Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373

Conflict o f Laws

scope for the applicable law of that contract to be affected by the applicable law of another contract. But where the parties to one contract have failed to make a choice of applicable law the question may arise whether the independence principle precludes the applicable law of a related contract in the same wider transaction from applying to the contract where the par­ ties have made no choice. The issue may be divided into two questions. Tire first is whether in the absence of choice, the applicable law of a letter of credit or demand guarantee contract can be affected by the applicable law of the underlying contract. The second is whether, in the absence of choice, the applicable law of any of the autonomous contracts with the banks or between the banks can be affected by the applicable law of any other autonomous contract in the chain of contracts.

13.71With respect to the first question, in the absence of choice in any of the banking contracts, the applicable law is not affected or ‘infected’ by the law that governs the underlying con­ tract. The principle of independence precludes such infection. In Power CurberInternational Ltd v. National Bank o f Kuwait SAK,KS where the Court of Appeal refused to apply the doctrine o f ‘infection in this context, Lord Denning M.R. defended the principle of inde­ pendence and quoted the UCP provision to the effect that credits are by their nature separate from the underlying transactions.156 In that case the UCP was incorporated into the letter of credit. However, the rule applies even where the UCP is not incorporated, since the principle of independence of letters of credit and demand guarantees is a common law principle.157 The position is the same under the Rome Convention.15819

13.72The same principle applies in the context of a performance bond. In Attock Cement Co Ltd v. Romanian Bankfor Foreign Trade159 where the underlying construction contract contained an express choice oflaw clause but the performance bond issued in respect of the contract did not provide for the applicable law, the Court ofAppeal rejected a contention that the perfor­ mance bond was governed by the proper law of the underlying contract by virtue of the doctrine o f‘infection’, which applies in the case of a suretyship guarantee.160 Staughton L.J. explained that:

[ajlmost every letter of credit or performance bond is issued pursuant to some underlying commercial transaction. Yet we were referred to no case where it had even been argued that one was affected by the proper law of the other. Seeing that the letter ofcredit or performance bond is intended to be a separate transaction, I would hold that it is not so affected.161

13.73That position should be the same under the Rome Convention and the Rome I Regulation.

13.74The position is different with respect to the contracts with the banks and between the banks. The starting point is that as a letter of credit or demand guarantee transaction is not a single contract but involves a number of separate and autonomous contracts, there is no single governing law. Each contract in the chain of contracts may have its own governing law that is different from that of the other contracts in the wider transaction. For, although it may be desirable that each of the contracts arising from the transaction should be governed by the

155[1981] 1 WLR 1233.

156Ibid., at 1239.

157See paras 4.04 to 4.05.

158Bank ofBaroda v. Vysya Bank [1994] 2 Lloyd’s Rep. 87 at 92.

159[1989] 1 WLR 1147; [1989] 1 Lloyd’s Rep. 572.

160Broken HillPty Co Ltd v. Xenakis [1982] 2 Lloyd’s Rep. 304.

161[1989] 1 WLR 1147, 1159.

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III. The Applicable Law

same law, chat is not essential.162 However, in the absence of choice, the applicable law of one of the autonomous contracts with the banks or between the banks may be affected by the applicable law of another autonomous contract with which it is so closely related that it would be commercially undesirable for the two contracts to have different and possibly con­ flicting applicable laws. In other words, although each contract with the bank is separate and independent of each other, for choice of law purposes the courts are prepared to depart from the independence principle in order to achieve a result which is commercially sensible. The extent to which the applicable law of one contract can affect the other is noted in the discus­ sion which follows.

The rules applicable to determine the applicable law of a letter of credit or demand guarantee 13.75 depend on the date of issue of the instrument. For instruments issued on or before 1 April

1991, the common law rules apply.163 For instruments issued between 1 April 1991 and 17 December 2009 the Rome Convention applies and for instruments issued after 17 December

2009 the Rome I Regulation applies. In the discussion that follows the applicable laws in the relationships arising in a letter of credit transaction will be examined before considering the applicable law in the relationships in a demand guarantee transaction.

