Letters of credit and the fraud exception (Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA and others)

Letters of credit and the fraud exception (Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA and others)
lan C Williams, senior associate, and Andy McGregor, partner, both at RPC, examine the Court of Appeal’s judgment in the Petrosaudi Oil Services case concerning whether a bank was obliged to pay the claimant the sums due under a contract pursuant to a letter of credit.

Original news

Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA and others [2017] EWCA Civ 9,

[2017] All ER (D) 92 (Jan)

The Court of Appeal, Civil Division, in allowing the appellant company’s appeal, held that the appellant, Petrosaudi Oil Services (POS), had been entitled to call for payment of sums under a standby letter of credit (SBLC) for the account of the third respondent, PDVSA Services BV. POS had contracted with PDVSA regarding the provision of drilling services. Further, in the circumstances, the general counsel of POS had been entitled to sign a demand presented to the relevant bank under the SBLC.

What are letters of credit?

Letters of credit are an essential cog in the mechanics of international trade. In essence a letter of credit substitutes a bank’s credit-risk for that of the buyer of goods or a service. The letter of credit creates a payment obligation on the part of the bank to the seller that is independent of the underlying contract between the buyer and seller. This fundamental principle is referred to as the ‘autonomy of the credit’ or the ‘principle of autonomy’. The seller is paid upon the presentation of certain specified documents, for example, an invoice, as long as such documentation meets any requirements specified in the letter of credit. The use of letters of credit gives sellers the confidence to ship goods, or provide services, in the knowledge that they will receive swift payment from the bank. Buyers are given comfort that goods and services will be provided without delay.

What is the ‘fraud exception’ and

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About the author:

Meet Suzanna:

1. Banking and finance lawyer with experience in real estate finance, trade finance and aviation finance

2. Likes skiing, comedy shows and listening to live music

3. Thinks the law is not for the fainthearted

Suzanna has wide-ranging experience in banking and finance transactions with particular emphasis on advising lenders in the context of real estate finance and trade finance, and advising on ECA supported aviation finance transactions. Suzanna qualified as a solicitor in 2001 with Theodore Goddard (now Addleshaw Goddard LLP) and has since gained experience with Barclays Bank PLC, ECGD and Crédit Agricole CIB before joining LexisNexis.