an analysis of the documents (which are all in English) as against the terms of the UCP for documentary credits. There is little, if any, scope for witness evidence of fact. Any expert evidence is likely to be more readily available in this country rather than in Indonesia. The provisions of UCP are expressly incorporated in the credit (and in any event are apparently incorporated by Indonesian law). Where, as it follows, the competing fora have domestic laws which are substantially similar in all material respects, the governing law is a factor of little significance in determining the appropriate forum.

37.

In this regard it is also appropriate to take into account the evidence of delay in the Indonesian courts. The evidence adduced by Marconi asserted that ‘it is quite usual for cases to exceed 10 years from commencement in the District Court to a decision of the Supreme Court, and indeed, for the Supreme Court to remit the entire case back to the District Court for re-hearing. There was a late response from Panin Bank to the effect that that policy of the Indonesian courts is to achieve a much shorter timetable. However it is clear that the volume of business (or a shortage of judicial manpower) renders this policy difficult to implement.

38.

Whilst it is invidious to draw comparisons as to matters of relative quality of procedure and experience of the competing courts, it is legitimate to have some regard to potential delays of this magnitude, not least in a claim involving a Letter of Credit the defences to which can fairly be categorised as unconvincing. Accordingly, even if Indonesian law governs the credit, it is not shown that Indonesia is distinctly the more appropriate forum for the determining issues relating to it.”

It is common ground that the question of the governing law must be determined by reference to the Rome Convention which provides by Article 4:

“1.

To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected …

2.

Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or in the case of a body corporate or unincorporated, its central administration. However, if the contract is entered into in the course of that party’s trade or profession, that country shall be country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

…

5.

Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.”

“The performance which is characteristic of the contract” is the obligation incumbent on one of the parties which is peculiar to the type of contract in issue or which marks the nature of the contract: see Dicey & Morris The Conflict of Laws 32-113 and generally at 32-111 to 32-115.

The question of the weight to be accorded to the presumption under Article 4(2), as against other features of the contract and its surrounding circumstances which indicate a closer connection with a country other than that which is the place of business of the party which is to effect the performance characteristic of the contract, gives rise to considerations of some complexity in relation to letter of credit transactions. That is because they involve various contractual relationships which may give rise to a ‘wholly undesirable multiplicity of potentially conflicting laws’: see Bank of Baroda at p.93. Prior to the introduction of the Rome Convention into English law by the Contracts (Applicable Law) Act 1990, questions of governing law were determined by the well-known principle that the contract should be governed by the system of law with which it had its closest and most real connection. As stated, that test was effectively the same as the test referred to in paragraphs (1) and (5) of Article 4, untrammelled by the necessity to identify a ‘characteristic performance’ for the purposes of the presumption articulated in Art 4(2). As a general rule, in applying the common law test, considerable weight was given to the law of the place of performance over the places of residence or business of either party.

This was well illustrated in the court’s approach to the duties of an issuing or confirming banker towards the seller of the goods in connection with a Letter of Credit: see Offshore International SA v Banco Central SA [1977] 1 WLR 399. In that case, a standby letter of credit was issued by a Spanish bank and advised (but not confirmed) by a New York bank payable in New York. The court decided that the governing law was the law of New York, as the place where the letter of credit was opened, the documents were to be presented and payment was to be made, rather than the law of Spain, the law of the country where the issuing bank was situated. At p.401-402 Ackner J emphasised the difficulties for an advising bank if it had to consider its obligations under a foreign law and emphasised the difficulty which would arise if the advising bank had confirmed the letter of credit.

That decision was approved and followed by the Court of Appeal in Power Curber International Ltd v The National Bank of Kuwait [1981] 1 WLR 1233 where there was a difference between the place where the advising bank was situated (Florida), the place where the credit was payable (North Carolina), and the place where the issuing bank had its place of business (Kuwait). The Court held that the contract had its closest and most real connection with North Carolina, being the law of the place where the issuing bank’s obligation under the credit fell due. See also European Asian Bank AG v Punjab and Sind Bank [1981] 2 Lloyd’s Rep 651 at 656-7 per Goff J and [1982] 2 Lloyd’s Rep 356 at 358 per Ackner LJ. It is clear to us that, as stated in Gutteridge & Megrah’s Law of Bankers’ Commercial Credits (8^th ed) 302, that trio of cases established that, at common law, the place with which the contract between the issuing bank and the beneficiary embodied in the credit is most closely connected is the place at which the documents will be presented and at which authority has been given to make payments of sums due or to accept drafts drawn under the credit.