B.The relationships in a letter of credit transaction

(i)The beneficiary and the issuing/confirming bank

In the absence of choice of law by the parties, at common law the task of the court is to iden­ 13.76 tify the system oflaw with which the contract has its closest and most real connection. In applying that test to the contract between the beneficiary and the issuing or confirming bank

much weight is given to the law of the place of performance (namely, payment) and very little or no significance is attached to the place of residence or business of the parties.164 In the case of an unconfirmed credit issued by a bank in one country and advised to the beneficiary by another bank in the beneficiary’s country, the rule is that in the absence of choice, the proper law of the contract is the law of the place where documents are to be presented and payment made.1651In Offshore International SA v. Banco CentralSA'№Ackner J. rejected the law of the place of the issuing bank as the proper law because ‘great inconvenience would arise, if the law of the issuing bank were to be considered as the proper law. The advising bank would have constantly to be seeking to apply a whole variety of foreign laws’.16718In Power Curber International Ltd v. National Bank o fKuwait 5АК,Ш the Court ofAppeal approved the deci­ sion in the Offshore International case and held that a letter of credit issued by a bank in Kuwait was governed by the law of North Carolina, which was the place where payment was to be made under it. More recently, in P T Pan Indonesia Bank Ltd TBK v. Marconi Communications International L td 169 the Court of Appeal confirmed that at common law,

162 PTPan Indonesia Bank Ltd TBK v. Marconi Communications International Ltd [2007] 2 Lloyd’s Rep. 72 at [611.

163See, e.g. H abib Bank Ltd v. CentralBank o fSudan [2006] 2 Lloyd’s Rep. 412, where the decision in 2006 was in respect of two letters of credit issued in 1982.

164PTPan Indonesia Bank Ltd TBK v. Marconi Communications International Ltd [2007] 2 Lloyd’s Rep. 72

at [41].

165Offshore InternationalSA v. Banco CentralSA [1977] 1 WLR399.

166[1977] 1 WLR 399.

167Ibid., at 401.

168[1981] 1 WLR 1233.

169[2007] 2 Lloyd’s Rep. 72 at [43].

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Conflict o f Laws

the place with which the contract between the issuing bank and the beneficiary embodied in the letter of credit is most closely connected is the place at which the documents will be pre­ sented and at which authority has been given to make payments of sums due or to accept drafts drawn under the credit’.

1 3 .7 7 The position is the same where a letter of credit is issued by a bank in one country and is advised to the beneficiary by a bank in another country and confirmed either by the same bank or another bank in the same country where documents are to be presented and pay­ ment is to be made to the beneficiary. In European Asian Bank A.G. v. Punjab v. Sind Bank'10 a letter of credit was issued by a bank in India but was notified to the beneficiary in Singapore through a correspondent bank in Singapore, which later confirmed the credit. The benefi­ ciary was advised of it through another bank in Singapore. The credit was payable against documents presented in Singapore. The court rejected the contention that the contract between the beneficiary and the issuing bank was governed by Indian law. It was held that it was contemplated that negotiation and payment would take place in Singapore and that in those circumstances the proper law was that of Singapore. It follows that the same law would be the applicable law to the co-existing contract between the beneficiary and the confirming bank, since performance is to be effected by the same bank at the same place.

1 3 .7 8 Whereas the proper law doctrine of the common law attaches much significance to the place of performance in the absence of choice of law by the parties, the presumption in Article 4(2) of the Rome Convention fixes the applicable law on the place of business or residence of the person effecting the characteristic performance. In the contract between the issuing bank and the beneficiary of a letter of credit it is the bank that effects the performance that is char­ acteristic of the contract (receiving documents, examining the documents, and making pay­ ment to the beneficiary). Therefore, in accordance with the presumption, the governing law will be the law of the place where the issuing bank is located rather than the place of presenta­ tion ofdocuments and payment. But applying the same presumption to the contract between the beneficiary and the confirming bank might lead to the law of the place where the con­ firming bank is located being found to be the applicable law. Thus, if the issuing bank and confirming bank are in two different countries there will be two different potentially con­ flicting laws that are applicable depending on whether the beneficiary is claiming against the issuing bank or the confirming bank. This is commercially undesirable.17710 There are strong commercial reasons for the contract between the beneficiary and the confirming bank and the co-existing contract between the beneficiary and issuing bank to be governed by the same law.17213To achieve this commercially desirable result the English courts have applied the escape provision in Article 4(5).

