Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA & Ors

Where mandatory local law prevents payment of disputed invoices until approval or an arbitral award, the underlying debt is not presently due and payable. A standby letter of credit requiring certification that the applicant is obligated to pay therefore requires certification of a present payment obligation under the underlying contract. The fraud exception to the autonomy principle applies where the beneficiary knowingly or recklessly makes a false certification. A presentation honestly made when submitted does not become fraudulent merely because falsity is established before payment. Contractual good faith does not, without evidence of breach of a specific contractual obligation, independently prevent presentation.

The claimant supplied drilling services under a contract with PDVSA and held a standby letter of credit issued by Novo Banco as security for payment. Venezuelan-law arbitration awards had held that Article 141 of the Venezuelan Public Contracting Law was mandatory and rendered contractual provisions for interim or deemed payment of disputed invoices void.

The claimant presented the letter of credit for approximately US$129 million, certifying that PDVSA was obligated to pay. The defendants sought to restrain payment, alleging that the certification was fraudulent or contrary to contractual good faith. The central issues were the meaning of “obligated”, the effect of the arbitral awards, the fraud exception, and Article 1160 of the Venezuelan Civil Code.

1. Underlying obligation. The arbitral awards meant that, under the contract as modified by mandatory Article 141, disputed invoices were not presently payable unless PDVSA approved them or an arbitral tribunal awarded payment. The distinction between sums due under the contract and sums affected by Article 141 was untenable.
2. Meaning of the certificate. The certification that PDVSA was “obligated” required certification that the demanded amount was due and payable immediately under the contract. The claimant could not certify merely that invoices had been rendered, that the credit period had expired, or that payment might ultimately be awarded.
3. Fraud exception. The claimant’s general counsel understood the arbitral awards and knew that the sums were not presently payable. His asserted interpretation of “obligated” was unrealistic. The court found that he did not honestly believe the certification to be true, alternatively that he was reckless as to its falsity. The fraud exception therefore applied and payment was restrained.
4. Alternative hypothesis. If the certification had been honestly made when presented, later proof of falsity would not by itself engage the fraud exception. The critical time is presentation. UCM v Royal Bank of Canada [1983] 1 AC 168 and Group Josi v Walbrook [1996] 1 WLR 1152 supported that conclusion.
5. Good faith. Article 1160 did not independently justify restraint. No specific contractual obligation was shown to have been breached or frustrated by presentation under the English-law letter of credit.

The Bank was restrained from paying under the letter of credit.