Stop Payment Orders under the Rome Convention

It is submitted that, under the Convention, stop payment orders made in the issuing 7.19 bank’s country do not have a longer reach than at common law. To be sure, in the case of an unconfirmed credit, the presumption in article 4(2) leads to the law of the issuing bank’s country applying to the contract between the beneficiary and the issuing bank, even where documents are to be presented to, and payment made at, a bank in a different country.

aff’d 976 F 2d 561 (9th Cir, 1992) (hereafter Chuidian v Philippine National Bank); Averbach v Vnescheconombank, 280 F Supp 2d 945 (ND Cal, 2003).

A.   Article 4(2) Points to the Law of the Issuer's Country

7.20 Article 4(1) of the Convention provides that in the absence of choice of law by the parties, a contract is governed by the law of the country with which the contract ‘is most closely connected’. This is essentially the same general principle as that of the common law, as dis­cussed above. However, the general principle in article 4(1) is followed by a presumption in article 4(2) to the effect that:

[T]he contract is most closely connected to the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration.

7.22 Therefore, if article 4(2) is applied then, unlike the position at common law, stop payment orders made in the issuer's country would be effective in England to defeat the beneficiary's claim. For example, Power Curber would be decided differently under article 4(2) of the Convention, since the applicable law would be the law of Kuwait, as the issuer's home country. However, it is submitted that the English courts would avoid that result by invoking article 4(5) to displace the law of the issuing bank's country in favour of the law of another country that is more closely connected to the contract.

B.   Displacing the Law of the Issuer's Country under Article 4(5)

7.23 In general, when applying article 4 of the Convention, the court must first determine the applicable law on the basis of article 4(2) before moving on to determine, under article 4(5), whether the applicable law identified under article 4(2) must be disregarded.^[637] A court is not required to go through the two stages in every case.

1.         The Weight of the Place of Performance

7.24

Where the issuing bank's country is different from the country of performance, the English courts usually resort to article 4(5) to displace the law of the issuing bank's country as the ap­plicable law (designated pursuant to article 4(2)) in favour of the law of the place of perform­ance.^[638] In Marconi Communications International Ltd v PT Pan Indonesia Bank Ltd (hereafter Marconi Communications),^[639] the English Court of Appeal stated that in the case of letters of credit the result arrived at under article 4(2) ‘will usually be displaced where the documents are to be presented to, and payments made by, an advising bank in another jurisdiction'.^[640]

7.25

Thus, whereas under article 4(2), the presumption is that the law applicable to a contract is the law of the country where the characteristic performer is located, in the case of let­ters of credit, the English courts have in effect replaced that presumption with a counter­presumption that the applicable law is the law of the country of performance. Therefore, under the Convention, in the case of an unconfirmed credit, where documents are to be presented to and payment made by a nominated bank in a different country, the applicable law is the law of the country where the nominated bank is located.

color=black face="Book Antiqua">2.          Closely Connected Contracts

7.26

The other factor that has weighed heavily with the English courts when applying the ‘escape clause' in article 4(5) of the Convention is the need to avoid contracts that are closely related being governed by different laws. This is a particular concern in the case of letters of credit where there are multiple autonomous, but interconnected, contracts. Considered separately, each of the contracts might have a different applicable law. However, as Mance J explained in Bank of Baroda v Vysya Bank Ltd (hereafter Bank of Baroda),^[641] it would be commercially undesirable for the confirming bank's obligation to the beneficiary to be governed by one law (under which the confirming bank may be liable to pay), whilst its right to reimbursement from the issuing bank is governed by a different law (under which the confirming bank may not be entitled to reimbursement even though it has paid the beneficiary as instructed by the issuing bank).^[642] To avoid that undesirable result, the courts take into account the fact that a particular contract arising under the letter of credit is closely connected to another contract or contracts in the chain of contracts arising under the same arrangement.^[643] In Bank of Baroda, the contract between the beneficiary and the confirming bank, located in England, was governed by English law.^[644] That was a relevant factor leading Mance J to conclude that English law also governed the related contract between the beneficiary and the issuing bank (in India).

7.27 In Bank of Baroda, the letter of credit was confirmed. However, Mance J expressly stated that he ‘should not be taken as suggesting that the conclusion would be any different if the credit had been an unconfirmed credit’ to be advised on the Indian issuing bank’s be­half by a bank in England and available for negotiation in England.^[645] In such a case, the law of the issuing bank’s country, which would be the law applicable to the contract be­tween the issuing bank and beneficiary under article 4(2), would be disregarded under article 4(5), in favour of the law governing the beneficiary’s contract with the negotiating bank (namely, English law).^[646] Consequently, in such a case, a stop payment order from the issuing bank’s country would afford the bank no defence to a beneficiary’s claim in England.

7.28 Under the Convention, therefore, stop payment orders made in the issuing bank’s country had no more effect in England than at common law. This perhaps explains why attempts to rely on such orders as a defence have been extremely rare under the Convention.

IV.