Societe Generale SA v Saad Trading & Anor

In this action the Claimant claims a sum of almost US$50m. and an indemnity in respect of other amounts from the First Defendant pursuant to the terms of a Facility Letter (“the Facility”) dated 29 January 2009. In the alternative the claim is advanced pursuant to an implied contract and in restitution. The Claimant claims the same sums from the Second Defendant pursuant to a Guarantee (the “Guarantee”) also dated 29 January 2009.

The First Defendant is part of the Saad Group which was formed in the 1980s by the Second Defendant. Its initial operations comprised civil construction projects in Saudi Arabia but later included design and engineering, property development and management, healthcare services, information technology services, travel services, education, banking and investments. In 2007 the Claimant, through its Australian Branch, provided a credit facility to the First Defendant in connection with the purchase of gold by the First Defendant from AGR Matthey. That facility was terminated in October 2008. There was evidence that the First Defendant’s gold trading was handled on a consultancy basis by a gentleman named Mr. Daya Govender who was involved in such activities for the Algosaibi Group, another Saudi Arabian group of companies.

The Facility pursuant to which this claim has been brought was sought in late 2008 and agreed in 2009. There was much discussion within the Claimant as to whether to continue financing the purchase of gold by the First Defendant. On the one hand there were doubts about the risk of lending to the First Defendant but on the other hand the Claimant did not wish to jeopardise its commercial relationship with the Saad Group and was anxious to obtain a banking licence in Saudi Arabia. There was also much discussion as to whether it was advisable to seek a guarantee from the Second Defendant. But on 29 January 2009 the Facility and the Guarantee were agreed.

Pursuant to the Facility the Claimant issued two letters of credit on 16 February 2009.

The letters of credit were used to enable the First Defendant to buy gold from AGR Matthey.

There was some evidence that the letters of credit and the purchase and subsequent sale of gold were used to enable the First Defendant to obtain short term financing. I was informed by counsel on behalf of the First Defendant that the purchasers of the gold from the First Defendant paid the First Defendant before the First Defendant was obliged to reimburse the Claimant. This was consistent with emails dated 17 and 18 February 2009 between Mr. Govender and the First Defendant and with evidence of payments into the First Defendant’s bank account on 21 February 2009. The suggestion was also supported by a statement by the Claimant in the credit application dated 3 December 2008 that “we consider this line merely as a Working Capital line used for the Company’s short term financing needs.” However, whether or not short term financing was a benefit which accrued to the First Defendant there is no reason to doubt that gold was bought and sold by the First Defendant. The First Defendant was reluctant to accept, and did not accept, that it ever acquired title to the gold. It would only accept that it had obtained “the benefit of any payment for the gold.” But the First Defendant must, it seems to me, have acquired title from AGR Matthey and passed it on to the purchasers of the gold from the First Defendant.

In the event, although AGR Matthey presented the documents to, and received payment from, the confirming bank, National Australia Bank Limited (“NAB”) and the Claimant reimbursed NAB, the First Defendant did not reimburse the Claimant, which failure has given rise to this claim.

The First Defendant resists liability to indemnify the Claimant under the Facility on the grounds that the bills of exchange drawn on and accepted by NAB, which were included in the documents listed in the letters of credit as being required for presentation and were in fact presented by AGR Matthey to NAB, were not forwarded by NAB to the Claimant. It was said that in those circumstances the First Defendant was not liable to indemnify the Claimant. The Second Defendant adopts that defence.

There was no oral evidence of fact. The Claimants had been intending to call oral evidence of fact but elected not to do so and did not seek to put the written statements of the proposed witnesses in evidence. The First Defendant wished to put in a written statement of a witness but I ruled that the statement was inadmissible because the maker had no knowledge of the transactions with which this case was concerned. In so far as he expressed opinions no leave had been sought to call him as an expert witness.

Expert evidence of international banking practice was adduced by both parties. I assume that this was to provide the necessary “background” against which to construe the Facility, letters of credit and UCP 600. The Claimant called Mr. Martin Shaw. For most of his career from 1967 he worked with Barclays and was involved with the handling of letters of credit. From 1990-1994 he was Head of Operations with Barclays International Services Office where he was responsible for documentary credit and guarantee business. From 1994-1996 he was Senior Manager Documentary Services with Lloyd’s Bank. He was undoubtedly well qualified to give evidence as to banking practice with regard to letters of credit. The First Defendant called Mr. Paul Hattori, a “consulting financial engineer”. His knowledge of banking practice with regard to letters of credit was not extensive and indeed was very limited. Early in his career he audited financial institutions which involved replicating the checking of documents against letters of credit. For a short period between 1997 and 1999 he was a trader of risks under letters of credit and more recently advised a Singaporean company as to the drafting of letters of credit. When he was cross-examined it was apparent that he answered questions by reference to his views as to what the provisions of UCP 600 meant rather than to any relevant experience of his. I therefore did not find his evidence helpful. Mr. Shaw, by contrast, was able to speak about the manner in which bankers dealt with letters of credit from his own extensive experience. It is true that he ceased to work as an employed banker in 1996 and so had not worked under UCP 600. However, he was familiar with its predecessor and attended ICC meetings and conferences leading up to its revision. I found him a reliable witness as to the practice of bankers with regard to letters of credit.

It is first necessary to set out the material terms of the Facility to which the Claimant and the Defendants were party. The Claimant was described as “SG”, the First Defendant as “the Customer” and the Second Defendant as “the Guarantor”. The Facility provided as follows, so far as material:

“1.

