National Infrastructure Development Co Ltd. v BNP Paribas

This is an application by the claimant, the National Infrastructure Development Company Limited (“NIDCO”) for summary judgment in the sum of $58,786,765 against BNP Paribas in respect of amounts claimed under two standby letters of credit. There was previously another defendant to the action, Credit Agricole Corporate and Investment Bank, but the dispute between NIDCO and Credit Agricole has been resolved.

At the hearing before me NIDCO was represented by Mr. Patten QC and Mr. Saunders, instructed by Fenwick Elliott LLP, and BNP Paribas by Mr. Deepak Nambisan, instructed by Herbert Smith Freehills LLP. I am grateful to all counsel for their submissions.

By way of a summary of the background, NIDCO is a company incorporated by the government of Trinidad and Tobago. It entered into a contract for a high value infrastructure construction project with a Brazilian company called Construtora OAS (“OAS”). That contract was concluded on 4th July 2011 and under its terms OAS was obliged to, and did, provide standby letters of credit to NIDCO to secure advance payments and by way of a guarantee of performance.

Two such standby letters of credit were issued by BNP Paribas on 5 ^th September 2012 and 23rd July 2014. I am not going to set out their terms at any length; they are in familiar form. They are irrevocable letters of credit carrying an obligation to pay on demand, which must be honoured by direct payment to the account of NIDCO. The credit payment demand was itself to be conclusive evidence that the sums claimed were due and owing and BNP Paribas promised to make payment in full without set-off, counterclaim or withholding. The letters of credit incorporated international standby letters of credit practices as set out in the ICC publication ISP 98. The place of demand was BNP Paribas’s operation centre in Paris.

The letters of credit were counter-guaranteed by a BNP Paribas subsidiary in Brazil, which the parties have referred to as BNPP Brazil. That, in turn, received back-to-back guarantees from OAS. I am told that the counter-guarantees and the back-to-back guarantees with OAS are subject to the jurisdiction of the Brazilian courts. Whilst it is obvious, it is perhaps worth recording that the claims brought in these proceedings are not brought under the counter-guarantees, nor are they brought against BNPP Brazil. Rather the letters of credit in issue before me were issued by BNP Paribas, are governed by English law and provide that the English courts have jurisdiction to settle any disputes which may arise in the relation to them.

It is clear that there are significant disputes between OAS and NIDCO. NIDCO served a termination notice in respect of the construction contract on 21st June 2016. That contract provides for the resolution of disputes between NIDCO and OAS by LCIA arbitration with a Trinidad and Tobago Port of Spain seat and I understand that OAS has commenced arbitration under the arbitration clause.

On 11th July of this year, demands were served by NIDCO under the standby letters of credit. There were initially issues raised as to the form of those demands, resulting in further demands being issued on 25th July 2016. There is no dispute that those revised demands conform with the requirements of the letters of credit. The amounts demanded have not been paid and NIDCO now seeks judgment for the amount which it says has fallen due under the standby letters of credit.

However, on 6th July, OAS obtained an injunction before the Brazilian court seeking to prevent four Brazilian companies, who were the Brazilian subsidiaries of banks which had provided the standby letters of credit, from making payment under the standby letters of credit.

So far as BNP Paribas is concerned, the order was not originally addressed to it but to BNPP Brazil. Similarly, so far as Santander (another bank which had provided a standby letter of credit) was concerned, the order was not originally addressed to Santander Madrid but to Santander Brazil. However, when OAS served the order on or sent a copy of the order to BNP Paribas, OAS described it as an injunction, the effect of which was to prevent BNP Paribas from making payment under the letters of credit.

NIDCO was informed of the injunction on about 12th July 2016. At around the same time, BNPP Brazil made an application to the Brazilian court seeking to clarify what BNP Paribas’s status was so far as the injunction was concerned. The Brazilian court’s initial response was that the injunction did not extend to BNP Paribas “except for internal issues between them” (i.e. between BNPP Brazil and BNP Paris). But, at a later stage, following an application by Santander Brazil, the Brazilian court ruled that the injunction against Santander Brazil did have effect as against Santander Madrid because, on the court’s understanding of the facts, any payment by Santander Madrid would constitute an internal issue. This led BNPP Brazil to make a further request for clarification in the Brazilian court as to whether its position differed from that of Santander and, on 18th August, the Brazilian court said that the situation of BNP Paribas and Santander was identical and the injunction similarly applied to BNP Paribas.