1 3 .7 9 In applying Article 4(5) in this context the courts have essentially adopted the approach of the proper law doctrine of the common law under which much significance is attached to the place of payment as opposed to the place of business ofeither party. In Bank ofBaroda v. Vysya Bank L tdm the court was concerned with the law applicable to the contract between an

170[1981] 2 Lloyd’s Rep. 651, 656, per Robert GoffJ.; [1982] 2 Lloyd’s Rep. 356, 368, per Ackner L.J.

171p j'p an Indonesia Bank Ltd TBK v. Marconi Communications International Ltd [2007] 2 Lloyds Rep. 72 at [4 i ].

172Bank of Credit and Commerce Hong Kong Ltd (in liquidation) v. Sonali Bank [1995] 1 Lloyds Rep. 227, 237; Wahda Bank v. Arab Bank [1996] 1 Lloyd’s Rep. 470, 473.

173[1994] 2 Lloyd’s Rep. 87.

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Marconi to an Indonesian company. The price was payable by letters of credit to be estab­ lished and advised through Standard Chartered Bank (SCB) in London. The credit was issued by Hastin Bank, an Indonesian bank, and advised to Marconi in England by SCB. It was confirmed by Panin Bank, another Indonesian bank. SCB was authorized but was not bound to negotiate the documents. Marconi shipped consignments of telephone equipment and drew two drafts on Panin Bank as required by the credit. The drafts, together with the other required documents, were presented to Panin Bank by SCB as Marconi’s collecting agent.

174Ibid., at 92.

175Expressed in Dicey a n d M orris on the Conflict o f Laws (12th edn) 1137-1138.

176[2007] 2 Lloyd’s Rep. 72.

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1 3 .8 2 Panin Bank passed the documents to Hastin Bank which rejected them as non-conforming. Panin Bank also refused to accept the documents for the reasons given by Hastin Bank. Marconi brought a claim in England against Panin Bank for damages for breach of contract in failing to honour its obligations as confirmer of a letter of credit. In order to decide whether the English courts had jurisdiction, it was necessary to determine whether there was a good arguable case that the contract between Marconi, as beneficiary, and Panin Bank, as confirmer, was governed by English law.'77

1 3 .8 3 The Court of Appeal rejected a submission that the case was distinguishable from the Bank ofBaroda case because in this case both the confirming bank and the issuing bank were in the same country (Indonesia) and, although the credit authorized negotiation in London by SCB, SCB in fact did not negotiate the credit. Potter L.J., who delivered the judgment of the Court of Appeal, explained that in the application of Article 4 to the contract between the beneficiary and the confirming bank, it was ‘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’.178 He went on to say that in the context of the overall purpose of the letter of credit transaction, when applying the test in Article 4(5) to the contracts arising between the beneficiary and the issuing or confirming bank, the geographical location of the factors which are of most obvious significance ‘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’.179 It was held that England was the contemplated place of payment and also the place of examination of documents before payment. These considerations were thought to amount to a preponderanceofconnecting factors that justified disregardingArticle 4(2) and applyingArticle 4(5). Potter L.J. observed that in these days of electronic communications, the place where the contract was concluded is oflittle significance so far as the close connection test in Article 4(5) is concerned, although it has jurisdictional significance.

1 3 .8 4 Therefore, the position is that under the Rome Convention, in the absence of choice, the law that governs the contract between the beneficiary and the issuing or confirming bank is the law of the place where documents are to be presented and where payment is to be made.180 It is not clear what the position will be where the documents are to be presented in one country but under the credit payment is to be made in another country. If, in such a case, it is still considered that the presumption in Article 4(2) should be displaced then it is suggested that, as between the place of presentation of documents and the place of payment, bearing in mind the essential nature and commercial purpose of the letter of credit as identified by

177See discussion at paras 13.48 ro 13.49 above.

178[2007] 2 Lloyd’s Rep. 72 at [62].

179Ibid., at [63].

180Trajigura B eh eerN V v . Kook?nin Bank Co [2005] EW HC 2350 (Comm); Trafigura Beheer N V v . Kookmin

Bank Co [2006] EW HC 1450 (Comm) at [106J; English law governed the contract between an issuing bank in Korea and a Dutch beneficiary where the credit was advised to the beneficiary through a bank in London and documents were (as envisaged by the parties) presented to the advising bank in London where payment was made.

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181 P T Pan Indonesia Bank L td TB K v. M arconi Communications International L td [2007] 2 Lloyds Rep. 72

at [64].