Facility

(i)

Each of SG and the Customer agrees that (a) this Facility Letter, (b) the Standard Terms Annex, (c) the Security Documents and (d) the terms of any particular transaction (each a Transaction) shall form a single agreement between SG and the Customer (hereinafter together called the “Facility Documents”) and the parties would not otherwise enter into any transaction. In the event of any inconsistency between the terms of the Facility Letter and the Standard Terms Annex, the terms of the Facility Letter shall prevail. In the event

of any inconsistency between the terms of any Transaction and either of the Facility Letter or the Standard terms Annex, the Terms of such Transaction shall prevail. Each of the Customer and SG intend that any transactions between them in relation to trade finance whether or not referring to this Facility Letter shall be subject to the Facility Documents and be part of the Facility unless specifically stated otherwise.

(ii)

The Customer acknowledges that the Facility is an uncommitted, revolving trade and commodity finance facility on the terms of the Facility Documents and that SG shall have no obligation to provide or to continue to provide all or any of the Facility hereunder.

(iii)

In the event that the Customer wishes to enter into a particular Transaction with SG, the Customer shall contact SG for the purposes of agreeing the terms relating to such particular Transaction. If agreed, the terms of any Transaction shall be confirmed in writing by exchange of fax, telex or tested telex, email or letter, each of which such documents shall constitute a Facility Document as described in (i) above.

2.

Purpose

The Facility will be used by the Customer to enter into one or more Transaction(s) for the purpose of financing its gold trading activity.

…………

4.

Facility Amount

(i)

The amount of the Facility shall be in a maximum total aggregate amount of up to USD 50,000,000.00 (Fifty Million United States dollars) to be provided under letters of credit with a maximum duration of 120 days, inclusive of deferred payment terms, if any, and secured by bills of lading (if applicable).

(ii)

Any annual or other adjustment to the terms of the Facility which may be agreed from time to time between the Customer and SG shall be recorded in a written amendment to this Facility Letter.

Schedule 1

…….

2.

Letters of Credit

(i)

The Customer may request SG to issue or confirm Letters of Credit. Unless otherwise agreed between the Customer and SG, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (ICC Publication UCP No600)(as amended from time to time) shall apply to Letters of Credit opened by SG.

(ii)

Letters of Credit may be opened by SG at the written request of the Customer up to a maximum aggregate amount (taking into account any outstanding Transactions) as detailed in paragraph (4) of the Facility Letter.

(iii)

The Customer irrevocably authorises SG to accept and pay for its account all drafts drawn under and tendered or negotiated pursuant to any Letter of Credit.

(iv)

The Customer irrevocably authorises SG in respect of all payments made by SG under any Letter of Credit (including any “red clause” Letter of Credit) to forthwith debit any such amount paid to the account of the Customer with SG. Unless otherwise provided in the Facility letter or specifically agreed, the Customer undertakes to ensure that it shall maintain a credit balance on its account sufficient to cover any payment due under any Letter of Credit as and when such amounts may be due. In the event that SG receives any amount in relation to the transaction underlying the Letter of Credit whether through assignment of any contract, assignment of any Letter of Credit or otherwise prior to the date of payment by SG under such Letter of Credit, unless otherwise specifically agreed, the Customer hereby instructs SG to transfer such amount, pending such payment, to an account opened by SG in its own name and identified as “compte de gage-espèces”.

(v)

If SG opens a Letter of Credit through a confirming correspondent, the Customer will indemnify SG against all liabilities to such correspondent under or in respect of such Letter of Credit.

(vi)

The Customer agrees that any action taken by SG or by any of its correspondents or agents under or in connection with any Letter of credit or the relevant drafts, instruments or demands, documents or goods, or in action or omission thereof, if taken in good faith, shall be binding on the Customer and shall not put SG or its correspondents or agents under any resulting liability to the Customer.

(vii)

Without prejudice to any other right which SG may have under any other Facility Document, until the Customer or any other Obligor makes due payment to SG of all moneys due and payable to SG from the Customer or any other Obligor in respect of any Letter of Credit or any Facility Document, (a) all documents received by SG or its agents under any Letter of Credit and the goods represented thereby shall be held by SG as security and (b) the Customer hereby irrevocably authorises SG to give all such orders as to shipment destination and delivery of any such goods as the Customer could give and to make any direct arrangement with the sellers or shippers or carriers as SG may, at its discretion think fit, including the variation or discharge of any contract, without any liability on the part of SG for any loss arising out of any such order or arrangement as aforesaid.

The Guarantee provided as follows:

“FOR VALUE RECEIVED and in consideration of Société Générale (“SG”) entering into any and all Transactions with SAAD TRADING, CONTRACTING AND FINANCIAL SERVICES COMPANY, a limited partnership organised under the laws of the Kingdom of Saudi of Arabia with Commercial Registration number 2051014862 dated 20/12/1411H (corresponding to 2 July 1991) and issued in Al-Khobar, Kingdom of Saudi Arabia, having its principal place of business at Salahudeen Al Ayoubi Street Al Khobar, Kingdom of Saudi Arabia (the “Customer”) in accordance with an uncommitted trade finance facility subject to the terms and conditions of a letter dated 29 January 2009 (the “Facility Letter”), I, Mr. Maan Abdulwahid Abdulmajeed Al-Sanea, having my home address at Salahuddin St., Khobar, Kingdom of Saudi Arabia (the “Guarantor”) hereby unconditionally and irrevocably guarantee, as primary obligor and not merely as surety, the full and prompt payment when due (whether upon maturity, acceleration or otherwise) to SG of any and all Obligations (as defined herein). In this Guarantee, “Transactions” has the meaning given to it in the Facility Letter and “Obligations” means all obligations or liabilities of any kind of the Customer from time to time to pay monies, express or implied, present, future or contingent, joint or several or incurred as principal or surety, incurred under or in connection with any of the Facility Documents, up to a maximum total aggregate amount of USD50,000,000.00 plus any related commission, fees and expenses and “Facility Documents” means (i) the Facility Letter, (ii) the Standard Terms referred to therein, (iii) each Transaction issued, executed or entered into by SG with or at the request of the Customer pursuant to the Facility Letter and (iv) all documents executed by the Customer and granting security to SG or guaranteeing the obligations of the Customer to SG under any of (i), (ii), or (iii) above, in each case as such documents are amended, restated, extended or replaced from time to time.

