The only exception to this principle recognised under English law is a fraud affecting the documents presented by the beneficiary (for example if they have been forged) or, in the case of a standby LoC, if the beneficiary had no honest belief in the validity of its demand. This exception arises, and the English courts will grant an injunction restraining the issuing/confirming bank from making payment, only in narrow and exceptional circumstances. To prove that a demand under a standby LoC is fraudulent, the applicant for an injunction (for example a buyer of the goods who alleges that the goods sold were defective) must show that the seller knows that the demand is fraudulent, or that the circumstances around the demand are such that the only reasonable interference is that the demand is fraudulent. The difficulty in meeting this threshold is demonstrated in the Court of Appeal’s decision in National Infrastructure Development Co Ltd v Banco Santander SA  EWCA Civ 27 (NIDCO v Santander).
NIDCO v Santander concerned demands under four standby LoCs issued by Santander in favour of National Infrastructure Development Company Limited (NIDCO), a corporate vehicle of the government of Trinidad and Tobago, for carrying out public infrastructure works. The standby LoCs were security for payment obligations in a construction contract between NIDCO, and a contractor, Constructora OAS Limited (OAS). A dispute arose between NIDCO and OAS and OAS ceased construction work claiming non-payment and commenced arbitration against NIDCO. NIDCO subsequently made a demand under the standby LoCs, the terms of which required NIDCO to confirm that payment “is due and owing … by [OAS]”. OAS sought and obtained an injunction from a court in Brazil (where Santander had a subsidiary) restraining payment by Santander under the standby LoCs. The standby LoCs were governed by English law and contained English jurisdiction clauses, and NIDCO subsequently sought summary judgment in the High Court against Santander for payment of the sums.
Santander argued that the fraud exception should be engaged because
- NIDCO’s certification that the sums were “due and owing” was false and that NIDCO could have had no honest belief it was true as no damages had yet been liquidated or awarded by the arbitral tribunal;
- NIDCO was claiming approximately USD 35m when it was only entitled to USD 31m in security and it was fully aware of this;
- There was potentially an equitable jurisdiction in English law to prevent unconscionable demands under LoCs, in addition to the fraud exception, and;
- There should be a stay of execution pending further order in light of the Brazilian injunction which prevented Santander from making payment.
The Court dismissed this argument and granted summary judgment in favour of NIDCO.
In the Court of Appeal, Santander argued that there was no evidence that personnel at NIDCO had considered whether sums were presently “due and owing” or would become “due and owing” at some future date. The court dismissed this argument, however, finding that: “No doubt lawyers can have a debate as to whether a current entitlement to claim damages for repudiation entitles one to say that the amount of such damages is due and owing … but it borders on the absurd to say that the only realistic inference from the fact that business did not have (or may not have had) that debate is that they could not have believed in the validity of their demands.”
The end result of NIDCO v Santander was that the English courts required Santander to satisfy the LoC demand even though the Brazilian courts had granted an injunction forbidding payment. We examine the consequences of this further below.