Introduction
7.01 It is well known that the principal purpose of a letter of credit is to provide the exporter with assurance that the importer’s payment obligation under the underlying contract of sale will be honoured by a reliable paymaster, namely a bank.
This assurance of payment is underpinned by the principle of autonomy or independence, which shields the bank’s undertaking to pay the exporter from disputes between the importer and the exporter relating to the underlying contract of sale. However, difficulties arise where, after the exporter has supplied goods to the importer, a court or other authority in the issuing bank’s country makes an order prohibiting the bank from making payment under the credit (a ‘stop payment order’). Such an order made by a local court at the request of the importer in connection with its claim against the exporter for breach of the underlying contract of sale strikes at the independence of letters of credit.1 Nevertheless, in such a case, the issuer, observing the terms of the order, will refuse to make payment under the credit, thus presenting a serious problem for the beneficiary or a bank that has paid the beneficiary pursuant to the credit and is claiming reimbursement from the issuer (a ‘claiming bank’).7.02 The question whether, and to what extent, a foreign stop payment order can constitute a defence to a claim against the issuer in a court outside the issuer’s home jurisdiction has presented itself to courts in various jurisdictions2 and to the International Chamber of Commerce (ICC) Banking Commission3 over many years. However, this question has
attracted very little, if any, academic attention.[596] This chapter examines this under-explored issue.
It shows that in the case of proceedings by a claiming bank, as opposed to the exporter, a stop payment order made in the issuer's home country rarely gives the issuer a good ground for resisting payment in England or in some other common law jurisdictions. The position is different, however, in a claim by a beneficiary under an unconfirmed credit where documents are to be presented to, and payment made at, the issuing bank's office in its home country. In such a case, a stop payment order made in the issuer's country normally constitutes a good defence to the beneficiary's claim in England and in some other common law jurisdictions. However, in the more usual case where documents are to be presented to, and payment made at, another bank in a different country, stop payment orders made in the issuer's home jurisdiction have had a more limited reach under the common law rules in England[597] and in other common law jurisdictions, such as Hong Kong and Singapore.7.03
The chapter argues that the outcome has been the same under the rules of the Rome Convention[598] [599] (‘the Convention'), which in England applied to credits issued between 1 April 1991 and 16 December 2009.7 This result is attributable to the courts' practice of invoking article 4(5) of the Convention to displace the law of the issuer's country, as the law prima facie applicable to the contract between the issuer and the beneficiary (under article 4(2)), in favour of the law of the country of performance. Since stop payment orders had a very limited reach at common law and under the Convention, attempts to rely on such orders to defeat the issuing bank's payment obligation have been rare.
7.04
However, that state of affairs may change under the Regulation (the Regulation),[600] which applies to credits issued from 17 December 2009.[601] Amendments to the structure and language of article 4 of the Regulation, compared to article 4 of the Convention, mean that the threshold required to displace the applicable law designated by the basic rule appears higher under article 4(3) of the Regulation than under article 4(5) of the Convention.
This chapter further explores the question whether this apparently higher threshold means, as some suggest,[602] that courts would no longer be able to displace the law of the issuing bank's country in favour of the law of the country of performance in situations where it was possible to do so under the Convention. If there has been such a shift in the law, then under the Regulation, the law governing the contract between the issuing bank and the beneficiary will be the law of the issuing bank's country in many cases where under the Convention it would be the law of the place of performance. Consequently, under the Regulation, a stop payment order made in the issuing bank's country would constitute a good defence to a beneficiary's claim in England in many cases where it would not have been a defence under the Convention. This would be a significant departure from the position under both the Convention and at common law. It would strike at the established policy of English law that a letter of credit ‘should be honoured—and not nullified by an attachment order at the suit of the buyer’.[603]7.05 After explaining the role of choice of law rules in this context, in section II, the chapter discusses the reach of stop payment orders in the context of unconfirmed credits, both at common law, in section III, and under the Convention, in section IV. The extent to which stop payment orders may now give the issuing bank a good defence under article 4 of the Regulation is examined in section V. Section VI explores the question whether the court can use the public policy exception as a ground to refuse to give effect to a foreign stop payment order. This is followed by a discussion, in section VII, of the reach of foreign stop payment orders in claims by banks seeking reimbursement from the issuing bank. The conclusions are stated in section VIII.
II.