182 Ibid., at [65].

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Conflict o f Laws

1 3 .8 8 Where the negotiating bank is not the advising bank, the governing law should be the law of the place where the negotiating bank is located where the credit is available for negotiation by the bank that has negotiated it or by any bank. There are a number of reasons for this. First, in such a case the negotiating bank is a bank nominated under the credit to handle documents, at least in the case of credits subject to UCP 600. Under UCP,183 ‘negotiation’ means the purchase ‘by the nominated bank’ of drafts and or ‘documents under a complying presentation’. A ‘nominated bank’ means the bank with which the credit is available ‘or any bank in the case of a credit available with any bank’. ‘Presentation’ means the delivery of documents under a credit to the issuing bank ‘or nominated bank’. And, under Article 6.d.ii ofUCP, ‘[t]he place of the bank with which the credit is available is the place for presentation. The place of presentation under a credit available with any bank is that of any bank.’ So, in the case of credit that is available by negotiation with any bank, if the beneficiary negotiates the documents by delivery to the negotiating bank that amounts to presentation under the credit. Secondly, such negotiation constitutes final payment to the seller/beneficiary against presentation of documents. The later presentation to the issuing/confirming bank is simply ‘the machinery of its reimbursement’.184 Thirdly, the negotiating bank is not in the same position as the beneficiary vis-a-vis the issuing/confirming bank, since the issuing/confirming bank’s promise to reimburse the negotiating bank that has negotiated a complying presenta­ tion and forwarded the documents is separate and different from the issuing/confirming bank’s undertaking to the beneficiary.185 Under Articles 7.c and 8.c of UCP 600 the undertaking of the issuing/confirming bank to the negotiating bank is expressly stated to be independent of the issuing/confirming bank’s undertaking to the beneficiary.

1 3 .8 9 Therefore, in the case of a credit that is available for negotiation by any bank, the basic rule under Article 4(2) of the Convention or Article 4(1 )(b) of the Regulation should apply, so that the contract between the negotiating bank and the confirming/issuing bank is governed by the law of the country where the branch of the negotiating bank that negotiated the credit is located. This will normally be the same as the country where the credit is negotiated (that is to say, where the beneficiary presents the documents and receives value from the negotiat­ ing bank). If so, there will hardly be any need for the basic rule to be disregarded in favour of the close connection test. As the place of negotiation is also the place of presentation of docu­ ments and payment under the credit, the same law will govern the contract between the negotiating bank and the issuing/confirming bank and the co-existing contracts between the beneficiary and the confirming bank and the beneficiary and the issuing bank, as discussed in paragraphs 13.78 to 13.84 above.

(iv) Issuing bank and advising!confirming bank

1 3 .9 0 Under common law rules, in the absence of choice, the law that has the closest and most real connection to the contract is the law of the place of performance. Performance by the advising or nominated bank includes: advising the credit, receiving documents and forward­ ing them, and making payment if so authorized and/or confirming the credit and honouring

183 Art. 2.

184 P I Pan Indonesia Bank L td TB K v. M arconi Com munications International Ltd [20071 2 Lloyd’s Rep. 72 at [64].

185 Ibid.

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186 Bank o f Credit a n d Com merce H ong K ang v. Sonali B ank [1995J 1 Lloyd’s Rep. 227.

187[2007] 2 Lloyds Rep. 72.

188[1994] 2 Lloyd’s Rep. 87.

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Conflict o f Laws

contract between a customer and his bank is governed by the law of the place where the account is kept.189 The same law should therefore govern the relationship of the parties in respect of the applicant’s request for the bank to issue a letter of credit.

1 3 .9 4 The position should be the same under Article 4(2) of the Rome Convention and 4(l)(b) of the Rome I Regulation, since the place where the account is kept is the place of business of the bank, the party who will be effecting the characteristic performance (namely, the issuing of the credit) or performing the service. The Giuliano and Lagarde Report190 states that in a banking contract the law of the country where the bank is located will normally govern the contract. As there will normally be no commercial reason why the contract between the applicant and the issuing bank should be governed by the same law as that which governs the contracts between the beneficiary and the confirming bank, the beneficiary and the issuing bank, and the confirming bank and the issuing bank,191 there should be no need to apply Article 4(5) of the Convention or 4(3) of the Regulation.

