On-demand securities: overcoming foreign injunctions

A recent Commercial Court decision has rejected an attempt by a bank to resist payment under Standby Letters of Credit subject to English law and jurisdiction by reference to injunctions obtained against the bank in Brazil. The fact that the bank would be exposed to penalties in Brazil for making payment was an insufficient reason to defer summary judgment or to grant a stay of execution.

NIDCO v BNP Paribas

NIDCO, a government owned corporation, entered into a contract with a Brazilian contractor, OAS Construtora, for the construction of a large highways project in Trinidad and Tobago. A number of Standby Letters of Credit (“SLCs”) were procured by OAS to secure its performance under the contract and the repayment of an advanced payment.

OAS entered insolvency proceedings in Brazil and its contract with NIDCO was terminated. NIDCO made demands under the SLCs, including two SLCs issued by BNP Paribas. These SLCs were counter-guaranteed by a BNP Paribas subsidiary in Brazil, who in turn had received guarantees from OAS. OAS obtained interim injunctions in Brazil preventing both the BNP Paribas entities from paying out under the SLCs. BNP Paribas was exposed to a penalty of 10% of the amount of the SLCs if it made payment in breach of these orders.

The SCLs were subject to English law and the jurisdiction of the English courts. NIDCO therefore brought proceedings against BNP Paribas in England and applied for summary judgment. BNP Paribas accepted that it had no English law defence to NIDCO’s demands, but argued that judgment should be deferred until the final outcome of the Brazilian proceedings was known to avoid (if possible) it being required to breach the interim injunctions granted in Brazil. Alternatively, if judgment were to be given immediately, a stay of execution was sought on the same basis.

The court rejected these arguments, following previous English cases which emphasised the vital importance to international trade of on-demand securities such as letters of credit. To refuse judgment on the basis of a foreign injunction would “strike at the recognised commercial purpose of such transactions”.

Conclusion and implications

This case provides a good example of the traditionally robust approach to on-demand securities taken by the English courts. Only in exceptional circumstances will the enforcement of demands under such securities be refused. Opportunities still exist, however, for beneficiaries to tighten the drafting of such instruments. For example:

• It is preferable to allow the beneficiary to nominate a bank account or place for payment, as otherwise an English court may allow a stay of execution where an injunction is obtained from courts in the bank’s local jurisdiction (see AES-3C Maritza v Credit Agricole).
• It is also preferable to include express provisions for the service of English court process so as to avoid delays in serving proceedings outside of England.

References:

AES-3C Maritza East 1 Eood v Credit Agricole Corporate and Investment Bank [2011] EWHC 123 (TCC)

National Infrastructure Development Co Ltd. v BNP Paribas [2016] EWHC 2508 (Comm)