Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373

Conflict o f Laws

circumstance that the two contracts are intimately connected, the close connection may be regarded as an important factor which shows that the law that has the closest and most real connection to the counter-guarantee is the proper law of the performance bond.200

1 3 .1 0 1 The same position is likely to be achieved under the Rome Convention through Article 4(5) or the Rome I Regulation through Article 4(3). Under the presumption in Article 4(2) of the Convention if the counter-guarantor (the instructing bank) is regarded as the character­ istic performer then the governing law will be the law of the place where the branch that is to pay under the counter-guarantee is located. This will normally be the law of the counter­ guarantor’s country rather than that of the issuing bank’s country. In such a case, the result will be that the law that governs the contract between the issuer of the performance bond and the bank that instructed it is different from the law that governs the contract between the issuer of the performance bond and the beneficiary. The English courts are likely to find this result to be commercially unattractive. It is likely that in such a case an English court will resort to Article 4(5) and, disregarding the presumption in Article 4(2), apply the close con­ nection test. In applying the close connection test the court will take into account the fact that the counter-guarantee is intimately connected to the performance bond and that the law that governs the performance bond is the law that is more closely connected to the counter-guarantee. The result will be that the law that governs the performance bond will also govern the counter-guarantee. That result will now be achieved more easily under the Rome I Regulation since in applying the escape provision (Article 4(3)), to determine whether the contract is manifestly more closely connected to a country other than that indi­ cated by the rule in Article 4(l)(b),201 the court is expressly permitted202 to take into account the fact that the contract (the counter-guarantee) has a very close relationship with another contract (the performance bond). The English courts will have little difficulty in finding that the counter-guarantee has a very close relationship with the performance bond and to con­ clude that the counter-guarantee is manifestly more closely connected to the law that governs the performance bond than to the law of the place where the counter-guarantor is located.203

(m)Instructing bank and account party

13 .1 0 2 The applicant will normally have an account with his bank, the instructing bank, and both parties will normally be in the same country. In such a case, there will be no difficulty as the law of that country will normally apply to the contract. Where the parties are in different countries then, in the absence of a choice of law, at common law the law that governs the contract between a customer and the bank is the law of the country where the branch where the account is kept is situated.204 Tire same result is likely to be produced under Article 4(2) of the Rome Convention. The bank is the party effecting the characteristic performance205

a solution will not be attractive to bankers. However, the rule in URDG applies only where the parties have not provided otherwise.

200TurkiyeIs BankasiAS v. Bank o fChina [1993] 1 Lloyd’s Rep. 132.

201The provision of a counter-guarantee is likely to be regarded as the provision of a service for the purposes of Art. 4( 1)(b), so that under the normal rule the law of the place of the counter-guarantor’s habitual residence (the branch that issued the counter-guarantee) will be the governing law.

202Recital (20).

204LibyanArab Foreign Bank v. Bankers TrustCo [1989] QB728; Libyan Arab Foreign Bank v. Manufacturers Hanover Trust Co [1988] 2 Lloyd’s Rep. 494.

205Sierra Leone Telecommunications Co Lad v, Barclays Bank Pic [1998] 2 All ER 821.

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ILL The Applicable Law

and normally under the contract the performance (instructing another bank to issue the bond) is to be effected through the branch where the account is held. This result does not appear to present any commercial inconvenience and so it is unlikely that in the ordinary case the courts will disregard it in favour of a governing law indicated by the close connection test in Article 4(5). As with letters of credit, there will normally be no commercial necessity for the governing law of this contract to be affected by the governing law of the underlying contract or the contract between the instructing bank and the issuing bank. The approach should be similar under the Rome I Regulation so that the governing law indicated by the primary rule under Article 4(l)(b) should be the applied law rather than disregarded in favour of a differ­

ent law indicated by the escape provision of Article 4(3).

3. Illegality

the effect that if parties enter into an agreement the real object of which is to contravene the law of a foreign and friendly state, it is against English public policy for an English court to enforce the agreement.20728Thus, in Foster v. Driscoll208 the Court of Appeal refused to

206 See, e.e. Continental Enterprises L td v. Shandong Z hucheng Foreign Trade Group Co [2005] EWHC 92

(Coram) at [48]-[49].