The initial term of the Guarantee in relation to the Facility Letter shall be twelve (12) Months from the date of this Guarantee. The term of the Guarantee shall be automatically renewed in its entirety for consecutive twelve (12) Month terms unless the Guarantor notifies SG at least 90 days prior to the expiry of the initial or renewed term that the Guarantor does not agree to the renewal of the Guarantee. The Guarantor agrees that its obligations under this Guarantee shall remain in full force and effect following such notification to SG until such time as the Obligations which are outstanding on the last day of the notice period have been satisfied in full.

I hereby guarantee to pay all such amounts as are or may become due in respect of the Obligations forthwith on your first written demand, without set-off or counterclaim and free and clear of any deductions or withholdings and without requiring SG to take any action against the Customer or any other person or obtain any judgement nor file any claim before enforcing this Guarantee.

A certificate signed by an officer of SG shall, in the absence of manifest error, be conclusive evidence of the amount due and payable by the Customer to SG.

………

The Guarantor hereby, unconditionally and irrevocably, as its own independent, separate and continuing primary obligation undertakes to indemnify SG on first demand against all losses, claims or costs suffered or incurred by SG should the Customer fails to perform any of its Obligations duly and punctually or should the amounts due from the Customer under the Facility Documents not be recoverable, for any reason whatsoever including (but not limited to) the Facility Documents or the Obligations being or becoming void, voidable or unenforceable in part or in whole.”

On 11 February 2009 the First Defendant requested the Claimant to issue two letters of credit for approximately US$25m. each, pursuant to the Facility. The letters of credit were stated as being required “for the purchase of approximately 28,000 fine oz’s of large 12.5 KG gold bars”. The application set out the documents required and other terms of the requested letters of credit. It contained an agreement to hold the Claimant harmless “as per provisions set forth in the Commercial Letter of Credit Agreement”. On 15 February 2009, following comments by the Claimant, the application was amended. One of the amendments was to change the words “Credit Agreement” to the “Facility Letter signed on 29 January 2009”. The effect of this was, it seems to me, that the First Defendant agreed to hold the Claimant harmless pursuant to the provisions of the Facility rather than to the Commercial Letter of Credit Agreement accompanying the initial request.

The letters of credit were issued on 16 February 2009 and confirmed by NAB on 18 February 2009. They contained the following terms numbered as “fields”:

“41A: Available With..…By….[NAB] BY ACCEPTANCE

42C: Drafts at…99 DAYS AFTER DATE OF AIRWAY BILL

45A: Descriptions of Goods and/or Services: FOR THE PURCHASE OF APPROXIMATELY 28,000 FINE OZ’S OF LARGE 12.5 KG GOLD BARS 99.5 PEFRCENT PURITY LONDON GOOD DELIVERY BARS WITH A TOLERANCE OF +/-10 PERCENT CIP LONDON…….

46a: Documents Required:

1.

SIGNED COMMERCIAL INVOICE MADE OUT IN THE NAME OF APPLICANT FOR 100 PER CENT VALUE OF GOODS SHIPPED

2.

COPY OF PACKING LIST AND/OR WEIGHT LIST AND/OR BAR LISTING.

3.

3. COPY AIRWAY BILL CONSIGNED TO STANDARD BANK PLC, C/O JP MORGAN CHASE……INDICATING THIS L/C NO. AND MARKED FREIGHT PREPAID. AIRWAY BILL MUST CONTAIN A SPECIFIC NOTATION OF THE ACTUAL FLIGHT DATE AND NUMBER.

4.

COPY OF LETTER FROM AGR MATTHEY STATING THAT THE SHIPMENT IS INSURED UNDER BLANKET INSURANCE POLICY QUOTING POLICY NUMBER.

5.

DRAFTS FOR 100 PERCENT OF THE INVOICE VALUE.

48: Period for Presentation: DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS FROM DATE OF SHIPMENT

78: Instructions to the Paying/Accepting/Negotiating Bank: AFTER RECEIPT YOUR CLAIM BY SWIFT CONFIRMING YOU HAVE RECEIVED DOCUMENTS IN COMPLIANCE WITH CREDIT TERMS AND UCP600 WE WILL COVER YOU AT MATURITY DATE AS PER YOUR INSTRUCTIONS. THIS CREDIT IS ISSUED SUBJECT TO ICC PUBLICATION 600.

72: Sender to Receiver Information: ALL DOCUMENTS ARE TO FORWARDED TO SOCIETE GENERALE …..PARIS ….BY COURIER.”

UCP 600 provided, inter alia, as follows:

“ARTICLE 7

Issuing Bank Undertaking

a.

Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:

i.

sight payment, deferred payment or acceptance with the issuing bank;

ii.

sight payment with a nominated bank and that does not pay;

iii.

deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;

iv.

acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

v.

negotiation with a nominated bank and that nominated bank does not negotiate.

b.

