High Court refuses Injunction to Restrain Payment under a Letter of Credit
High Court refuses Injunction to Restrain Payment under a Letter of Credit
The Irish High Court (the Court) has refused an injunction seeking to restrain payment under a letter of credit . The Court found that the applicant had failed to satisfy the necessary threshold for injunctive relief where letters of credit are concerned: a seriously arguable case that the only reasonable inference is that the claim for payment on foot of the letter of credit was fraudulent. The injunction was sought in aid of arbitration proceedings in another jurisdiction and the Court also found that the application in this case could not properly be characterised as an interim measure in aid of arbitration.
In early 2023, First Modular Gas Systems Limited (FMGSL), an infrastructure fund located in Nigeria, obtained an interim injunction restraining Citibank Europe plc (Citibank) from making payment on foot of a letter of credit, pending the determination of arbitral proceedings between FMGSL and Ennovate Consultants Incorporated (Ennovate). The seat of the arbitration was in Nigeria.
The letter of credit was created in the context of a transaction for the development of a gas processing plant in Nigeria. Ennovate had engaged Bosai Energy Technology Corporation (Bosai) as a sub-contractor on the development project. The beneficiary of the letter of credit arranged by FMGSL was Bosai, while Citibank and Access Bank plc held the roles of “confirming bank” and “issuing bank” respectively.
In its role as confirming bank, Citibank examined the presentation of documents by Bosai and was satisfied that the documents constituted a complying presentation and proposed to release payment under the letter of credit.
FMGSL obtained interim injunctive relief on 7 January 2023 following an ex parte application and then proceeded to seek an interlocutory injunction, pending the determination of the arbitral proceedings. Citibank sought to oppose the application for interlocutory relief on the grounds that FMGSL had not demonstrated that there was evidence of a clear and obvious fraud. In circumstances where Citibank was neither a party to the contract nor the sub-contract, and was not a proposed party to the arbitral proceedings, Citibank’s argument was that FMGSL’s claim was an attempt to bring the bank into the substance of a dispute concerning the performance of the contract and/or the sub-contract and, more particularly, the supply of goods thereunder.
Citibank submitted to the Court that a letter of credit is a payment mechanism that operates independently of any underlying contract, with the function of replacing the uncertain credit of an unfamiliar purchaser with the more certain credit of a bank. It was FMGSL’s argument that Bosai failed to adhere to certain requirements when seeking to be paid under the letter of credit. Citibank argued, however, that any such matters were in the nature of a contractual dispute that did not concern Citibank and could not, in its view, provide a basis for an injunction to restrain payment under the letter of credit.
Citibank also argued that an application to restrain payment on foot of a documentary credit was not subject to the normal test governing applications for interlocutory injunctive relief (i.e. whether there is a fair question to be tried) and that a Court should instead apply a higher test of ‘seriously arguable’ as set out in the Construgomes case. Ennovate and Bosai also opposed the application and strongly rejected the allegation of fraud.
The Court noted that there were two issues to be considered:
The first issue was whether the injunction sought fell within the jurisdiction of the Court pursuant to Order 56 of the Rules of the Superior Courts (Order 56) and the UNCITRAL Model Law on International Commercial Arbitration (the Model Law, the relevant procedural rules around arbitration adopted by, and applicable in, Ireland) at all, i.e. could it properly be characterised as an interim measure in aid of arbitration? If not, then the injunction must be discharged.
If the application did fall within the parameters of Order 56, then the second issue to be determined was whether FMGSL had met the very high threshold required to restrain payment on foot of a letter of credit.
In circumstances where the relevant intended arbitration, on which FMGSL relied to invoke the jurisdiction of the Court, was pleaded as an intended arbitration against Bosai, the Court needed to be satisfied that such an intended arbitration was indeed legally possible and intended.
The Court found that FMGSL had not made out that it had a prima facie or arguable case that Bosai was bound by the relevant arbitration agreement in the contract. Only Ennovate was party to the arbitral proceedings at the time of the hearing of the application for an interlocutory injunction and FMGSL had not adduced any evidence supporting its position that Bosai could be legally bound by that arbitration agreement.
On that basis, the Court held that the injunction sought was not an ‘interim measure’ within the meaning of Article 17 of the Model Law, since there was no underlying arbitration or obligation to enter arbitration between the parties to whom the injunction was directed.
As a result, the injunction sought did not fall within the jurisdiction of the Court pursuant to the Model Law, meaning it could not properly be characterised as an ‘interim measure in aid of arbitration’.
Letters of Credit
The Court found that, even if it was incorrect about the scope of the Court’s jurisdiction, FMGSL had not met the necessary threshold for seeking injunctive relief and could not, therefore, be entitled to the injunction.
The Court found that, on an application to restrain the operation of a letter of credit, there is a far higher threshold to be met than applies for other types of injunctions: it is necessary for the applicant seeking to restrain payment under a letter of credit to show that it is seriously arguable that the only reasonable inference is that the attempt to secure payment on foot of the letter of credit is fraudulent. The Court noted that ‘fraudulent’ in this case would have meant that the party claiming payment (Bosai) had no honest belief that it was entitled to such payment.
FMGSL contended that the lower threshold applied because the particular terms of the letter of credit at issue meant that Citibank’s obligations were more extensive than required by a ‘normal’ letter of credit. FMGSL argued that the letter of credit was not autonomous or independent of the underlying transaction. However, that argument was rejected by the Court, which found that there was nothing in the terms of the letter of credit which altered its fundamental nature as a guarantee that funds were available and would be paid if the beneficiary provided the documentation specified in the letter. FMGSL further argued that since the injunction was sought in aid of an international arbitration, a lower threshold should have applied than if the application sought to restrain reliance on a letter of credit in domestic proceedings. The Court held that it would be entirely illogical to apply a standard which undermined the utility of letters of credit in facilitating international trade simply because the relief was being sought in the context of an international arbitration. The appropriate threshold for the grant of an injunction in this case is that identified in Construgomes: a seriously arguable case that the only reasonable inference is that the claim for payment on foot of the letter of credit is fraudulent.
Assessment of information – timing
The Court also noted an unusual feature of this application being that the most compelling evidence in favour of the alleged fraud regarding Bosai’s conduct had only become apparent after the granting of the ex parte interim Order, or at least subsequent to Citibank rejecting FMGSL’s objections to the claim (FMGSL had only subsequently put forward evidence that the goods for which payment had been claimed by Bosai could not be located).
There was some debate at the hearing of the application as to whether:
the Court should assess the question of whether the claim was fraudulent based on the information available to Citibank at the time it confirmed the documents presented; or
if Citibank’s obligations had to be assessed having regard to the information available to the Court at the hearing of the application
In circumstances where the Court was concerned with whether to grant an injunction in aid of arbitration proceedings which were pending, the Court found that there was no justification for confining the inquiry to matters pre-dating the initial application to the Court. The Court was prepared to consider all of the evidence before the Court in assessing whether the only reasonable inference was fraud. Ultimately, the Court was not satisfied that FMGSL had met that necessary threshold.
The judgment of the Court recognises the importance of documentary credits in international trade which requires immediate compliance with a demand for payment, save in cases of obvious or established fraud.
The judgment also clarifies and reaffirms the following points:
an injunction in aid of arbitral proceedings can only be granted if there is an arbitration involving the parties who would be affected by the injunction; and
there is a higher than normal threshold for the grant of an injunction where the injunction is to restrain payment under a letter of credit, i.e. a seriously arguable case that the only reasonable inference is that the claim for payment on foot of the letter of credit is fraudulent.