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ARTICLE · 23 JANUARY 2017

When Good Security Is Paramount And The Courts Are Hands Off

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The law on letters of credit has been upheld in two cases; banks cannot refuse to pay a demand meeting the requirements of a letter of credit unless it would involve fraud.

United KingdomReal Estate and Construction
Simon Tolson
Simon Tolson
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The law on letters of credit has been upheld in two cases; banks cannot refuse to pay a demand meeting the requirements of a letter of credit unless it would involve fraud.

The strict approach of English law in enforcing payment under standby letters of credit has been reinforced in two judgments (National Infrastructure Development Company Limited (NIDCO) vs BNP Paribas and NIDCO vs Banco Santander SA). Once a demand has been made in accordance with the requirements of a letter of credit, a bank can only refuse to pay is if it is on notice of fraud at the time of the call or where payment would be fraudulent.

Letters of credit are used internationally as performance securities for major construction contracts and the law on demands made in respect of them is essentially the same as for on-demand bonds.

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