Sirius International Insurance Company (Publ) v FAI General Insurance Ltd. & Ors

An autonomous letter of credit operates according to its terms as between the bank and beneficiary, but that autonomy does not override an express agreement restricting drawdown between the beneficiary and another contracting party. A beneficiary cannot retain proceeds where the agreed conditions for drawdown were not met, even though the bank would have had to honour a compliant demand. An acknowledgment of indebtedness and entitlement to prove in a liquidation does not necessarily amount to agreement that an underlying claim should be paid. Clauses preserving letter-of-credit arguments do not reopen matters already compromised by a Tomlin order. A hypothetical injunction issue is not determinative, although such relief would likely be available for breach of an express negative covenant.

FAI arranged reinsurance through Sirius, which required a letter of credit as security. In an agreement dated 3 September 1999, Sirius agreed not to pay Agnew’s claim or draw on the letter of credit unless FAI agreed to payment without putting Sirius in funds, or Agnew obtained a judgment or binding arbitration award against Sirius.

After arbitration proceedings between Sirius and FAI were compromised by a Tomlin order dated 6 April 2001, FAI acknowledged indebtedness of US$22.5 million and Sirius drew down US$5 million into escrow. The order preserved the parties’ positions concerning the letter of credit. Jacob J held that the first drawdown condition was satisfied, and alternatively that FAI could restrain an inconsistent drawdown. The issues were whether the Tomlin order satisfied the condition and whether the letter of credit’s autonomy prevailed between Sirius and FAI.

1. Disposition. The Court of Appeal unanimously allowed FAI’s appeal and dismissed Sirius’s cross-appeal. FAI was entitled to the proceeds of the letter of credit in the escrow account.
2. Tomlin order. Paragraphs 4 and 5 preserved arguments concerning the letter of credit, but they did not leave open matters compromised by paragraph 1. Paragraph 1 determined FAI’s indebtedness to Sirius under the retrocessions. That necessarily involved acceptance of corresponding liability to Agnew under the reinsurances, but it did not itself determine the parties’ separate rights concerning the letter of credit.
3. First condition for drawdown. The 3 September 1999 agreement required FAI to agree that Sirius should pay Agnew’s claim, notwithstanding the simultaneous settlements clause. Paragraph 1 of the Tomlin order acknowledged indebtedness and allowed proof in the liquidation, but its words could not be extended to express or imply that agreement. FAI remained entitled to withhold consent, and the second condition was also unmet. The documents had to be construed objectively, without resort to subjective intentions.
4. Autonomy. The autonomy of a letter of credit protects the bank’s obligation to pay against disputes outside the credit and maintains its cash-like commercial character, as illustrated by United City Merchants v Royal Bank of Canada [1983] 1 A.C 168 at 183, Group Josi Re v Walbrook Insurance [1996] 1 Lloyd’s R. 345 at 360–361 and Deutsche Ruckverischerung v Walbrook Insurance [1995] 1 WLR 1017 at 1030. It does not entitle the beneficiary, as against a contracting counterparty, to draw in breach of an express restriction. The bank’s obligation to honour a conforming demand did not determine Sirius’s entitlement as against FAI.
5. Consequences. Since the agreed conditions had never been fulfilled, Sirius was never entitled to draw the credit as against FAI or retain its proceeds. The hypothetical question whether an injunction would have been granted therefore did not arise. The court nevertheless indicated that it would have been strongly inclined to restrain breach of the negative covenant, subject to the qualification discussed in Insurance Co. v Lloyd’s Syndicate [1995] 1 Lloyd’s R. 273 at 277, following the principle in Doherty v Allman (1878) 3 App. Cas. 709 at 719–720.

1. Court of Appeal (Civil Division): In [2003] EWCA Civ 470, the court allowed FAI’s appeal on the construction of the Tomlin order, dismissed Sirius’s cross-appeal on letter-of-credit autonomy, and held that FAI was entitled to the escrow proceeds.
2. High Court: Jacob J, on 23 July 2002, held that the first drawdown condition was satisfied and alternatively that FAI could enforce the contractual restriction against drawdown.