An issuing bank is irrevocably bound to honour as of the time it issues the credit.

c.

An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

ARTICLE 8

Confirming Bank Undertaking

a.

Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i.

honour, if the credit is available by

a)

sight payment, deferred payment or acceptance with the confirming bank;

b)

sight payment with another nominated bank and that nominated bank does not pay;

c)

deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;

d)

acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

e)

negotiation with another nominated bank and that nominated bank does not negotiate.

ii.

negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

b.

A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

c.

A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse another nominated bank is independent of the confirming bank’s undertaking to the beneficiary:

d.

If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

ARTICLE 14

Standard for Examination of Documents

a.

A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

b.

A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation.

…………..

ARTICLE 15

Complying Presentation

a.

When an issuing bank determines that a presentation is complying, it must honour.

b.

When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.

c.

When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.

ARTICLE 16

Discrepant Documents, Waiver and Notice

a.

When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.

b.

When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b).

c.

When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.

The notice must state:

i.

that the bank is refusing to honour or negotiate; and

ii.

each discrepancy in respect of which the bank refuses to honour or negotiate; and

iii.

a) that the bank is holding the documents pending further instructions from the presenter; or

b)

that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or

c)

that the bank is returning the documents; or

d)

that the bank is acting in accordance with instructions previously received from the presenter.

d.

The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation.

e.

A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.

f.

If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.

g.

When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.”

On 18 February 2009 AGR Matthey delivered the gold to Brinks Australia for shipment to Standard Bank PLC, London.

On 19 February 2009 AGR Matthey presented the documents to NAB. The documents included the bills of exchange drawn on NAB who accepted them. It was suggested to me by counsel that the bills may have been negotiated at that stage.

On or about 19 February the documents, excluding the bills of exchange drawn on NAB, were forwarded to the Claimant. The drafts were retained by NAB. The documents, excluding the drafts, were forwarded under a cover of a letter which said as follows:

“Refer the provisions of UCP and SWIFT advise if documents are not acceptable stating reasons. SWIFT advise if documents are acceptable. Advise us of dishonour by SWIFT stating reason(s).”

The documents, excluding the drafts, were received by the First Claimant on 24 February and checked by the Claimant. The “bataille” for the set of documents in respect of one letter of credit noted that the draft had not been presented and had been drawn on the confirming bank. The “bataille” for the second letter of credit again noted that the draft had not been presented and that the confirming bank had kept it.

The Claimant informed NAB by a SWIFT message (which I was told was sent on 2 March 2009 according to a manuscript note on its face) that the documents were in compliance with the letter of credit terms “so we shall cover you at maturity date 28 May 2009 as per our l/c instructions.”

Also on 2 March 2009 the Claimant informed the First Defendant that the documents had been received and were “in duly accordance with credit terms.” The documents sent were listed as the invoice, the air waybill, the packing list and letter. No mention was made of the drafts. The Claimant asked the First Defendant “to cover us” through a named account “at maturity date May 28, 2009”.

In May 2009 there arose concern as to the financial health of the Algosaibi Group and, in view of perceived connections between that group and the Saad Group, the Saad Group as well. On 18 May 2009 there was a discussion between representatives of the Claimant and the First Defendant in the course of which the First Defendant confirmed that the two letters of credit would be paid on time. On 19 May the Second Defendant, in his capacity as managing partner and ultimate beneficial owner of the First Defendant, said that he would ensure that all of the First Defendant’s obligations would be honoured as they fell due.

However, on 24 May 2009 the First Defendant requested a “one-time one-month postponement of settlement as to ensure an overall healthy cash flow position of the company”. On 27 May 2009 a telephone conversation took place between representatives of the Claimant and the First Defendant. Mr. Ross, a lawyer acting on behalf of the First Defendant, said that the Saad Group was facing a massive short-term liquidity crisis because of a misconception that the Saad Group was in some way responsible for the operations of the Algosaibi Group. He stated that the Saad Group’s intention was to treat all creditors equally or pari passu and as a result the First Defendant would not be able to repay the letters of credit the next day. All obligations would however be met in due course. The representative of the Claimant stated that the Claimant was bound to pay the next day because “we gave our commitment.” Mr. Ross said that the First Defendant was aware of that and that a payment was due to the Claimant from the First Defendant but that the First Defendant was not in a position to fulfil that obligation in the short term. He requested a standstill agreement until November 2009. At the end of the call a representative of the Claimant said that he would revert to head office and the legal department.

On 28 May 2009 the Claimant paid the sums stated in the letters of credit to NAB.

On 3 June 2009 the Claimant wrote to the First Defendant. Reference was made to the Facility and to the issue of the two letters of credit at the First Defendant’s request. The letter continued:

“The required documents under the Letters of Credit were presented to [the Claimant] on 24 February 2009. After confirmation that those documents were in order, [the Claimant] paid into the beneficiary’s bank, value date 28 May 2009, the amounts of USD 24,521,518.99 in respect of Letter of Credit number ……..1864 and USD 24,617,026.45 in respect of Letter of Credit number ….1865 ……….”

The letter referred to clauses 2 and 6 of the Standard Terms of the Facility and continued:

“On 2 March 2009 [the Claimant] sent two letters to the [First Defendant]….., one in respect of each Letter of Credit, requesting the [First Defendant] to provide [the Claimant] with sufficient monies to cover the amounts due under the Letters of Credit as required by Clause 2(iv) of the Standard Terms. To date, no payment has been made by the [First Defendant] and the [First Defendant] is liable to [the Claimant] for the full amount of USD 49,138,545.44 in respect of the Letters of Credit.”

