Ibrahim v Barclays Bank Plc & Anor

Payment under a standby letter of credit may discharge the underlying debtor’s liability where the contractual documents and the parties’ intentions show that the payment was intended to represent and cover that liability. The court must focus principally on the intentions of the creditor and debtor, assessed from the documents and admissible surrounding evidence.

Where the underlying liability is discharged, a contractual right to share recoveries under a realisation agreement may terminate according to its terms. A person who paid through an autonomous letter of credit could not claim subrogation to that terminated right. Type 2 subrogation, where available, ordinarily requires proceedings in the name of the indemnified party.

The claimant arranged for UBS to issue an irrevocable standby letter of credit in favour of the Secretary of State. The Secretary of State had guaranteed Barclays’ lending to LDV and held a counter-indemnity from LDV. After Barclays called the guarantee, the Secretary of State demanded payment from UBS and certified that the amount represented and covered unpaid sums due by LDV.

UBS paid, and the claimant sought to recover from Barclays by subrogation to the Secretary of State’s rights under a realisation agreement which provided for sharing certain recoveries. The central questions were whether UBS’s payment discharged LDV’s liability and, if so, whether any subrogated right survived.

1. Underlying debt discharged. The relevant intentions were those of the Secretary of State and LDV, as creditor and debtor under the Counter-Indemnity. Those intentions were principally determined from the contractual documents, supplemented where admissible by other evidence. The Letter of Credit required certification that the amount demanded represented and covered the unpaid sums due by LDV. In context, “covered” meant discharged or paid, rather than merely being sufficient to discharge. The Secretary of State could not obtain payment on that basis and then contend that the underlying liability remained outstanding.
2. LDV had authorised the Secretary of State, under clause 6 of the Counter-Indemnity, to claim amounts due from LDV or any other person in such order and at such times as the Secretary of State considered appropriate. UBS’s payment therefore discharged LDV’s liability under both the Counter-Indemnity and the Guarantee Facility Agreement.
3. Effect on the Realisation Agreement. Clause 2.1 permitted sharing of Distribution Moneys only while the Guarantor Liabilities remained unpaid and the Secretary of State retained actual or contingent liability under the Guarantee. Those conditions ceased to be satisfied when UBS paid. The Secretary of State’s contractual right to Distribution Moneys therefore terminated, and no surviving right was identified to which the claimant could be subrogated.
4. The claimant’s alternative arguments did not alter the result. The court expressed the provisional view that the expectation among BERR, Weststar and the claimant that subrogation would arise was mistaken in light of the agreed wording. It declined to decide definitively whether subrogation could arise through an autonomous documentary credit, stating that the issue required fuller argument. It considered that the claim would have failed on that ground as well.
5. Had a type 2 subrogation claim arisen, it would ordinarily have had to be brought in the Secretary of State’s name. The court made no concluded decision on other possible parties or on the change of position defence.

The claim was dismissed.