It might appear at first sight that the application of Article 4 of the Rome Convention would lead to a different result given the emphasis of Article 4(2) which requires the court to apply, at least initially, a presumption to the effect that the contract is most closely connected with the country where the party (an issuing or confirming bank) which is to effect the performance which is characteristic of the contract (i.e. payment against documents) has its principal place of business. However, by Article 4(5) the presumption in 4(2) falls to be disapplied ‘if it appears from the circumstances as a whole that the contract is more closely connected with another country’. In this connection, the Court of Appeal has held that the presumption should only be disregarded in circumstances which demonstrate ‘a preponderance of contrary connecting factors’ justifying such a course, see: Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2001] EWCA Civ 2019 per Potter LJ at para 45; Ennstone Building Products Ltd v Stanger Ltd [2002] EWCA Civ 916 [2002] 1 WLR 3059 per Keene LJ at para 41).

The most recent review of the authorities in this area is to be found in a decision of the Inner House of the Court of Session in Scotland, Caledonia Subsea Ltd v Microperi SRL [2003] SC 70. In considering the proper application of Article 4 of the Convention in a context far removed from letter of credit transactions, the Lord President expressed agreement with the position as stated in Samcrete concluding at paragraph [41] that:

“I consider that the presumption under para 2 should not be disregarded unless the outcome of the comparative exercise referred to in para 5 which, unlike para 2, may involve difficulty and uncertainty, demonstrates a clear preponderance of factors in favour of another country.”

Lord Cameron did not appear to differ significantly in his approach. He stated that it was clear from the cases cited:

“… that where a challenge is made, it is for the party other than the party who is to effect the characteristic performance, to satisfy the court that circumstances as a whole demonstrate that the applicable law is the law of a location other than that of the party who is to effect the characteristic performance. In particular cases, the place of performance of a contract may doubtless be regarded as a powerful factor … ”

Lord Marnoch expressed himself in sympathy with the approach of the Supreme Court of the Netherlands in Socit Nouvelle des Papeteries de l’Aa S.A. v B.V. Machinefabriek BOA to the effect that the presumption in Article 4(2)

“… should be disregarded only if, in the special circumstances of the case, the place of business of the party who is to effect the characteristic performance has no real significance as a connecting factor …”

and that:

“It is only by adopting the Dutch approach that real and practical effect can be given to the objective of art 4 referred to above, namely that of clarifying and simplifying the law.”

For reasons which I stated in the Samcrete case at paragraph 42 I do not accept the rigidity of that approach. Nor, as it appears to me from the judgments of the Lord President or Lord Cameron, did it form the basis of their decision.

The view is widely expressed among current text-book writers that, in the case of letters of credit, the presumption will usually be displaced where the documents are to be presented to, and payments made by, an advising bank in another jurisdiction and that the Offshore and Power Curber cases would be decided the same way today under the Rome Convention as they were under the common law: see for example Dicey & Morris at paragraph 33-305, Brindle & Cox: Law of Bank Payments (3^rd ed) para 8-113 Gutteridge & Megrah’s Law of Bankers’ Commercial Credits (8^th ed) p.304.

That was indeed the view of Mance J in the Bank of Baroda case. In that case, an Indian buyer had agreed to purchase a consignment of Latvian steel through its London office. The buyer instructed Vysya, its bank in India, to issue a credit in favour of the seller beneficiary. The credit was confirmed by the Bank of Baroda’s London office. The seller presented the documents stipulated under the credit to Bank of Baroda and was paid. The Bank of Baroda then sent the documents to Vysya in India claiming reimbursement. When Vysya refused to pay, the Bank of Baroda issued proceedings in England seeking reimbursement. The Bank of Baroda sought leave to issue the writ and serve it out of the jurisdiction on the grounds, inter alia, that its contract with Vysya was governed by English law. In dealing with that question under Article 4 of the Rome Convention, Mance J held that under a contract between an issuing bank and a confirming bank the performance which is characteristic of the contract is the addition by the confirming bank of its confirmation of the credit and its honouring of the obligations thereby accepted in relation to the beneficiary. That being so, if the presumption in Article 4(2) were applied, the contract between the issuing bank and the confirming bank would be governed by English law being the law of the place of business through which the Bank of Baroda was to effect its performance.