The letter said that the First Defendant’s failure to make the payments was an event of default and that the Claimant “hereby terminates the Facility and demands immediate payment in full of the amounts due.”

On 4 June 2009 the Claimant wrote to the Second Defendant. Having referred to the Facility, the Guarantee, the letters of credit and the payments by the Claimant on 28 May 2009 and the Claimant’s letter to the First Defendant dated 3 June 2009 the letter continued:

“Under the terms of the Guarantee you have agreed, as primary obligor, to pay to [the Claimant] all sums payable by the [First Defendant] under the Facility on first written demand, without set-off or counterclaim. The [First Defendant] has failed to make payment in accordance with the demand set out in the Letter. Therefore, in accordance with the terms of the Guarantee, we require you to make payment to [the Claimant] of USD 49,138,545.44, being the full amount owing by the [First Defendant] under the Facility. This amount is immediately due and payable by you, without demand or further notice of any kind. You are requested to pay the amount of USD 49,138,545.44 into the following Societe Generale account without further delay……. ”

It is common ground that the Claimant was under a liability to indemnify NAB in respect of the sums which it had paid pursuant to the letters of credit though there was disagreement as to how that liability came about. Mr. Layton QC, on behalf of the Claimant, said that it came about pursuant to field 78 of the letter of credit and/or article 7(c) of UCP 600. Mr. Zellick, on behalf of the First Defendant, said that it came about because the Claimant failed to reject the documents on the grounds that they did not include the drafts and so became bound to indemnify NAB pursuant to article 16(f) of UCP 600. For present purposes it is not necessary to resolve this particular dispute. It is sufficient to note that it is common ground that when the Claimant indemnified NAB on 28 May 2009 it was obliged to do so.

Pursuant to clause 2(v) of Schedule 1 the First Defendant was obliged to indemnify the Claimant against all liabilities to NAB under or in respect of the letters of credit.

Mr. Layton’s argument was simple. In circumstances where the Claimant had incurred a liability to indemnify NAB under the letters of credit the First Defendant was liable to indemnify the Claimant.

Mr. Zellick’s argument was rather more complex. He submitted that clause 2(v) should be construed by having regard to the relationship between the Claimant and the First Defendant under the letters of credit. If the First Defendant had no liability to indemnify the Claimant under the letters of credit, then clause 2(v) should not be construed as imposing such a liability. Alternatively, clause 2(v) of the Facility was inconsistent with the letters of credit and, pursuant to clause 1(i) of the Facility the terms of the particular transaction, namely, the letters of credit, should prevail.

I was not persuaded by Mr. Zellick’s submissions. The relationship between the Claimant and the First Defendant is to be found in the Facility and in the particular instructions, or mandate, which the First Defendant gave to the Claimant to issue letters of credit; see for example Benjamin on Sale of Goods 8^th.ed. para.23-004 and Ellinger on The Law and Practice of Documentary Letters of Credit pp.103-104. The letters of credit, when issued, do not evidence or contain the relationship between the Claimant and the First Defendant. (The letters of credit are the “immediate progeny” of the contract between the Claimant and the First Defendant; see Benjamin on Sale of Goods 8^th.ed. para.23-004.) The obligation of the First Defendant to indemnify the Claimant in respect of its liability under the letters of credit is to be found in the Facility and in particular in Schedule 1 clause 2 (iv)-(vi). Indeed, the mandate as amended on 15 February 2009, provided that the First Defendant was to hold the Claimant harmless pursuant to the provisions of the Facility.

In those circumstances I see no reason why Schedule 1, clause 2(v) should not be given its ordinary and natural meaning. It is true that the UCP 600 is to apply to the letters of credit but UCP 600 does not contain an obligation by the First Defendant to indemnify the Claimant. That obligation is to be found in the Facility. In so far as the mandate is a “particular transaction” for the purposes of clause 1 of the Facility there is no inconsistency between it and the Facility. On the contrary the mandate expressly refers back to the Facility. In so far as the letters of credit are a particular transaction for the purposes of clause 1 of the Facility they do not contain an undertaking by the First Defendant to indemnify the Claimant and so there can be no inconsistency between the Facility and the letters of credit.

It therefore follows, once it is conceded that the Claimant incurred a liability to NAB in respect of the letters of credit, that the First Defendant is liable to indemnify the Claimant against that liability pursuant to Schedule 1 clause 2(v) of the Facility.

That would appear to be sufficient to dispose of this case. However, in circumstances where the Claimant did not accept that it was liable to reimburse NAB for the reasons advanced by Mr. Zellick and where the First Defendant did not accept that the Claimant was liable to reimburse NAB for the reasons advanced by Mr. Layton it is probably necessary to consider whether the Claimant was indeed liable to reimburse NAB and, if so, why.

