Letters Of Credit: When Not To Pay

A recent case has explored when a bank will be relieved of its duty to make payment under a letter of credit in a situation where the payment terms of the underlying contract are subject to a dispute under foreign law proceedings. Below we will highlight the potential impact of this case, including, the scope for foreign law proceedings to impact on a bank's obligation to pay and recommend the key points to check in respect of an English law letter of credit which is subject to an alleged fraud.

The case

The case of Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA (1) PDVSA Servicos SA (2) PDVSA Services BV (3) [2016] EWHC 2456 (Comm), concerned an English law letter of credit where the underlying contract (for oil drilling services) was governed by Venezuelan law. A dispute arose between the parties to the underlying contract which affected invoices totaling $129M and had been referred to arbitration. Whilst the final outcome of the arbitration was awaited,