It was argued for Vysya that the presumption in favour of English law should be disregarded pursuant to Article 4(5) on the grounds that it appeared from the circumstances as a whole that the contract between the Bank of Baroda and Vysya Bank was more closely connected with India. Mance J considered the law applicable to the other potentially relevant contractual relationships arising pursuant to the letter of credit, noting that, under Article 4, the beneficiary’s contract with the issuing bank (Vysya) would be governed by Indian law if the presumption in Article 4(2) were applied because the only place of business of Vysya was in India. However, if that was correct it would mean that the obligations arising under one and the same credit would be governed by two different systems of law, depending on whether one had regard to the position of the confirming bank (Bank of Baroda) or the issuing bank (Vysya). Mance J avoided this undesirable result by holding that, in relation to the beneficiary's contract with Vysya, the presumption under Article 4(2) was displaced by Article 4(5) with the result that, for the purposes of his decision, the contract between the beneficiary and the issuing bank was also governed by English law. In my view he was right in holding as he did.

He said:

“In my judgment this is a situation where it would be quite wrong to stop at art.4(2). The basic principle is that the governing law is that of the country with which the contract is most closely connected (art.4(1)). Art.4(2) is, as stated in professors Giuliano and Lagarde’s report, intended to give ‘specific form and objectivity’ to that concept. In the present case the application of art.4(2) would lead to an irregular and subjective position where the governing law of a Letter of Credit would vary according to whether one was looking at the position of the confirming or issuing bank.

It is of great importance to both beneficiaries and banks concerned in the issue and operation of international Letters of Credit that there should be clarity and simplicity in such matters. Article 4(5) provides the answer. The Rome Convention was not intended to confuse legal relationships or to disrupt normal expectations in the way which is implicit in Vysya’s submissions. Under art.4(5) the presumptions in art.4(2), (3) and (4) are to be

… disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.

I accept that the presumptions are to be applied unless there is valid reason, looking at the circumstances as a whole, not to do so. But I note and consider that there is force in the comment in Dicey & Morris on The Conflict of Laws (12^th ed) at pp.1137-1138:

Inevitably the solution of individual cases will depend on the facts, but in principle it is submitted that the presumption may be most easily rebutted in those cases where the place of performance differs from the place of business of the party whose performance is characteristic of the contract.

The present situation provides in my judgment a classic demonstration of the need for and appropriateness of art.4(5). I conclude that English law applies to the contract between Vysya and [the beneficiary].

The fact that the credit was to be confirmed by Bank of Baroda’s City of London branch highlights the need for art.4(5) and its applicability in this case but I should not be taken as suggesting that the conclusion would be any different if the credit had been an unconfirmed credit to be opened and advised on Vysya’s behalf in London through National Westminster or Bank of Baroda’s City branch available for negotiation here. I agree with the editors of Dicey & Morris that the application of the law of the place of performance would in such a case still be likely to result, by application of art.4(5), as it did applying common law principles: Dicey & Morris pp.1238-1239 illustration 4; and cf Offshore International SA v Banco Central SA [1976] 2 Lloyds Rep 402; [1977] 1 WLR 399; where the ‘very great inconvenience’ of any other conclusion in the case of an unconfirmed credit was the direct subject of Mr Justice Ackner’s comments which I have already cited.

I therefore conclude that the Letter of Credit was governed by English law as between the beneficiary and each of the banks. On this basis, it would be wholly anomalous if English law were not also to govern the contract between Vysya and Bank of Baroda and in my opinion it does. As between Bank of Baroda and Vysya the application of the presumption arising under art.4(2) accords with good sense and sound policy and there is therefore no reason to depart from it.” (emphasis added)

In this case, the judge followed the reasoning of Mance J in the italicised passage emphasised above. He noted the different circumstances in the Bank of Baroda case, namely that there the court was applying Article 4 to ascertain the governing law of the letter of credit in the context of a claim by the confirming bank under its contract with the issuing bank in relation to which the performance characteristic was the addition and honouring of the confirmation of the credit in favour of the beneficiary which took place in London. However, he did not consider that to be a distinction which should lead to a different conclusion as to the governing law as between the beneficiary and each of the banks, given the intended as well as the actual role of SCB under the L/C.

David Steel J stated:

“24.

The position in the present case is of course that SCB did not confirm the credit. Does this affect the position bearing in mind that:

(i)SCB advised Marconi both of the issuance of the credit (by their letter dated 27^th March) and of its confirmation (by their letter dated 1^st April), both as required under the credit.