207 Regazzorti v. К C Sethia (1 9 4 4 ) L t d [ 1956] 2 QB 490; a ffd [1958] AC 301; Euro -D iam L td v. Bathurst [1990] 1QB 1at 40; RoyalBoskali W estm insterNVv. M aountain [1999] QB 674 at 735-736. Ispabaniv. Bank

M elli Iran [1998] Lloyd’s Rep. Bank 133. See also Patriot Pte L td v. Lam H on g Com m ercial Co [1978-1979] 1 SLR 175 (Court ofAppeal ofSingapore).

208 [1929] 1 KB 470.

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Conflict o f Laws

enforce a contract, the real object of which was to import whisky into the USA where there was a prohibition.209 Another common law rule is that the court will not enforce a contract (governed by English law) if the contract is illegal by the law of the foreign place of performance,210 whether the illegality is initial211 or supervening.212 Titus, if a letter of credit or performance bond contract which is governed by English law is to be performed in a foreign country and performance in that country becomes illegal an English court will not enforce the contract. However, the rule applies only where the contract requires performance in the foreign country where it is illegal. If the contract requires performance in England where it is not illegal, illegality arising under foreign law will not affect performance in England, even if the foreign law is the law of the defendant’s country of residence, domicile, or nationality.213 Titus, if an international contract of sale which is governed by English law requires payment by the overseas buyer in the form of an irrevocable letter of credit to be confirmed in England, illegality by the law of the buyer’s country which makes it impossible for him to open the letter of credit in his country will not defeat the sellers claim for breach of contract.214

1 3 .1 0 6 Where the letter of credit or performance bond contract is governed by English law, the ques­ tion whether it is illegal because of the illegality of the underlying contract (that is to say, whether the illegality exception applies) is to be determined by English law as the law that governs the letter of credit or performance bond contract.21526In Mahonia Ltd v. JP Morgan Chase Bank,2K the credit was payable at the London branch of the issuing bank. The bank refused to honour a complying demand and claimed that the credit was unenforceable because the underlying contract was illegal as involving violations of the law of a foreign country and that the letter of credit contract between the beneficiary and the issuing bank was tainted with that illegality. English law was applied to determine whether the bank had a good defence based on the illegality exception.

(ii) Where the governing law isforeign

1 3 .1 0 7 Where under the Convention or Regulation the putative governing law is a foreign law, the English courts will apply the governing law and refuse to enforce the credit or bond if it is illegal under the governing law.217 For example, if the contract between an issuing bank and the beneficiary is governed by New York law then if performance of the contract by the

209 Followed by the Singapore Court ofAppeal in Patriot Pte L td v. Lam H ong Com m ercial Co [ 1978-1979] 1SLR 175; contract to get goods into aforeign country (Indonesia) in breach ofthe revenue laws ofthat country was illegal and unenforceable in Singapore.

2,0 Kahlerv. M idland Bank L td [ 1950] AC 24,48.

211 Toprak v. Finagrain [1979] 2 Lloyd’sRep. 98, 107, approved [1979] 2 Lloyd’s Rep. 112, 117; U nited City

M erchants (Investments) L td v. Royal Bank o f Canada [1982] QB 208, 228. The position is similar in other

Commonwealth jurisdictions such asSingapore. See, BrooksExim Pte Ltdv. Bhagw andas[\995\ 2 SLR 13; Four

Seas Com m unication Bank L td v, Sim. See Kee [1990] 3 MLJ 226; Singapore Finance L td v. Soetanto & Ors IT 9921

2 SLR407.

216Ibid.

217The position is the same at common law; D e Beeche v. South Am erican Stores L td [1935] AC 148; St Pierre

v.South Am erican Stores L td [ 1937] 3All ER349; K ahlerv M id la n d Bank L td [1950] AC24; Zivnostenska Banka

v. Frankm an [1950] AC 57; Re Iianque des M erchands de Moscou (No 2 ) [1954] 1WLR 1108; Royal Boskali W estminsterNVv. M ountain [1999] QB 674.