There was some suggestion in NIDCO’s written submissions that BNP Paribas had engineered the application of the injunction to itself. That is not an issue which I would feel capable of resolving on a summary judgment application. In any event, on the limited material before me I see nothing to suggest that BNPP Brazil’s request for clarification was anything other than a bona fide attempt to resolve issues as to what the reference to “internal” issues between BNPP Brazil and BNP Paribas meant and how the clarification of the injunction given in relation to Santander would impact BNP Paribas.

On the morning of the hearing, I was provided with a large bundle of documents and a witness statement which had been sent by e-mail by OAS. I read the covering letter and the witness statement. It is clear from that material that there are substantial disputes between OAS and NIDCO which will have to be resolved in their chosen forum of LCIA arbitration, but the principle of autonomy applicable to letters of credit governed by English law means that those disputes do not provide BNP Paribas with a defence under the letter of credit or a reason for not paying. In those circumstances, I am satisfied that the material served by OAS does not affect and is not relevant to the English law issues I must decide. It is right I should record that Mr. Nambisan’s position in relation to that material was that it was not BNP Paribas’s evidence but material produced by OAS.

Various issues were raised about the effect of Brazilian law injunctions and how far they were binding upon BNP Paribas. There was a report from a Mr. Correa, a partner in the Brazilian firm of Lefosse Advogados, and NIDCO also served expert evidence in the form of a letter of advice from Aroeira Salles Advogados. On a summary judgment application, it is not possible for me to resolve disputed issues of Brazilian law and I do not attempt to do so. For the purposes of determining this application, I have proceeded on the basis that there is a good arguable case that the Brazilian court has jurisdiction under its own rules, that the order it made applied to BNP Paribas, that its effect is to prevent BNP Paribas from paying under the injunction as a matter of Brazilian law and that, if it does so, BNP Paribas has an exposure to a penalty of ten per cent of the letter of credit amount under Brazilian law.

The issue I must determine is whether those matters which I have found to be arguable as a matter of Brazilian law give BNP Paribas any arguable defence or grounds for resisting payment under the letter of credit as a matter of English law.

It is well established under English law that the integrity of letters of credit and standby letters of credit is of vital importance to international trade and the English courts have always approached any suggestion they should interfere with the enforcement of those contracts with great circumspection. There are a number of authorities that make clear the great care with which the English court approaches any suggestion it should prevent payment under such documents in accordance with their terms; for example, Groups Jossi Re v Walbrook Insurance Co. Ltd . [1996] 1 WLR 1152. There are certain limited exceptions where an English court will be prepared either to refuse to enforce or prohibit payment under a standby letter of credit: when a noncompliant demand has been made or where the so-called fraud exception arises. There is no suggestion that either applies here and, therefore, I say no more about them.

Mr. Nambisan for BNP Paribas makes three principal submissions in response to the application: first, he says that this is one of those cases in which the application for summary judgment should be dismissed because there is some other compelling reason for trial; second, by way of an alternative means of putting forward the first argument, that the court should stay or adjourn the application for summary judgment until the outcome of the Brazil proceedings is known; and, thirdly, that any order that I make, if I grant summary judgment contrary to his primary submission, should be subject to a stay of execution. Given the very strict requirements of English law so far as the enforcement of standby letters of credit are concerned, Mr. Nambisan is unable to suggest that BNP Paribas has an English law defence to the claim and realistically he does not seek to do so. Instead, he relies on the fact that BNP Paribas finds itself facing a Brazilian law injunction prohibiting it from paying under the letters of credit and the exposure to penalties imposed by the Brazilian court if it does not comply with the terms of that injunction, saying that those factors constitute a compelling reason why the case should be disposed of at a trial rather than now.

With all due respect to the compelling way in which the argument is put, I regard this submission as untenable as a matter of English law. While there is jurisdiction not to grant summary judgment even where there is no defence to the claim, that is very much an exceptional course, particularly in a commercial case. When a claim is brought under a standby letter of credit, which under English law has a status equivalent to cash, it would strike at the recognised commercial purpose of such transactions if a bank could refuse to pay and then avoid judgment being entered for reasons other than the very limited categories of defence to such actions recognised by English law. Whilst it is said that the facts of the present case are extraordinary, I suspect they would soon become commonplace if a party who had opened a letter of credit could defeat the bank’s payment obligation to pay by obtaining an injunction against the bank in its home jurisdiction.

