'The Rome I Regulation: Has it Opened a Door to Stop Payment Orders?
7.29 Turning to the position under the Regulation, the question is whether the amendments to article 4 have increased the likelihood that the English courts would give effect to stop payment orders made in the issuing bank’s country.
If, under article 4(1) or (2), the law of the issuing bank’s country is the law applicable to the contract between the issuing bank and the beneficiary and if that law cannot be displaced pursuant to article 4(3), then such orders would indeed constitute a good defence to a beneficiary’s claim. If so, then in effect the Regulation has opened a door to stop payment orders where, in English law, it was shut under the Convention.A. Does the Law of the Issuer's Country Apply under Article 4(1) or (2)?
Under the Regulation, in the absence of a choice of law, the law applicable to the contract 7.30 between the issuing bank and beneficiary under an unconfirmed credit would be determined by the rule in article 4(1)(b), if that contract is classified as ‘a contract for the provision of services’. If the contract is not one for the provision of services, however, then the applicable law would be determined under article 4(2). The Regulation does not define the concept of ‘provision of services’ in article 4(1)(b) and the European Court of Justice (ECJ) has not yet provided a definition of the concept. So, it is not entirely clear whether the contract between an issuing bank and a beneficiary would fall within that provision. The editors of Dicey, Morris & Collins on the Conflict of Laws have suggested that, although the issuing bank-beneficiary contract may be classified as one for the provision of a payment service within article 4(1)(b), it is ‘more likely’ to be regarded as a contract other than one for the provision of services.[647] However, it is submitted that the contract should be classified as one for the provision of services within article 4(1)(b) and that the issuing bank is the party providing the services.
This view derives support from the ECJ’s interpretation of the concept of ‘provision of services’ in article 5(1)(b) of the Brussels I Regulation,[648] now article 7(1)(b) of the Brussels I Recast Regulation.[649] Recital 17 of the Rome I Regulation states that the concept of ‘provision of services’ in article 4(1)(b) should be interpreted in the same way as it is interpreted under what is now article 7 of the Brussels I Recast Regulation.[650]In FalcoPrivatstiftungv Weller-Lindhorst,[651] the ECJ held that ‘the concept of service implies, at 7.31
the least, that the party who provides the service, carries out a particular activity in return for remuneration’[652] Further, in Corman-Collins SA v La Maison du Whisky SA,[653] the ECJ clarified that the first criterion set out in the Falco case, namely the existence of ‘a particular activity’, requires the performance of positive acts, rather than mere omissions,[654] and that the second criterion, namely the ‘remuneration’ paid as consideration for that activity, is not to be understood strictly as payment of a sum of money.[655] The notion of ‘remuneration’ is given an expansive meaning. All advantages that ‘represent an economic value’ for the party carrying out the activities may be regarded as constituting remuneration.[656] More recently, in Kareda v Benko,[657] the ECJ held that a credit agreement between a credit institution and a borrower is a contract for the provision of services within article 7(1)(b) of the Brussels Recast Regulation. In such a contract, ‘the supply of services lies in the transfer of a sum of money by the credit institution to the borrower, in return for fees paid by the borrower, in principle, in the form of interest’[658]
7.32 Based on the ECJ's case law discussed above, the contract between an issuer and the beneficiary of an unconfirmed letter of credit would fall within article 4(1)(b) because the issuing bank carries out certain tasks under the contract.
These include arranging for another bank (the advising bank) to advise the beneficiary of the credit; arranging for another bank (the nominated bank) to receive documents presented under the credit and, if so authorised, to honour or negotiate a complying presentation; and receiving and examining the documents presented under the credit and, if the documents comply with the credit, making payment in accordance with the credit. In short, the services provided by the issuing bank lie in the transfer of a sum of money from the issuer to the beneficiary, as in Kareda v Benco. Moreover, the issuing bank provides these services in return for remuneration,[659] in the form of bank charges or commission. To be sure, in most cases, the remuneration is paid by the applicant, as opposed to the beneficiary. However, in view of the ECJ's expansive approachface="Times New Roman">[660] discussed above, it matters not that the remuneration is not provided directly by the beneficiary, but comes from another source. The English common law rule of contract law that consideration must move from the promisee[661] is not relevant to the interpretation of the Regulation, which is a piece of EU legislation.7.33 If, as suggested, an unconfirmed letter of credit is classified as a contract for the provision of services within article 4(1)(b) and the issuer is the party providing the services, then, under that provision, the law applicable to the credit is the law of the country where the issuer has its habitual residence, as defined in article 19 of the Regulation.[662] In that case, stop payment orders made in the issuing bank's country would be effective to defeat claims by beneficiaries in England even where, under the credit, documents are to be presented to, and payment made by, a nominated bank in another country.
7.34 However, if contrary to the view advanced above, an unconfirmed letter of credit is not a contract for the provision of services within article 4(1)(b), then the applicable law is determined by the rule in article 4(2).