C. Tbe relationships in a demand guarantee transaction

(0 Beneficiary and issuing bank

1 3 .9 5 A demand guarantee will not normally contain an express choice of law clause.192 However, where the bond is subject to the ICC Uniform Rules for Demand Guarantees (URDG 758), then unless otherwise agreed, Article 34(a) makes an express choice of law, namely, the law of the place of the issuer’s branch or office that issued the guarantee.

1 3 .9 6 In the absence of choice of law by the parties, at common law the proper law of a demand guarantee is the law of the place where under the guarantee payment is to be made.193 In many cases the place of payment under the guarantee is the place of the branch that issued it.194

1 3 .9 7 Under Article 4(2) of the Rome Convention, the party effecting the characteristic perfor­ mance is the issuing bank and normally under the guarantee or bond, the performance (issuing the bond and honouring it) is to be effected at the branch or office that issued the bond. Therefore, the governing law will be the law of the country where the bank’s branch that issued the bond is located. The result should be the same under Article 4(I)(b) of the Rome I Regulation. The issuing bank is likely to be regarded as providing the services. Therefore, the law of the location of the place of business (the branch) where the services are to be provided will be the governing law. This is the country of location of the branch that issued the bond and where payment is to be made. In such a case, there should be no need for the presumption in Article 4(2) of the Convention or the basic rule in Article 4(l)(b) of the Regulation to be disregarded under Article 4(5) of the Convention or Article 4(3) of the Regulation.

189Lybyan Arab Foreign Bank v. Bankers Trust [1988] 1 Lloyds Rep. 259 at 270.

190Giuliano and Lagarde Report, 21.

191e.g. Bank o f Credit and Commerce Hong Kong v. Sonali Bank [1995] 1 Lloyd’s Rep. 227 at 237; PTPan Indonesia Bank LtdTBKv. Marconi CommunicationsInternationalLtd [2007] 2 Lloyd’s Rep. 72 at [55].

192But see, e.g. UxinterimpexJSC v. Standard Bank Pic [2007] EW HC 1151 (Comm), where an advance payment guarantee contained an express choice of law clause.

193Attock Cement Co Ltdv. Romanian Bankfor Foreign Trade [1989] 1 WLR 1147.

194In practice the position is similar to that under the ITNCITRAL Convention on Independent Guarantees and Standby Letters of Credit, whereby in the absence of choice, the contract is governed by the law of the place of business at which the bond was issued (Art. 22).

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its liability under the bond is back-to-back with the instructing bank’s liability under its counter-guarantee. It therefore makes commercial sense that the two contracts should be governed by the same law. The legal route to that result is either on the basis that there is an implied choice or that the proper law of the performance bond is the law that has the closest and most real connection to the counter-guarantee. In Wahda Bank v. Arab Bank198 the Court ofAppeal was able to infer a choice from the fact that, although the counter-guarantee and the performance bonds are autonomous contracts, the two are intimately connected. Staughton L.J. explained the connection on the basis that a bank that issues a performance bond will want to ensure that it takes no greater risk than the solvency of the instructing bank that has given it a counter-guarantee. Therefore, the issuing bank would want to ensure that its liability under the bond is back-to-back with its right of reimbursement under its counter­ guarantee. In other words, the issuing bank would want the law that governs the perfor­ mance bond to govern the counter-guarantee as well. Staughton L.J. said that the bank that instructs the issuing bank to issue the bond would readily agree to this, thus providing the basis of an inferred choice.199 Even if choice of law cannot properly be inferred from the

195See discussion at paras 13.83 to 13.84 above.

196Under Art. 1 (b) of the URDG where at the request of a counter-guarantor a performance bond is issued

subject to URDG, the counter-guarantee shall also be subject to the URDG, unless the counter-guarantee excludes the URDG.

197 Turkiye IS Bankasi A S v. Bank o f C hina [1993] 1 Lloyd’s Rep. 132; Wahda Bank v. A rab Bank [1996] 1 Lloyd’s Rep. 470.

198[1996] 1 Lloyd’s Rep. 470.

199In that case the counter-guarantee was not subject to the URDG but the court was referred to it.

Staughton L.J. expressed disagreement with the choice of law rule stated in the URDG that the law that governs the counter-guarantee is the law of the place of the branch that issued the counter-guarantee. He said that such

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