In Power Curber v National Bank of Kuwait [1981] 2 Lloyd’s Rep 394, the Court of Appeal considered a case on very similar facts in which the claimant applied for summary judgment under a letter of credit issued by a Kuwaiti bank and where the courts of Kuwait had made an order, upheld on appeal, preventing the bank from making my payment in or outside Kuwait. The Court of Appeal upheld the decision of Parker J. at first instance to grant summary judgment and overturned his decision, awarding a stay of execution pending appeal in Kuwait. The court did so even though in that case, as here, the bank found itself facing inconsistent orders from the English court and the Kuwaiti court. The court said that it would strike at the heart of international trade if a letter of credit were not to be honoured by reason of an injunction that had been obtained, in that case, in Kuwait.

Mr. Nambisan tried valiantly to distinguish Power Curber , saying that here the 6th July injunction and the liability that BNP Paribas would face if it is breached are clear, whereas the outcome in Power Curber of the bank’s noncompliance with the Kuwaiti injunction was less clear. However, it is apparent from the report of the judgment that the bank was indeed relying in Power Curber on the fact that it would face the risk of contempt proceedings or double payment if forced to pay. In any event, it seems to me that the decision in Power Curber rests not on some fine weighing of the sanctions for noncompliance with the order of the other court, but on an issue of principle. That issue of principle applies equally strongly here. It would undermine the important principle of English law protecting the sanctity of standby letters of credit if the payment could be subverted by procedural means; for example, holding that there should be no summary judgment because of the need to put the matter off for a trial or simply adjourning the application until some future date.

In Power Curber , the court noted its sympathy for the position that the bank found itself in, but held that this provided no defence, nor any means or justification for a procedural order staying execution. I have equal sympathy for the position of BNP Paribas here. Once again, under English law that provides it with no defence and no grounds for resisting summary judgment.

That leads to the second application for a stay of execution. I must first deal with one argument raised by NIDCO, namely its reliance on s.32 of the Civil Jurisdiction and Judgments Act 1982 as a reason why I should not recognise or give effect to the Brazilian court injunction, it being said that it had been granted in breach of an agreement for settlement of disputes. Whilst there might be room for such an argument to operate if I was concerned with the injunction insofar as it was obtained by OAS against NIDCO, the reliance placed by BNP Paribas on a Brazilian injunction in the proceedings before me concerns an injunction operating on BNP Paribas itself. In those circumstances, it seems to me I am not in territory in which the Brazilian court injunction can be shown at this stage to have been clearly obtained in breach of some relevant agreement for the determination of disputes in a particular forum. I, therefore, do not place reliance on the s.32 factor.

However I do conclude that it would be wrong in principle to use a stay of execution to subvert the principles of substantive law which provide very limited defences indeed to claims to enforce letters of credit. It was essentially for that reason that the Court of Appeal in Power Curber overturned the judge’s decision to grant a stay of execution. In this case it might be said the factors weighing against a stay of execution are even stronger, as this is a case in which there was an express selection of English jurisdiction by the parties. In those circumstances, the application for a stay of execution is denied.

I should conclude this brief judgment with two further observations. The first is that nothing in the judgment is intended in any way to criticise the decisions of the Brazilian courts now or in the future. It has been my responsibility to determine the dispute between NIDCO and BNP Paribas under English law because that is the law the parties selected to govern the letters of credit and in circumstances in which they had agreed that the English courts had jurisdiction. For reasons I have given, the long-established effect of English law is that BNP Paribas has no defence to NIDCO’s claim.

Secondly, it is right that I should record that, so far as I can see, BNP Paribas has taken every step properly open to them to resist this judgment and its enforceability. That attempt has failed not because of any lack of diligence or forcefulness on its part but because of the very clear effect of English law so far as standby letters of credit are concerned. However much BNP Paribas did not wish to pay under the letter of credit, given the Brazilian law injunction, I have held that the effect of English law is that it is obliged to do so.