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2.8 This principle is recognized in other jurisdictions, e.g. Chudian v. Philippine N ational Bank, 734 F. Supp. 415, tiff'd 9 7 6 F. 2d 561 (1992), where a US court refused to enforce a letter of credit (to be performed in the Philippines and governed by Philippine law) because the payment under the credit had become prohibited under laws passed by the regime of President Corazon Aquino to recover ill-gotten wealth accumulated by former President Marcos and his associates. Similarly, in Sinotani Pacific Pte L td v. Agricultural Bank o f C hina [1999] 4 SLR 34, the Singapore Court of Appeal refused to enforce a letter of credit governed by Chinese law because a Chinese court had ordered the issuing bank to stop payment under the letter of credit. More recently, in Rabobank v. Bank o f C hina [2004] 848 HKCU 1, the Hong Kong High Court held that a letter of credit which was governed by Chinese law had become illegal and unenforceable because of an order of a Chinese court restraining the issuer of a letter of credit from paying under it.

2.9 See discussion in para 13.119 below.

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Conflict o f Laws

Article 3 or by the rules applicable in the absence of choice under Article 4. Article 9(2) of the Rome I Regulation makes similar provision for the application of the overriding manda­ tory provisions of the forum. Unlike Article 7 of the Convention, Article 9 of the Regulation provides a definition of mandatory rules separate from that under Article 3(3). It defines ‘overriding mandatory provisions’ as ‘provisions the respect of which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation’.220 An example of such an overriding mandatory provision may be an Order in Council prohibiting payments under a letter of credit or performance bond to any beneficiary in a specified country.221 In such a case, although the particular contract in the letter of credit or perfor­ mance bond transaction may be governed by a foreign law by which it is valid, the English court will apply the Order in Council, as a mandatory rule or an overriding mandatory provision of the forum, and refuse to enforce payment under the credit or bond.222

13.113 The Bretton Woods Agreement Order in Council 19462232which implements in the United Kingdom the International Monetary Fund Agreement, otherwise known as the Bretton Woods Agreement, will now be given effect to by the English courts as mandatory rules of the forum under Article 7 (2) of the Convention or as overriding mandatory provisions of the forum under Article 9(2) of the Regulation. The provisions of the Order can be regarded as falling within the definition of overriding mandatory provisions under Article 9(1) of the Regulation, having regard to the purpose of the Order. As Robert Walker L.J. said in hpahani v. Bank Melli Iran,12* ‘The purpose of the 1946 Order was to incorporate into the domestic law of England an important international agreement intended to improve international financial co-operations and stability. .. One means of achieving this was by ensuring mutual recognition, by members of the IMF, of each other’s restrictions on exchange contracts.’ Mutual recognition is required under Article V III(2) (b) of the Bretton Woods Agreement which provides that ‘exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of any member maintained or imposed consistently with this agreement shall be unenforceable in the territories of any member . Therefore, a letter of credit or performance bond contract which involves the cur­ rency of a member of the IMF and is an exchange contract which is illegal under the relevant exchange control regulations of the Member State will not be enforced by the English courts (as a mandatory rule of the forum) even if it is enforceable by its governing law.

220Art. 9(1).

221cf. Ait. 2 of the Control of Gold, Securities, Payments and Credits (Republic of Iraq) Directions 1990 (SI 1990/1616), implementing United Nations sanctions against Iraq.

222cf Wahda B ank v. Arab Bank pic (1992) 2 Bank LR; [1992] TLR 633, a case decided under the common law. An international contract for the supply of goods to the Libyan Armed Forces which was entered into in 1978 became illegal when in 1992 the British Government, by the Libya (United Nations Sanctions) Order (1992/975), prohibited such contracts, lhe Order also expressly prohibited payment of any bond given in respect of any contract rendered illegal by the Order. In a claim by a Libyan bank that had issued the perform­

ance bond to enforce payment under its counter-guarantee against the instructing bank, it was held that

payment under the counter-guarantee had become unlawful and therefore unenforceable bv virtue of the Order.

223SR & О 1946/36, made under the Bretton Woods Agreement Act 1945

224[1998J Lloyd’s Rep. Bank 133.

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225[1983] 1 AC 168.

226Exercising a right under Art. 22(l)(a) of the Convention.

227Dutson, (2006) 122 LQR 374; Dickinson, (2007) 3 J Priv Int L 53.