Mr. Zellick submitted that just as NAB was obliged to check whether the documents which had been presented were compliant so the Claimant had to check that those documents forwarded to it by NAB were compliant. This was the manner in which confirmed letters of credit had always been understood to work and was, he said, reflected in Articles 7,14, 15 and 16 of UCP 600. The failure of NAB to forward the drafts had the consequence that the Claimant was entitled to refuse to indemnify NAB and that in those circumstances, where a waiver had not been sought by the Claimant from the First Defendant pursuant to Article 16 of UCP 600, the First Defendant was not obliged to indemnify the Claimant. Mr. Layton submitted that this was not so. The presentation of the documents by AGR Matthey to NAB had been in order and compliant. There was no dispute that NAB had been obliged to pay AGR Matthey. The drafts had been drawn on and accepted by NAB and so there was no purpose in forwarding them to the Claimant. “Forwarding” was different from “presenting” documents and the strict need for compliance which governs presentation did not require that the drafts should be forwarded to the Claimant. The evidence of Mr. Shaw showed that this was consistent with international banking practice and the Claimant’s internal documents showed that the Claimant’s personnel did not consider that there was anything untoward in the drafts not having been sent by NAB. In any event, Field 78 of the letters of credit obliged the Claimant to indemnify NAB where NAB had confirmed that the documents were compliant. Further, if the drafts ought to have been sent, the decision of the Claimant to indemnify NAB notwithstanding the absence of the drafts, was taken in good faith and that decision, pursuant to clause 2(vi) of the Facility, was binding on the First Defendant.

Mr. Zellick submitted that Article 14 of UCP 600, when read with Articles 15 and 16, provided that both the issuing and confirming bank must examine the documents to check that they comply with the letter of credit. In this regard he relied in particular upon Benjamin on the Sale of Goods 8^th.ed. para.23-092, Ellinger, The Law and Practice of Documentary Letters of Credit pp.118 and 224 and Jack, Documentary Credits 4^th.ed. paras.5.41 and 5.47. The expert evidence of Mr. Shaw was also relied upon by Mr. Zellick in this regard. Thus Mr. Shaw agreed that the issuing bank was entitled to decide whether or not the presentation was compliant.

Mr. Layton accepted that when a presentation of documents by the beneficiary was to be made to an issuing bank that bank had a duty under UCP 600 to examine the presentation. But on the facts of the present case the presentation by the beneficiary was to be made to the confirming bank. That presentation was in fact compliant. The confirming bank was then obliged to forward the documents to the issuing bank. Forwarding is, it was submitted, different from presenting. And reimbursement of a confirming bank that has honoured a complying presentation is different from honouring a complying presentation.

I agree that UCP 600 distinguishes between presenting and forwarding and between honouring and reimbursing; compare Article 7(a) and (c) and Article 8(a) and (c). Honouring is defined in Article 2, where the credit is available by acceptance, as meaning to accept a bill of exchange drawn by the beneficiary and pay at maturity. On the facts of the present case it was the confirming bank, NAB, that was to honour by accepting the bills of exchange. By contrast the Claimant was to reimburse NAB if NAB had honoured a complying presentation.

These distinctions between presenting and forwarding and between honouring and reimbursing suggest that Articles 14-16 apply to an issuing bank when documents are presented to it so that it may determine whether to honour them but do not apply to an issuing bank when documents are forwarded to it so that it may determine whether to reimburse a confirming bank which has honoured them. For example Article 15 provides that an issuing bank which determines that a presentation is complying must honour. It does not provide that an issuing bank to whom documents have been forwarded by a confirming bank seeking reimbursement must reimburse the confirming bank if the issuing bank determines that the documents comply. Similarly, Article 16 provides that an issuing bank which determines that a presentation does not comply may refuse to honour or negotiate. It does not provide that an issuing bank to whom documents are forwarded by a confirming bank (which has honoured or negotiated a presentation) and then determines that the documents do not comply may refuse to reimburse the confirming bank.

However, this does not appear to be the way in which UCP 600 has been understood by others; see for example Benjamin on Sale of Goods 8^th.ed. paras.23-092 and 23-219 where it is contemplated that Articles 14 and 16 apply to an issuing bank deciding whether to reimburse a confirming bank. If those articles do not apply to an issuing bank when deciding whether to reimburse a confirming bank pursuant to Article 7(c) (as opposed to deciding whether to honour pursuant to Article 7(a)) then it would appear that UCP 600 makes little provision for forwarding and reimbursing beyond stating that the confirming bank must forward documents which are complying (Article 15(b)) and that the issuing bank must reimburse a confirming bank which has honoured a complying presentation and forwarded the documents (Article 7(c)).

I have noted that Mr. Layton was unable to refer me to any authority or textbook which supported his construction and that the terms of NAB’s letter to the Claimant suggest that NAB saw no difference between presentation and forwarding. But I accept his submission that UCP 600 distinguishes between presentation, leading to a decision to honour or not, and forwarding, leading to a decision to reimburse or not. I take comfort from Mr. Shaw’s evidence. He recognised a clear distinction between presentation and forwarding.

However, where, as in the present case, the beneficiary is to present the documents to the confirming bank so that it may decide whether or not to honour, the issuing bank will still require to examine the documents which have been forwarded to it by the confirming bank to satisfy itself that they comply with the letter of credit. That is why the documents must be forwarded to the issuing bank by the confirming bank. If the documents are not compliant the issuing bank will not be obliged to indemnify the confirming bank pursuant to Article 7(c). The issuing bank is not bound by the view of the confirming bank that the documents are compliant.

The documents to be forwarded to the issuing bank must, it seems to me, be the documents presented to the confirming bank. Mr. Layton submitted that there was no useful purpose in forwarding drafts which had been presented to and accepted by the confirming bank and so they did not need to be forwarded. That does not appear to me to be the correct construction of Article 7(c) of UCP 600. That article, in my judgment, requires the confirming bank to forward to the issuing bank the documents which had been presented to the confirming bank. There seems to be no reason why “the documents” to be forwarded should not be the documents presented to the confirming bank. Indeed field 72 in the letters of credit expressly required all documents to be forwarded.