(ii)The credit was available by negotiation and SCB were contemplated by the credit as the (or one of the) negotiating banks. Although SCB did not in the event negotiate the credit, it acted as collecting bank in checking and forwarding the documents and requesting payment to their own London account.

(iii)Panin Bank undertook to reimburse SCB if SCB negotiated the documents.

25.

In short, it was contemplated that the credit would be communicated in this country and become effective here, that the documents would be presented here and that payment would be here. It does not seem to me to be a matter of great significance in considering the application of Article 4 taken as a whole that SCB did not add its confirmation. The availability of SCB as negotiating bank would give rise to the same closeness of connection with England. The performance characteristic in these circumstances would remain the provision of the banking service in the form of payment on presentation of non-discrepant documents. Given the availability of negotiation in that form, it would be contrary to the requirement of avoiding the governing law being dependent on the mode of negotiation chosen to contemplate that a different law would govern in the event that negotiation did not take place.

26.

Thus, whilst Article 4(2) might still lead to the presumption that the contract is most closely [connected] with Indonesia (being the country where the party who was to effect performance which was characteristic of the contract was situated) there is a good arguable case in my judgment that the application of Article 4(5) would lead to a disregard of that presumption since the circumstances as a whole demonstrate that the contract was more closely connected with England.”

We consider that the judge was right in the conclusion to which he came.

It was and is common ground between the parties that the correct approach for the purposes of identifying the governing law is to look at how the contract was intended by its terms to operate at the time it was made, rather than to look at what in fact occurred. That is what the judge did in coming to his conclusions. He dealt with the matter on the basis that, under the terms of the contract, it was anticipated that vis-a-vis the issuing bank (Hastin) and the confirming bank (Panin), the beneficiary (Marconi) would deal with, and be entitled to receive, payment from SCB as advising and negotiating bank making payment to Marconi in England and itself receiving reimbursement here. Further, it was and is common ground that under a Letter of Credit it is desirable that the same system of law should govern the co-existing contracts between (a) the issuing bank and the beneficiary, (b) the confirming bank and the beneficiary, (c) the issuing bank and the confirming bank: see Bank of Baroda (supra) and Bank of Credit and Commerce Hong Kong Ltd v Sonali Bank [1995] 1 Lloyds Rep 227 at 237(col.1). Since the instant letter of credit was a negotiation credit, it is also relevant to consider the contracts between the issuing/confirming banks and the negotiating bank.

In his argument for Panin Bank, Mr Glennie QC has not challenged the approach of Mance J in the Bank of Baroda case in applying Article 4(5) to the letter of credit in the circumstances of the case before him, but submits that on the facts of that case there was a crucial difference, namely that, in addition to being the advising bank, the Bank of Baroda was also the confirming bank (through its London office) and thus the contract with which the court was immediately concerned i.e. that between the confirming bank and the issuing bank was governed by English law, whether by applying the presumption under Article 4(2) or on wider examination under 4(5). It was thus necessary, in order to avoid the governing law varying as between the confirming bank/issuing bank contract and the contract between the beneficiary and the issuing bank, that the latter should also be governed by English law rather than Indian law, which would have been the position on application of the Article 4(2) presumption.

Mr Glennie submits that the judge was in error when he said that it was not “a matter of great significance in considering the application of Article 4 taken as a whole that SCB did not add its confirmation”. He suggests that, in holding that the position of SCB as advising and negotiating bank gave the same closeness of connection with England as if SCB had been the confirming bank, the judge overlooked (or at any rate failed to give weight to) the fact that Panin Bank was the confirming bank under the credit.

Mr Glennie submits that cases such as the Bank of Baroda case and Bank of Credit and Commerce v Sonali demonstrate that under a letter of credit it is the contracts between the beneficiary and the issuing and confirming banks which are central to the transaction and not that between the beneficiary and the advising/negotiating bank. The contractual relationship with the advising bank is ancillary to the main transaction, even when that bank is also the negotiating bank which, by negotiating the drafts, puts itself into the position of holder in due course for the purpose of obtaining reimbursement from the issuing or confirming bank.

