National Infrastructure Development Company Ltd v Banco Santander S.A.

A bank’s independent obligation under a letter of credit is not displaced by an underlying contractual dispute. On a beneficiary’s application for summary judgment, the bank need show only a real prospect of establishing the fraud exception, but the court must require particularly cogent evidence. The relevant inference is that the beneficiary could not honestly have believed its demands valid. Whether the demand was legally correct is not itself decisive. Contractual wording such as “due and owing” is construed in context and may cover sums claimed following contractual termination, including claims not yet quantified. Retention security supplied instead of cash retention may secure the same underlying claims unless expressly limited. A foreign injunction and speculative hope that cross-examination may reveal fraud do not ordinarily justify a stay or trial.

National Infrastructure Development Company Ltd was the beneficiary of four standby letters of credit procured by Constructora OAS Ltda under a highway construction contract. After NIDCO terminated the contract, it made demands under the letters of credit. Banco Santander refused payment, alleging fraud, excessive demands and the effect of an injunction granted by a Brazilian court.

Knowles J granted NIDCO summary judgment and refused a stay of execution. The bank appealed, challenging the summary-judgment threshold, the meaning of “due and owing”, the use of retention security, the need for cross-examination and the refusal of a stay.

Appeal dismissed. Lord Justice Longmore upheld the summary judgment for NIDCO and the refusal of a stay. Lord Justice Christopher Clarke agreed.

1. Independent obligation and fraud exception. Letters of credit and performance bonds are collateral and independent obligations. Courts interfere only exceptionally, principally where the beneficiary’s fraud is clear and known to the bank. Underlying contractual disputes are ordinarily left to litigation or arbitration. This followed the principles in RD Harbottle v National Westminster Bank [1978] QB 146, Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 and United City Merchants v Royal Bank of Canada [1983] 1 A.C. 168.
2. Summary judgment test. The applicable test under the Civil Procedure Rules 1998 Part 24 was whether the bank had a real prospect of establishing its fraud defence. The court must remain mindful that particularly cogent evidence is needed. The judge had therefore set the threshold too high by asking whether it was seriously arguable that NIDCO lacked an honest belief. The approach in Enka Insaat Ve Sanayi A.S. v Banca Popolare Dell’Alto Adige SpA [2009] EWHC 2410 (Comm) was correct in this context. The stricter approach in Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 and Alternative Power Solution Ltd v Central Electricity Board [2015] 1 WLR 697 concerned interlocutory relief sought by a bank’s customer.
3. Due and owing and fraud. The phrase “due and owing” had to be construed against the underlying construction contract. The performance security could cover sums claimed on a contractual termination following abandonment, even though damages had not been agreed or quantified. Legal uncertainty about the entitlement did not establish fraud. The evidence relied on by the bank did not support the only realistic inference that NIDCO could not honestly have believed in the validity of its demands.
4. Retention security. Letters of credit provided instead of cash retention could be used as security for claims arising from wrongful repudiation. They were not limited to the certified amount of cash retention, absent express wording to that effect.
5. Cross-examination and stay. A speculative hope that cross-examination might reveal fraud was insufficient to require a trial. A stay was generally inappropriate in a letter-of-credit case. The Brazilian injunction did not justify withholding payment, particularly as it came from neither the bank’s head-office jurisdiction nor the forum court.

The orders requiring payment of US$38,020,306.79 and refusing a stay were upheld.

• Court of Appeal (Civil Division): Banco Santander’s appeal was dismissed and the summary judgment and refusal of a stay were upheld: [2017] EWCA Civ 27 .
• High Court, Queen’s Bench Division, Commercial Court: Knowles J granted NIDCO summary judgment for US$38,020,306.79 and refused a stay of execution. No citation for that judgment is stated in the judgment under review.