Mr. Shaw disagreed with this view. He gave expert evidence that in the vast majority of cases where the drafts have been drawn on the confirming bank they are not forwarded by the confirming bank to the issuing bank. I have no reason to doubt his evidence that in practice this is what happens. It is consistent with the fact that NAB did not forward the drafts in this case and with the fact that the Claimant did not consider the absence of the drafts a reason for refusing to indemnify NAB. But in my judgment, where the drafts are included in the letter of credit in the list of documents to be presented by the beneficiary to the confirming bank and are so presented, the duty of the confirming bank on the true construction of UCP 600, and in particular of Article 7(c), is to forward them to the issuing bank. The language of Article 7(c) does not permit any exception. Further, to permit NAB a discretion to decide not to forward a listed document because it would appear to serve no useful purpose seems to me to be contrary to the principle of strict compliance which permeates the law of documentary letters of credit; see, for illustrations of the doctrine of strict compliance concerning drafts (albeit in different circumstances from the present), The Lena [1981] 1 Lloyd’s Reports 68 at p.75 and The Messiniaki Tolmi [1986] 1 Lloyd’s Reports 455 at p.457.

In the present case the drafts, although required to be presented under the letters of credit and in fact presented by AGR Matthey to NAB, were not forwarded by NAB to the Claimant. However, I do not consider that that failure, in circumstances where there is no dispute that the documents presented by AGR Matthey to NAB were compliant, would ultimately have enabled the Claimant to refuse to indemnify NAB. The object of the Claimant in examining the documents forwarded to it is to check that the documents presented by the beneficiary to the confirming bank were in order and compliant. That seems to me clear from the structure of UCP 600 and the nature of the relationship between the issuing and the confirming bank. It is reflected in a passage relied upon by Mr. Layton in the Commentary on UCP 600 issued by the ICC which stated, albeit in the context of different factual circumstances, that the reimbursement obligation under a credit is not subject to the receiving of documents by the issuing bank but only to a compliant presentation being made to the nominated bank. In the present case the Claimant would never have been able to say that the documents presented by AGR Matthey to NAB were not in order or compliant because they were in fact in order and compliant. Had the Claimant said to NAB that the drafts were missing, and for that reason the documents presented by AGR Matthey to NAB were non-compliant and the Claimant did not propose to indemnify NAB, NAB would doubtless have forwarded the drafts (because they had in fact been presented to it by AGR Matthey and had been retained by NAB).

I have therefore concluded that the Claimant was liable to indemnify NAB. If, contrary to my decision, the Claimant was not liable to reimburse NAB pursuant to the terms of UCP 600, Mr. Layton submitted that the particular terms of the relationship between the Claimant and NAB nevertheless required the Claimant to reimburse NAB “after receipt of your claim by SWIFT confirming you have received documents in compliance with credit terms and UCP 600”. It was submitted that once NAB had confirmed that the documents were compliant the Claimant was obliged to reimburse NAB. Mr. Zellick submitted that Field 78 should not be read in this way because Field 78 expressly referred to UCP 600 and therefore should be construed in a manner consistent with UCP 600, that is, that the Claimant was only obliged to indemnify NAB if in fact the documents were compliant. It is unnecessary for me to resolve this question of construction because NAB did not confirm that it had received documents “in compliance with credit terms”. On the contrary NAB asked the Claimant to “advise if documents are not acceptable ……..[or] acceptable” (see their letter dated 19 February 2009). I was not referred to any document in which NAB confirmed that the documents which had been received were “in compliance with credit terms”.

Mr. Layton further submitted that the Claimant could rely upon on the good faith provision in Schedule 1 clause 2(vi) of the Facility. There is no dispute that in agreeing to indemnify NAB the Claimant acted in good faith. Mr. Layton said that in those circumstances its decision to reimburse NAB, even if mistaken, was binding upon the First Defendant pursuant to Schedule 1 clause 2(vi) of the Facility and so the First Defendant was bound to indemnify the Claimant. Mr. Zellick said that clause 2(vi) prevented the Claimant from incurring liability to the First Defendant where it had acted in good faith but did not create a liability of the First Defendant to the Claimant where there would not otherwise be one. In this regard he relied upon the decision of David Steel J. in Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Reports 123.

Clause 2(vi) followed clause 2(v) which expressly required the First Defendant to indemnify the Claimant against all liabilities under or in respect of the letters of credit. In that context the provision in clause 2(vi) that action taken by the Claimant under or in connection with any letter of credit “if taken in good faith, shall be binding” on the First Defendant would, it seems to me, reasonably be understood as meaning that a decision taken by the Claimant in good faith to reimburse NAB would be binding on the First Defendant so that the indemnity in clause 2(v) applied to the resulting liability. It is true that the latter part of clause 2(vi) concerns liabilities of the Claimant to the First Defendant but in context the two parts of clause 2(vi) would, in my judgment, be reasonably understood as applying both to liabilities of the First Defendant to the Claimant and to liabilities of the Claimant to the First Defendant. I accordingly accept that the Claimant can rely upon the good faith provision.