Mr Glennie accepts that the intention of the parties, reflected in the terms of the L/C, were that Marconi should receive payment in London by negotiation of Panin Bank’s draft. However, he points out that Marconi would be paid by SCB under a separate contract between Marconi and SCB pursuant to which SCB negotiated the drafts. If Hastin Bank or Panin Bank dishonoured the terms of the undertaking in the L/C to pay Panin Bank’s drafts on maturity, then the claim pursuant to that undertaking would be that of SCB on its own account and not Marconi. Mr Glennie submits that the judge should have recognised the L/C for what it was, namely a credit issued by Hastin and confirmed by Panin, of which Marconi (or if the draft was negotiated, SCB) were beneficiaries. On that basis, the three critical contractual relationships under the L/C to which I have referred would, on application of the Article 4(2) presumption, have been governed by Indonesian law. That is because the acts of characteristic performance of the contract between the beneficiary (Marconi) and both the issuing bank (Hastin) and the confirming bank (Panin), namely payment under the L/C, were those of an Indonesian bank and the contract between the issuing and the confirming bank was a contract between two Indonesian banks. Thus, application of the presumption in 4(2) to all three contracts would render Indonesian law the governing law and the ‘wholly anomalous’ position adverted to in the final paragraph of the quotation from Mance J’s judgment in the Bank of Baroda case (see para 52 above) would not arise. That being so, Mr Glennie submits that to hold that the circumstances as a whole render the L/C more closely connected with another country was counter-intuitive and commercially unrealistic.

We do not accept that submission.

The presumption contained in Article 4(2) is a blanket provision which falls to be applied across the entire field of contract law. It assumes the ability to identify a single party charged with the (single) performance characteristic of the contract. A letter of credit as such is not susceptible of such treatment. It is the source of a number of autonomous bilateral contracts arising successively between the parties and/or banks involved, each of which, considered separately, has a separate characteristic performance and therefore potentially a different governing law, albeit that a conclusion as to the law governing one contract may be the same in respect of another. Thus it is misleading to speak of the governing law in respect of a letter of credit. It is desirable but not essential that each of the contractual relationships arising in the course of the transaction have the same governing law.

The task of the court is to reach a conclusion as to the governing law of the contract with which it is immediately concerned by application of Article 4 of the Convention in the circumstances of the case. Here it is the contract between the beneficiary and the confirming bank. In doing so, it is in our view important for the court to bear in mind the essential nature and commercial purpose of a letter of credit transaction in the international sale of goods, namely to provide the seller/beneficiary with the right to receive payment against compliant documents in a particular country, usually that in which the seller carries on business. That was of course the position under the sale contract in this case. However, so universal is international practice and understanding in relation to documentary credits governed by the UCP that it is not necessary and, bearing in mind the autonomy of the letter of credit (see UCP Article 3) it is probably not appropriate, for reference to be made to the contract of sale to support that proposition.

In the context of the overall purpose of a letter of credit transaction, when considering the contracts arising between the seller/beneficiary and the issuing or confirming bank, the geographical location of the factors which, absent the presumption contained in Article 4(2), are of most obvious significance when considering the closest connection with a particular country, are not the location of the central administration or place of business of either of those banks but the place where the documents necessary to procure payment to the seller/beneficiary are to be presented and checked, and the place where payment to the seller/beneficiary is to be made against those documents. I would also observe that, whereas the place where the contract is made may have jurisdictional significance, in these days of electronic communication it is of little significance so far as ‘close connection’ is concerned. While frequently the confirming bank will be the corresponding/advising bank, it is not necessarily so, as this case demonstrates. Nor does it affect the essential nature, structure and effect of the transaction as governed by the UCP. In either case, the confirming bank, by adding its confirmation, simply assumes by separate engagement, obligations to the same effect as those of the issuing bank so far as the beneficiary is concerned: see UCP Article 9(a)(iv) and 9(b)(iv).

By being ‘available for negotiation’, underwritten by an undertaking to honour drafts properly drawn, the terms of the letter of credit operate to empower the seller to negotiate his drafts in order to obtain payment and as an invitation and authority to the negotiating bank to give value for the seller’s draft against the promise of the issuing/confirming bank to pay in accordance with the terms of the credit on presentation of the documents: UPC Article 10(d). Such negotiation constitutes final payment to the seller/beneficiary against presentation of documents, the later presentation by the negotiating bank to the issuing/confirming bank being the machinery of its reimbursement: see Article 10(d). This is so whether the confirming bank is itself the corresponding and/or advising bank through whom the issuing bank deals with the beneficiary in his own country or is located in a different country. While the former will frequently be the case, the latter may also occur, as here. In either case, although the confirming bank, on adding its confirmation to the already issued letter of credit, enters into a distinct engagement with the beneficiary, it is (as already stated) an engagement to the same effect as that of the issuing bank, and there is good reason for the governing law to be the same.