Under this provision, the applicable law is the law of the country where the party required to effect the characteristic performance has its habitual residence. In the case of the contract between the issuing bank and beneficiary under an unconfirmed credit, the issuing bank is the party effecting the characteristic performance.[663] Therefore, the law that governs the contract is the law of the country where the issuing bank has its habitual residence.[664] Consequently, stop payment orders made in the issuer's home country would have the same extended reach in England as in the case where article 4(1) (b) applied. This raises the question, however, as to whether this outcome can be avoided by resorting to article 4(3) to displace the law of the issuer's country as the applicable law in favour of another country's law, as had been the practice under the Convention.B. Can Article 4(3) Be Invoked to Displace the Law of
the Issuer's Country?
It is well known that the architecture and language of article 4 of the Regulation are dif- 7.35 ferent from article 4 of the Convention. First, whereas the basic test in article 4(2) of the Convention is only a presumption, under articles 4(1) and (2) of the Regulation, the status of the basic position has been raised to a rule. Secondly, under article 4(3) of the Regulation, the law identified pursuant to the basic rule may be disregarded only where ‘it is clear' that the contract is more closely connected with another country. Thirdly, under article 4(3), the contract must be ‘manifestly' more closely connected to another country.
What difference do these changes make in practice? In Molton Street Capital LLP v Shooters Hill Capital Partners LLP,[665] Popplewell J said that the revision of article 4 ‘suggests a higher threshold, which requires that the cumulative weight of the factors connecting the contract to another country must clearly and decisively outweigh the desideratum of certainty in applying the relevant test in Article 4(1) or 4(2)’. For this reason, his Lordship said that, when interpreting article 4 of the Regulation, decisions on article 4 of the Convention should be used with caution.[666]However, some commentators have gone further and have expressed the view that, in ap- 7.36 plying article 4(3) of the Regulation, it would not be ‘legitimate to treat the place of performance as a more significant connecting factor than the territorial connections of the characteristic performer’[667] Those commentators argue that, if the drafters of the Regulation had intended the place of performance to play a special role, this would have been specifically reflected in article 4. They accordingly conclude that it is not reasonable for a court to displace the law identified under article 4(1) or (2) on the basis of one connecting factor alone (namely the place of performance) and that article 4(3) should be used to displace the applicable law identified under article 4(1) or (2) only where a combination of factors lead to the conclusion that the contract is manifestly more closely connected with a country other than that identified by the primary rule.[668] Applying this approach in the context of letters of credit, it has been suggested that the decision of the Court of Appeal in Marconi Communications, discussed above, is no longer of much value under the Regulation,[669] because it accorded special weight to the place of performance. On the same facts, it is argued, a court would not be justified in coming to the same result under the Regulation.[670]
If the Regulation were applied to the facts of Marconi Communications, the court would 7.37 not displace the law of the issuing bank's country as the applicable law, so that a stop payment order made in the issuing bank's country would constitute a good defence to the beneficiary's claim in England against the issuing bank. Consequently, cases such as Power Curber would be decided differently under the Regulation.
This will result in a significant shift in the law's response to such orders. It would mean that, as the court explained in NIDCO v BNP Paribas,[671] ‘a party who [has] opened a letter of credit could defeat the bank's payment obligation to pay by obtaining an injunction against the bank in its home jurisdiction'. The result in practice would be that, whereas at common law and under the Convention reliance on stop payment orders has been rare, under the Regulation such orders ‘would soon become common place’.[672]7.38 However, it is doubtful that the Regulation dictates this result. Whilst it is recognised that the changes introduced to article 4 of the Regulation mean that the threshold for disregarding the applicable law designated by the basic rule is higher than under the Convention, it does not necessarily follow that the threshold under the Regulation is radically different from that of the Convention. In certain respects, some of the new language in the Regulation simply reflect the practice of (continental European) national courts[673] and the ECJ under the Convention. For example, article 4(5) of the Convention does not stipulate, as does article 4(3) of the Regulation, that the law applicable under the basic rule may be disregarded only where it is ‘clear' that the contract is more closely connected with another country. However, the ECJ had already decided that, under article 4(5) of the Convention, it had to be clear that the contract was more closely connected to another country.[674] In this respect, by inserting the word ‘clear' into article 4(3) of the Regulation, the legislator is simply stating in express terms a standard that was already being applied by the ECJ under the Convention.
7.39 It is submitted that, in the particular context of letters of credit, it is likely that the place of performance will continue to weigh heavily when applying the ‘escape clause' in article 4(3). First, one reason for the English courts' approach under the Convention is that ‘[t]he presumption contained in Article 4(2) is a blanket provision which falls to be applied across the entire field of contract law. It assumes the ability to identify a single party charged with the (single) performance characteristic of the contract. A letter of credit as such is not susceptible of such treatment.'[675] It is arguable that this statement applies equally to the new rules in articles 4(1)(b) and 4(2) of the Regulation. The former is a blanket provision covering all contracts for the provision of services and the latter is a blanket rule across the entire field of contracts other than those specifically listed in article 4(1). To that extent, the rationale for displacing the applicable law identified under the basic rule in the Convention continues to be relevant under the Regulation.