In Credit Agricole Indosuez v Generale Bank one of the issues decided was whether the issuing bank, Generale Bank, was entitled to an indemnity from its customers in circumstances where a nominated bank, Credit Agricole, had paid out against discrepant documents but Generale Bank had disabled itself from relying upon the discrepancies. The claim for an indemnity was put on the basis of a clause which ended in similar form to clause 2(vi) in the Facility in this case. The full text of the clause is not set out in the report. The claim failed. David Steel J. held at p.128 that:

“……..the overall thrust of cl.5 was to excuse the bank from liability arising from the underlying transaction. By the same token the bank’s activities qua bank are not to expose it to liability to the borrower. These provisions are not material on the face of it to the right of reimbursement or otherwise in the event of rejection of the documents by the bank. ………The contract has to be construed, if possible, in a manner consistent with UCP and the banker’s duty of strict compliance………”

Since the whole text of the relevant clause is not reported but was material to the decision of the judge I do not consider that the decision can assist me in construing clause 2(vi) of the Facility in its context, which includes clause 2(v). Further, in Credit Agricole Indosuez v Generale Bank the documents when presented were discrepant whereas in the present case the documents when presented were complaint.

I have therefore concluded that the Claimant was obliged to reimburse NAB and, for the reasons given earlier in this judgment, that the First Defendant is liable to indemnify the Claimant in respect of that liability. If the Claimant was not obliged to reimburse NAB it did so in good faith and the First Defendant is bound by that decision.

It is unnecessary to consider this alternative claim but I shall do so very shortly. It was submitted that a contract by the First Defendant to make payment to the Claimant of the sums which the Claimant had paid NAB was to be implied from the following facts:

Points (iv) and (v) arise from the telephone conversation between representatives of the Claimant and the First Defendant on 27 May 2009. I am unable to agree that the suggested agreement can be implied from the facts relied upon and in particular from the telephone conversation of 27 May 2009. In that conversation Mr. Ross, a lawyer acting on behalf of the First Defendant, said that the First Defendant could not indemnify the Claimant in the short term and sought a standstill agreement until November 2009. At the end of the call a representative of the Claimant said that he would revert to head office and the legal department. It seems to me that no agreement to indemnify the Claimant the next day after the Claimant had paid NAB can be inferred from that telephone call, albeit that the First Defendant accepted that the Claimant was liable to make payment to NAB.

I do not intend to say anything about this further alternative case. If the terms of the contractual relationship between the Claimant and the First Defendant do not permit the Claimant to be indemnified by the First Defendant, contrary to my decision, it will be necessary to examine carefully why that is so because a restitutionary right is not normally available where such right would be inconsistent with that which the parties have agreed. If a higher court determines that my decision as to the First Defendant’s liability to indemnify the Claimant is wrong it would be more sensible to determine the claim in restitution then, when it is known why the claim under the Facility has failed.

In circumstances where the First Defendant is liable to indemnify the Claimant pursuant to the terms of the Facility there was no dispute that the Second Defendant was in breach of its guarantee and was also liable to the Claimant.

Since I have not found an implied contract between the Claimant and the First Defendant or determined the claim against the First Defendant in restitution I do not consider that it is appropriate to determine whether, on the true construction of the Guarantee, any liability of the First Defendant to the Claimant by reference to an implied contract or in restitution would be a sum “due in respect of the Obligations” which are defined as “liabilities of any kind ……….under or in connection with any of the Facility Documents”. This question can more properly be addressed if and when it is determined that there was a liability by reference to an implied contract or in restitution.

It is necessary to mention two further matters.

Mr. Layton submitted that the Guarantee was to be characterised as a “performance bond” so that the Second Defendant was liable to the Claimant even if the First Defendant had no liability to the Claimant.

Although several clauses of the Guarantee were referred to, this alternative claim was, in my judgment, dependent upon the clause in the Guarantee which provided that a certificate signed by an officer of the Claimant was to be conclusive evidence of the amount due and payable by the First Defendant to the Claimant; see Bache & Co. v Banque Vernes [1973] 2 Lloyd’s Reports 437.

Mr. Layton submitted that the Claimant’s letter dated 4 June 2009 to the Second Defendant which contained the required written demand by the Claimant was also a certificate for the purposes of the conclusive evidence clause in the Guarantee. That letter required the Second Defendant to make payment to the Claimant of USD 49,138,545.44 “being the full amount owing by the Company under the Facility.” However, whilst the conclusive evidence clause had been referred to in the pleadings, it had not been expressly pleaded that the letter dated 4 June 2009 was a certificate for the purposes of this argument and that the Second Defendant was liable to the Claimant even if the First Defendant was not so liable. That argument, under the heading of “performance bond” was raised for the first time in Mr. Layton’s Skeleton Argument. No application was made to amend the pleadings to take the point. I have considered whether the Claimant should nevertheless be permitted to advance the argument. It would be possible to form a view as to whether the letter amounted to a “certificate” and, if so, where there was any “manifest error”. But I have concluded that in circumstances where the Second Defendant was unable to attend the trial and indeed had sought an adjournment on account of that inability (before the performance bond argument had surfaced) it was not appropriate to allow an unpleaded point to be advanced.

It was also submitted, by means of a footnote to Mr. Layton’s Skeleton Argument, that the Second Defendant was liable under the Facility as well as under the Guarantee. This was a surprising submission because, if correct, it would mean that the Guarantee (about which there had been much anguished debate within the Claimant) was unnecessary. This alternative case was not pleaded (the prayer was not sufficient for this purpose) and in any event it was not justified by the true construction of the Facility.

The Claimant is entitled to judgment against the First Defendant under the Facility and against the Second Defendant under the Guarantee. (Footnote: ¹)

In those circumstances there is no dispute as to the commission claim. It was suggested that the Claimant was not entitled to interest because interest was not provided for in Schedule 4 to the Facility. However, the Claimant is entitled to interest pursuant to the Senior Courts Act 1983 section 37. That is not excluded by the terms of the Facility. The parties are requested to agree the figures in respect of which judgment is to be given.