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

Where a contract requires payment of invoices within a stated period, a statutory restriction on making payment may postpone discharge without preventing the underlying payment obligation from accruing. After that period has elapsed, a certificate that a party is obligated to pay may refer to an accrued liability, even though payment cannot yet be made without statutory approval or an arbitral award.

An autonomous standby letter of credit is construed in its own contractual and commercial context. Its requirements need not be read as requiring an award or proof of statutory approval where those documents are not called for. A dispute over the underlying invoices does not itself defeat the bank’s liability. The appeal was allowed and payment ordered.

Petrosaudi provided drilling services under a Venezuelan-law contract with PDVSA. The contract required payment guarantees, and a standby letter of credit was issued for approximately US$130 million. Seven invoices remained unpaid and were disputed as to the applicable day rate.

An arbitral tribunal held that contractual provisions requiring payment pending dispute or deeming invoices accepted were inconsistent with Article 141 of the Venezuelan Public Contracting Law. Petrosaudi then presented demands under the standby letter of credit. The High Court, Commercial Court, held that no present debt was due, that the certificate was false, and that its signatory had acted fraudulently. The appeal concerned the meaning of obligated to pay, the effect of Article 141, and the fraud exception to the autonomy principle.

1. Disposition. The Court of Appeal allowed the appeal. Lord Justice Christopher Clarke delivered the leading judgment, and Lord Justice Lewison agreed. The High Court’s conclusion that no obligation to pay existed, and that the certificate was fraudulent, was set aside.
2. Under clauses 803(1) and (2) of the drilling contract, PDVSA’s obligation to pay accrued when the invoices had been received and the 30-day period had elapsed. Article 141 of the Venezuelan Public Contracting Law restricted PDVSA from making payment until the statutory procedure had been completed or an arbitral award had been made. It did not prevent the contractual obligation from arising. The provisions concerning interest and suspension also supported that construction.
3. The phrase obligated to pay in the standby letter of credit was capable of referring to an accrued liability rather than an obligation immediately to discharge the debt. The court applied the contextual approach illustrated by Charter Reinsurance v Fagan [1997] AC 313, at 393, and Tea Trade Properties Ltd v CIN Properties Ltd [1990] 1 EGLR 155. After 30 days had elapsed, Petrosaudi was entitled to certify that PDVSA was obligated to pay, subject to the invoices having been correctly calculated.
4. The standby letter of credit was a separate and autonomous contract governed by English law. Its terms required invoices, evidence of receipt and certification, but did not require an arbitral award or proof of compliance with Article 141. In the absence of fraud, a dispute between the underlying parties did not affect the bank’s liability on conforming documents.
5. The arbitral awards addressed clauses 803(3) and (4), not clauses 803(1) and (2). They did not decide that no liability to pay could accrue before statutory approval or an award, nor did Procedural Order No 8 make a binding determination that any presentation under the standby letter of credit would breach the contract. Procedural Order No 16 was inconsistent with that interpretation.
6. On the proper construction, the certificate was true and Mr Buckland was entitled to sign it. He was not fraudulent. The court declined to decide whether knowledge of falsity acquired after presentation but before the payment date would engage the fraud exception, because that issue would require consideration of authorities on an obiter basis.
7. The court directed that paragraphs 1–5 of the High Court’s order be set aside, that the withdrawal notices be treated as null and void, and that the bank pay US$129,877,699.54 to Petrosaudi. The consequential orders were made to achieve the restitution required by the result, applying Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1997] 1 WLR 1627, 1637.

• Court of Appeal (Civil Division): On 25 January 2017, the appeal was allowed. The High Court order was set aside in material respects, the withdrawal notices were declared ineffective, and the bank was ordered to pay US$129,877,699.54.
• High Court, QBD, Commercial Court: HHJ Waksman QC held on 5 October 2016 that no present debt was due under the drilling contract, that the certificate under the standby letter of credit was false, and that the fraud exception applied.