7.40 Secondly, in an unconfirmed credit under which documents are to be presented to, and payment made by, a nominated bank in the beneficiary's country, the usual expectations of the parties are that the law of that country would apply to the bank's undertaking to honour the credit in that country. In such a case, as Mance J explained in Bank of Baroda,[676] ‘it would
be quite wrong to stop at [Article] 4(2), since ‘[t]he Rome Convention was not intended to confuse legal relationships or to disrupt normal expectations’. Nor is the Regulation intended to do so. In a letter of credit transaction, where performance can take place in the issuing bank's home country or in a different country, if the parties concerned have agreed that performance should take place in a different country, the normal expectations of the parties is that the designated place of performance has a very strong connection to the contract.
7.41
Therefore, whilst it is recognised that the threshold for the ‘escape clause’ is higher under the Regulation, it is submitted that it is not so much higher that it would make a significant difference in the context of letter of credit transactions. Where, under a letter of credit, documents are to be presented to and payment made by a nominated bank in a country other than that of the issuing bank, a court would be justified in holding that, under article 4(3), the contract between the beneficiary and the issuing bank is manifestly more closely connected with the country where that nominated bank is located. On this basis, it is suggested that, in relation to letter of credit transactions in particular, the courts can and should continue to give the place of performance considerable weight in the application of article 4(3) of the Regulation.
7.42
It is recognised that the position would be different in cases where performance is split between multiple countries, as where documents are to be presented in one country (for example, where the beneficiary is resident), but payment is to be made in a different country. Cases of this type are not very common, but an example may be found in Taurus Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Iraq.[677] An unconfirmed credit[678] was issued by a bank in London and advised to the beneficiary in Iraq by an Iraqi bank. The beneficiary was to present documents to the advising bank in Iraq and these were to be forwarded to the issuing bank in London. However, for special reasons, payment was to be made by the issuing bank into a bank account in New York (in accordance with arrangements set up following the imposition of sanctions on Iraq by United Nations Security Council Resolution 1483 of 22 May 2003). It was held that, under article 4(2), the law that governed the contract between the issuing bank and the beneficiary was English law, since the characteristic performer (the issuing bank) was located in England. It does not appear to have been argued that, pursuant to article 4(3), English law should have been displaced in favour of the law of Iraq or New York, as the country of performance. It is submitted, however, that such an argument would have been difficult to sustain, as it is not clear that either Iraq or New York was ‘manifestly’ more closely connected to the contract than England. Whereas the beneficiary was resident in Iraq where its performance (presentation of complying documents) was to take place, the performance of the issuing bank (payment) was to be made in New York. The facts of Taurus Petroleum are different from those of the ordinary case where documents are to be presented to, and payment made at, a nominated bank in the beneficiary’s country. In the ordinary case where, under the letter of credit, the performance of both the beneficiary and the issuing bank take place in the same country, then the courts are likely to displace the law of the country where the issuing bank is habitually resident in favour of the law of the country of performance.
7.43 Another factor that the courts take into account in applying article 4(3) of the Regulation is ‘whether the contract in question has a very close relationship with another contract or contracts’.[679] In the context of letters of credit, the contract between the beneficiary and the issuer will have a very close relationship with another contract or contracts where, for example, the credit authorises negotiation by another bank (as a contract will exist between the negotiating bank and the issuing bank). In such a case, the law that governs the contract between the negotiating bank and the issuing bank will be the law of the negotiating bank’s country, either pursuant to article 4(1)(b) of the Regulation, on the basis that the negotiating bank is the party providing the services, or under article 4(2) of the Regulation, on the basis that the negotiating bank is the party carrying out the characteristic performance. As the negotiating bank’s country is also the place of performance, it is unlikely that the court will displace that law pursuant to article 4(3).
7.44 Since the law of the negotiating bank’s country would be the law that governs its contract with the issuing bank, when applying article 4(3) to the issuing bank’s contract with the beneficiary, the court will take into account the fact that the latter contract has a very close connection with the former contract and accordingly will likely conclude that the issuing bank’s contract with the beneficiary is manifestly more closely connected with the law of the negotiating bank’s country than with the law of the issuing bank’s country. On this basis, it is submitted that on the same facts, cases such as Bank of Baroda and Marconi Communications should be decided in the same way under the Regulation. If this approach were adopted by the courts, then under the Regulation stop payment orders made in the issuer’s country would constitute no defence to a beneficiary’s claim in England against the issuer. The position would be broadly similar to that under the Convention. Accordingly, the Regulation has not (even unintentionally) laid the foundation for a shift in the effect of foreign stop payment orders.
7.45 If, as suggested, the outcome in cases under the Regulation is likely to be similar to that under the Convention and at common law, then there would be no difficulties. However, if, contrary to the contention in this chapter, the court would stop at the first stage, under article 4(1) or 4(2), so that the law of the issuing bank’s country would be the applicable law, then stop payment orders made in the issuer’s country would be able to defeat beneficiaries’ claims against issuing banks in England. This would create significant difficulties for bene- ficiaries/exporters. In such a case, the beneficiary may seek to argue that the court should nevertheless refuse to give effect to such an order on the basis that its application in England would be contrary to English public policy. It is by no means clear, however, that public policy would come to the rescue of the beneficiary in this context. This is considered in the next section.
V.