228e.g Kleinwort, Sons & Co v. Ungarische Banmwolle Industrie Aktiengesellschaft [1939] 2 KB 678,

694; Zivnostenska Banka v. Frankman [1950] AC 57, 78; Mackender v. Feldia AG [1967] 1 QB 590, 601;

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Conflict o f Laws

of nations, required effect to be given to the illegality in the foreign place of performance. As there was no actual decision on the point and since a number of commentators have argued against such a principle,229 there was some uncertainty on this point. Moreover, even if at common law an English court can give effect to the law of the place of performance and not apply the foreign applicable law, it is not clear whether the common law principle can apply under the Rome Convention due to the United Kingdom’s reservation with respect to Article 7(1).230 The principle cannot be applied under Article 7(2) as a mandatory rule of the forum because it is a rule of public policy based on the comity of nations and is not a domes­ tic rule.231 It might be applied under Article 16 (public policy). However, it has been argued that cases of this kind do not fit within Article 16 since the public policy exception in that provision is a negative one, intended to exclude a provision of the applicable law that is objectionable, rather than a positive one, intended, on the basis of comity of nations, to give effect to the law of a foreign country.232

13.118 Under the Regulation these uncertainties fall away. Article 9(3) provides that if a contract is illegal by the overriding mandatory provisions of the foreign place of performance the court has a discretion to refuse to apply the applicable law and give effect to the law of the place of performance instead. Suppose a bank in country X issues a credit to a beneficiary in country Y. The credit provides for payment in country Y. It also contains a choice of law clause by which it is governed by the law of country X. In such a case, if payment under the credit in country Y is illegal under the law of country Y, the place of performance, but not under the law of country X, the governing law, Article 9(3) of the Regulation now allows an English court to give effect to the law of country Y and refuse to apply the governing law. But under the Convention it is not clear whether and how an English court can arrive at the same result.

(ii) Publicpolicy

13.119 Article 16 of the Rome Convention provides that ‘application of a rule of the law of any country specified by this Convention may be refused only if such application is manifestly incompatible with the public policy (“ordre public”) of the forum’. The equivalent provision in the Rome I Regulation, Article 21, is in substance the same. Article 16 is phrased in nega­ tive form and the intention is that this provision should only be used in exceptional circum­ stances.233 It is the application of the foreign law to the circumstances of the case rather than the law in itself considered in the abstract that has to be contrary to English public policy under this provision.234 In the context of illegality, the English courts may enforce a contract,

Toprak v. Finagrain [1979] 2 Lloyds Rep. 98 at 114; XAG v. A Bank [1983] 2 Lloyds Rep. 535 at 543; EuroDiam Ltdv. Bathurst [1990] 1 QB l,a t 15, ajfdhy CA at 30. 'the principle only applies where performance is illegal in the country where, under the contract, performance has to be done: Toprak v. Finagrain [1979] 2 Lloyds Rep. 98.

229e.g. Cheshire & North, Private International Law (11th edn, 1987) 486M88; Reynolds, (1992) 109 LQR553.

230See Dicey, Morris & Collins, Conflict o f Laws (14th edn) para 32-148 etseq.-, Fawcett and Carruthers,

Cheshire, North dr Fawcett: Private International Law (14th edn, 2008) 760-761; Chong, (2006) 2 J Priv Int L 27.

231Fawcett & Carruthers, Cheshire, North & Fawcett: Private International Law (14th edn) 742-743.

232e.g. Fawcett & Carruthers, Cheshire, North dr Fawcett: Private International Law (14th edn, 2008) 742-743; Hartley, (1997) 266 Hague Recueil 341 at 353; Kaye, 69; cf. Lasok and Stone, 372-374.

233Giuliano and Lagarde Report, 38.

234Ibid.

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III. The Applicable L aw

although it is illegal under its applicable law, if to apply the provision which renders the contract illegal would be contrary to English public policy. Conversely, the court may refuse to enforce a contract, although it is valid under its governing law, where to apply the relevant provision of foreign law would be contrary to English public policy. Thus, if payment under a letter of credit or performance bond transaction is rendered illegal by a provision of the applicable law which prohibits payment to the beneficiary on grounds that amount to a serious violation of human rights an English court may exclude the applicable law on the ground that its application would be contrary to English public policy.235

235 cf. Oppenheimer v. Cattermole [1976] AC 249.

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IN D E X

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Index

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