This also fits well with the view expressed in Jack, Malek and Quest: Documentary Credits (3^rd ed) at pp.406-7 where it is stated that, so far as the contract between the negotiating bank and the issuing bank is concerned, where the credit is available by negotiation, in the sense that the credit provides for the advising bank to negotiate the documents, the governing law will be the place where the advising bank is situated (see also Brindle & Cox: Law of Bank Payments (3^rd ed) at para 8-115).

In the instant case, as found by the judge, there was valid reason and commercial logic why, rather than simply applying the presumption in Article 4(2) of the Convention, Article 4(5) should be applied to the contracts between Marconi as seller/beneficiary and Hastin Bank and Panin Bank as issuing and confirming banks respectively, in circumstances where the L/C was opened in London through SCB and contemplated payment of the beneficiary in sterling in London by SCB as negotiating bank authorised to make payment to Marconi against the conforming documents specified in the credit. In those circumstances, not only was the contemplated place of payment England but, for the purposes of negotiation, the documents would be submitted and checked in England before such payment was made. Upon that basis there was similarly good reason to apply Article 4(5) to any putative contract between the advising/negotiating bank and the confirming bank.

In those circumstances, the only relevant contract of those mentioned at paragraph 55 above in respect of which it could be said that there was no preponderance of connecting circumstances present to justify application of Article 4(5), so displacing the Article 4(2) presumption, was that between Hastin Bank and Panin Bank as the issuing and confirming banks. However, when confirmation of a credit has been made by a bank and communicated to a seller/beneficiary who relies upon it, the right of the confirming bank to reimbursement by the issuing bank is merely consequential upon the payment earlier made and the conformity of the documents earlier examined under the contract of the confirming bank with the seller/beneficiary for whose benefit the letter of credit was established. To hold that the governing law of the contract between the seller/beneficiary and the issuing/confirming banks should give way to what would otherwise be the governing law of a contract by which the confirming party has a right to indemnity or reimbursement from the issuing bank would be to allow the tail to wag the dog.

Accordingly, we consider that the judge came to the right conclusion for essentially the right reasons and we dismiss the appeal in relation to ground (c) of CPR 6.20.

On the assumption that we are correct, it is unnecessary to consider the appeal in relation to the grounds (a), (b) and (d) of CPR 6.20 upon which the judge also held that Marconi were entitled to serve the claim form out of the jurisdiction. However, for the purposes of completeness, we do so.

In deciding issues raised before the court which are asserted to be governed by foreign law, the court proceeds upon the basis that such law is to the same effect as English law unless material is provided which demonstrates the contrary. Mere assertion is insufficient unless it is supported by credible evidence as to the foreign law. This is a necessary rule if proceedings are not to be stultified or unduly delayed, particularly in the interlocutory stages, in any case where the answer to a claim with a foreign element is clear so far as English law is concerned. It will often be the case that the material provided as to foreign law will be of an incomplete or provisional nature unsupported by detailed authority or by materials of the weight or complexity suitable to a final disposal, but nonetheless sufficient to satisfy the court that an arguable defence or other relevant issue has been established for the purposes of a decision at that stage of the proceedings. Nonetheless, the party who asserts that the application of foreign law would provide a different result bears the burden of satisfying the court that that is so. If the evidence proffered is of such incomplete, inconsistent or unconvincing character that it is insufficient for its purpose, it is not necessary for the opposing party to adduce his own contradictory evidence from an expert in the relevant foreign law.

In this case, the judge plainly considered that to be the position before him. At the meeting of Panin Bank’s lawyers to which we have referred at paragraph 26 above, the advice given was that there was no contract between the confirming bank and the beneficiary, this assertion being justified by reference to Article 3 of UCP 500 which plainly says no such thing; it merely makes the point that the transaction embodied in the letter of credit is separate from the sale and purchase contract. It was stated that, assuming it could be said that there was a contract, that contract would have been made in Indonesia because the act of confirmation took place in Indonesia. Asked for authorities to support this case, the lawyers said they would research the point. In the subsequent written opinion, no authority was produced. However, it was recognised that (a) upon conveyance of the confirmation to the beneficiary by the confirming bank “a legal relationship in the form of a guarantee of payment” came into being and (b) by the General Rules of Legislation for Indonesia, paragraph 18, “the form of legal action decided by the court will be in accordance with the laws … of the country or place where the legal act took place”. On that basis, the statement that the place of confirmation was Indonesia was on the face of it wrong. Faced with these difficulties and inconsistencies, Mr Thompson for Panin Bank acknowledged that the manner and substance of the authorities quoted were inadequate to make the position clear. We consider that, whether taken alone or in conjunction with the similarly unconvincing reasoning on the question of agency supplied in respect of ground (b) below, the judge was fully entitled to find that it was well arguable that Indonesian law was no different from English law as to the time when and place where the contract was made.

