Claims by Correspondent Banks

7.49 In the case of a claim for reimbursement by a bank that has made payment under the letter of credit, a stop payment order made in the issuing bank's country normally affords the issuing bank no defence.

A.   Confirming Bank

7.50 At common law, in the absence of choice, the proper law of the contract between a con­firming bank and an issuing bank is the law of the country with which the contract has the closest and most real connection and that is usually the law of the country where the confirming bank carries on its business.^[691] A similar position has been adopted by courts in other common law jurisdictions,^[692] including Singapore.^[693] Therefore, in the ordinary case where the issuing bank and confirming bank are in different countries, a stop pay­ment order made in the issuing bank's country has no effect on the confirming bank's claim against the issuing bank in England.

The outcome is the same under the Convention, at least as applied in England. According 7.51 to the English courts, under article 4(2) of the Convention, the performance that is char­acteristic of the contract between the issuing bank and the confirming bank is that of the confirming bank, in adding its confirmation to the letter of credit and honouring its under­taking given to the beneficiary at the request of the issuing bank.

What is the performance that is characteristic of the contract? Essentially the character­istic performance is the reimbursement on receipt of the appropriate documents. Which party is to effect that characteristic performance? The defendant [issuing bank] as the re­imbursing bank is the party making the payment that is the characteristic performance of the contract between the [confirming bank] and the [issuing bank].

This view is, with respect, questionable. The Northern Irish High Court appears to have 7.52 misunderstood the full extent of the confirming bank's obligations under its contract with the issuing bank. Thus, the court stated: ‘What are the performance obligations that arise in the contract between the issuing bank and the confirming bank? On one side the obli­gation is to furnish the appropriate documents. On the other side the obligation is to make payment on foot of the documents.'^[697] The confirming bank's obligation to forward docu­ments received under the credit is, however, incidental to its core obligation. As Mance J explained in Bank of Baroda,^[698] confirmation by the confirming bank is ‘the object or focus of the contract'. The confirming bank does this by adding its own undertaking to honour the credit and by honouring its undertaking thereby given to the beneficiary. In order to discharge that obligation, the confirming bank receives documents presented under the credit, examines them to determine whether they constitute a complying presentation,^[699] and, if they do, honours the credit by making payment in accordance with its terms.^[700] As a consequence of performing these important obligations, the confirming bank forwards the documents to the issuing bank for reimbursement and for remuneration by way of commis­sion or bank charges.

7.53 It is submitted that the outcome is unlikely to be different under the Regulation. First, it is contended that the contract between the issuing and confirming bank is one for the provi­sion of services within article 4(1)(b) of the Regulation,^[701] and that the confirming bank is the party providing the services. Those services are the same as the characteristic perform­ance outlined above and the confirming bank provides the services in return for remuner­ation in the form of a fee or commission. Secondly, if the contract is within article 4(1)(b), then its governing law is the law of the country where the confirming bank has its habitual residence. If the inter-bank contract is not one for the provision of services, so that article 4(2) applies, the result is still the same. Since article 4(2) of the Regulation is similar to art­icle 4(2) of the Convention, it follows that the approach of the English courts to the former will be the same as that adopted in relation to the latter. The confirming bank is the char­acteristic performer. Therefore, the law of the country where the confirming bank has its habitual residence is the applicable law. Thus, whether the court applies article 4(1)(b) or 4(2) of the Regulation, the result would be the same; the law of the issuing bank's country is not the law that governs the contract between the issuing and confirming banks. Therefore, a stop payment order made in the issuer's country would afford the issuer no defence to a confirming bank's claim in England for reimbursement.

7.54 Would the court resort to the ‘escape clause' in article 4(3) of the Regulation to displace the law of the confirming bank's country as the applicable law under article 4(1)(b) or 4(2)? It is submitted that this would be unlikely, especially in the ordinary case where the confirming bank's country is the place of performance, where the documents are to be presented and payment is to be made.^[702]

7.55 However, the position may be different where the issuing bank is in one country (A), the confirming bank is in another country (B) that is different from that of the beneficiary (C) and, under the credit, documents are to be presented to and payment made by a nom­inated bank in the beneficiary's country (C).

Thus, in the case of claims in England by confirming banks against issuing banks, stop pay- 7.56 ment orders made in the issuing bank's country have very limited reach at common law, under the Convention and under the Regulation.

B.           Nominated Bank that Has Not Confirmed the Credit, but Has

Honoured or Negotiated a Complying Presentation

At common law, in the absence of choice, the law that governs the contract between an is- 7.57 suing bank and a nominated bank that is authorised to honour or negotiate a complying presentation is the law of the country where, under the credit, the nominated bank is au­thorised to do so. On this basis, at common law, a stop payment order from the issuing bank's country is no defence to the nominated bank's claim in England for reimburse­ment.^[704] It is interesting to observe that courts in the US arrived at a similar result through a different choice of law rule.

The position is similar under the Convention. In the contract between the issuing bank and 7.58 the nominated bank, the characteristic performance is that of the nominated bank in hon­ouring or negotiating a complying presentation.^[707] Therefore, under article 4(2), the law of the nominated bank's country is the law that governs the contract.^[708] Since the nominated bank's country is normally the country where, under the credit, documents are to be pre­sented and payment made, the court would usually not proceed to the second stage in art­icle 4 to displace that law, in favour of the law of a different country, as the applicable law.^[709] Consequently, under the Convention, a stop payment order from the issuing bank's country provides the issuer with no defence against a nominated bank's claim in England.

The outcome is likely to be the same under the Regulation. First, it is submitted that the 7.59 contract between the issuing bank and a nominated bank that has honoured or negotiated a complying presentation is a contract for the provision of services within article 4(1)(b) and that the nominated bank is the party providing the services.^[710] If so, the law that applies to that contract is the law of the country where the nominated bank has its habitual residence.

Secondly, even if the contract is not one for the provision of services under article 4(1)(b), the outcome would be the same under article 4(2), on the basis that the nominated bank is the characteristic performer,^[711] and therefore the law applicable to the contract under art­icle 4(2) is the law of the country where the nominated bank is habitually resident. Since that country is normally the country of performance, it is highly unlikely that the English courts will proceed to the second stage to displace that applicable law in favour of the law of another country. Since, in most cases, the law of the nominated bank's country will be the applicable law, a claim by a nominated bank in England against an issuing bank would be insulated from a stop payment order made in the issuing bank's country.

VII.