High Court Upholds Autonomy of Letters of Credit in Macquarie Bank Limited v Banque Cantonale Vaudoise Case

Citation: [2024] EWHC 114 (Comm)
Judgment on

Introduction

In the case of Macquarie Bank Limited v Banque Cantonale Vaudoise [2024] EWHC 114 (Comm), the High Court addressed several crucial legal principles surrounding the enforcement of Standby Letters of Credit (SBLCs), the jurisdiction challenges in international banking disputes, and the implications of the governing law chosen for financial instruments. This case illustrates the English court’s stance on the autonomy of credit instruments, the circumstances under which proceedings may be stayed, and the jurisdictional expectations when contractual obligations are governed by English law but challenged in a foreign legal context.

Key Facts

Macquarie Bank Limited (MBL), an Australian bank, sought declarations to enforce two SBLCs issued by the Swiss bank, Banque Cantonale Vaudoise (BCV). Previously, MBL launched similar proceedings in Switzerland, which were stayed due to a concurrent criminal investigation in Switzerland related to the transaction. MBL contended that Phoenix, the supplier in the underlying transaction, had defaulted, and thus MBL was entitled to payment under the SBLCs. BCV had not honored the SBLCs, citing potential fraud by Phoenix. The proceedings in Switzerland remained stayed indefinitely, leading MBL to commence litigation in England. The primary question was whether England was the appropriate forum for these disputes, considering the choice of English law as the governing law of the SBLCs.

The decision delves into several important legal principles, notably:

  1. Autonomy of Letters of Credit: The principle upheld in Edward Owen Engineering Ltd v Barclays Bank International Ltd and subsequently reinforced, states that banks must honor confirmed letters of credit if the documents presented are in order, irrespective of disputes between the buyer and seller.

  2. Fraud Exception to the Autonomy of Letters of Credit: The court reiterates the long-standing rule that claims of fraud, which seek to prevent a bank from honoring a letter of credit, must be “established or obvious fraud” as described in Edward Owen and elaborated upon in Alternative Power Solution Ltd v Central Electricity Board.

  3. Procedural Implications of Substantive Law: English procedural practice does not permit a stay of enforcement of a judgment under a letter of credit. This approach, highlighted in cases like Continental Illinois and National Infrastructure Development Co Ltd, underlines the importance of immediate payment under these instruments, free from interferences such as set-offs, counterclaims, or attachment orders.

  4. Choice of Governing Law: The court stressed that the choice of English law in the SBLCs carries significant weight, as English courts are best equipped to handle the intricate legal and technical consequences associated with such instruments—particularly when foreign proceedings potentially undermine the instruments’ nature as cash equivalents.

  5. Forum Conveniens Analysis: Following the Spiliada Maritime Corp test, the court considered whether England or Switzerland was the more appropriate forum for the trial, concluding that due to the indefinite stay in the Swiss Civil Proceedings and the failure of the Swiss courts to give effect to the substantive rights under English law, England was the “clearly” more appropriate jurisdiction.

Outcomes

The court dismissed BCV’s jurisdiction challenge, thus endorsing England as the correct forum for the dispute. The court found that the Swiss proceedings failed to respect the substantive rights of MBL under the English-governed SBLCs, allowing BCV to avoid enforcement on grounds inimical to English law’s conception of such instruments. The decision also emphasized that English courts are specifically qualified to enforce the unique legal characteristics of letters of credit governed by English law.

Conclusion

In Macquarie Bank Limited v Banque Cantonale Vaudoise, the High Court affirmed the primacy of English law in determining the substantive and procedural obligations associated with financial instruments it governs. The case underscores the English court system’s commitment to upholding the autonomy of documentary credit and to providing a forum where international financial disputes can be adjudicated effectively and in accordance with English legal principles, particularly when foreign legal proceedings may fail to recognize and give effect to such principles.