In the lawyers’ meeting it was asserted that SCB did not act as Panin Bank’s agent because an advising bank in the position of SCB was not regarded in Indonesian law as the agent of a confirming or issuing bank. Again, reliance was place on UCP Article 3, which did not in fact assist. Asked for authority, the only Indonesian authority produced was a local textbook which in fact expressed the contrary view. In the written opinion, no additional authority was referred to. A distinction was simply taken between an agent as an intermediary businessman and the ‘correspondent’ relationship. No attention was paid to the concept of agency for the purpose of communicating and/or acting as an intermediary in relation to the formation of the contract and/or communications in relation to it. In those circumstances, again, we consider the judge was entitled to take the view which he did in the passage we have quoted at paragraph 36 above.

It was necessary for Marconi to establish a breach of contract within the jurisdiction. The judge stated that, on the face of it, Panin Bank were required to pay in London “whether as a consequence of negotiation or, as here, as a consequence of the request of SCB for payment in London as … a collecting bank”. It is alleged that no negotiation took place. If so, that did not involve any breach on the part of Panin Bank. We thus ignore the first alternative adverted to by the judge. So far as the second alternative is concerned, in argument before us Mr Thompson accepted that under UCP 500 and/or Indonesian law, Panin Bank had an obligation to remit the proceeds of its drafts to England, on being so requested by SCB as collecting bank and that that matter was not dealt with in the evidence as to Indonesian law. However, he submitted that the breach of contract occurred when the drafts presented for acceptance by SCB on Marconi’s behalf were rejected by Panin Bank for non-conformity of the documents presented, and he points out that the drafts were not sight drafts, but were payable 60 days from bill of lading date, which date had not arrived at the time of presentation. Thus, he submits that the relevant breach undoubtedly occurred in Indonesia. However, when pressed upon the matter, he conceded that the breach complained of by Marconi was not simply rejection of the documents at the time of presentation but the subsequent failure to pay the drafts on maturity by remission of the proceeds to London. That being so, he was obliged to accept that there was a good arguable case for service under ground (d).

Mr Thompson conceded that, if English law was the governing law, then the judge’s decision on forum conveniens was not open to challenge. However, on the basis that Indonesian law was applicable, he submitted that the balance shifted. He advanced no convincing reasons for this assertion. He made two particular criticisms of the judgment on this aspect.

First he asserted that the judge reversed the burden of proof. Instead of applying the principle made clear in Spiliada Maritime Corporation v Cansulex [1987] AC 460 at 481D-E that the burden is on the claimant to persuade the court that England is clearly the most appropriate forum for trial, the judge betrayed an erroneous understanding of the position when he stated at the end of paragraph 38 of his judgment that “it is not shown that Indonesia is distinctly the more appropriate forum for … determining [the] issues relating to it”.

We do not accept that this is so. At paragraph 3 of his judgment the judge rightly recorded that:

“Marconi resists the application on the basis that it has a good arguable case that the English court has jurisdiction and that England is clearly the most convenient forum for the determination of the claims.”

In paragraph 38 the judge was effectively dealing in shorthand with Panin Bank’s arguments by way of counterpoint that Indonesia was clearly the most convenient forum, which the judge rejected for the reasons he gave. None of those reasons is said to be invalid. The second particular point made by way of criticism is that the judge overstated the weight of the evidence of delay in the Indonesian courts by his reference to “10 years” for the overall process. The points made depend upon an analysis of evidence which to some extent dilutes the point made by the judge. However, they do not negate the position that long delays are likely to be experienced in Indonesia or the force of the other points made by the judge in analysing the position so far as ‘forum conveniens’ was concerned. In our view the judge was right in the decision to which he came.

We therefore dismiss the appeal in relation to grounds (a), (b) and (d) of CPR 6.20.